By: Russ Kamp, CEO, Ryan ALM, Inc.

I’m not asking about your plans for America’s 250th celebration come this Fourth of July. 

I read a very interesting email yesterday that referenced the tragic events in Venezuela by saying that the “earthquake doesn’t write the verdict. It audits the books.” My initial reaction: that’s harsh given the significant deaths and injuries that resulted, but upon reflection the author is correct. It wasn’t the fact that an earthquake of that magnitude hadn’t occurred in 125-years. It was the fact that poor planning, weak building codes, inferior construction, and poor maintenance well before the event created the tragic outcome.

As I contemplated the authors words, I began to reflect on what Warren Buffet had said in his 2001 annual letter to shareholders. He stated, “only when the tide goes out do you discover who’s been swimming naked.” Bringing this post back to investing and the impact on pension plans;

• Rising markets make almost every strategy appear successful.
• Cheap credit, abundant liquidity, and investor optimism hide poor decisions and weak fundamentals.
• Excessive leverage, weak business models, and speculation can all seem to work (think SPCX).

But when the “tide goes out” (markets decline) we are left with the truth, and it can be pretty ugly.

• Companies with too much debt struggle.
• Investors who relied on leverage are forced to sell.
• Weak business models fail (Dot Com bubble).
• Investment managers, pension plans, and their advisors that took hidden risks are exposed.

Importantly, bear markets don’t create weakness—they expose weakness that was already there.

We witnessed what happened following the go go 1990s, when it seemed as if every investment made money, pension funded ratios were at or near all-time highs, and contributions were well contained. It was that prolonged bull market that made almost any pension investment strategy look successful. But then the piper came calling! By the time the tide had rolled out, we witnessed the crushing impact on America’s pension system that hadn’t done anything to secure the promised benefits, improve liquidity, and reduce risk in very aggressive asset allocations.

So, I ask once more, will you be wearing a bathing suit when the next market crash/event occurs? Have you done enough to protect the promises made to your plan participants? If you are concerned that you haven’t, let us perform the audit before the event occurs. Our turnkey system will:

• Properly measure your fund’s liabilities and cash flow needs.
• Generate and maintain sufficient liquidity chronologically.
• Avoid excessive risk.
• Manage interest-rate risk.
• Buy-time for the growth assets to perform.
• Stabilize the funded status and contribution expenses.

Those plans that prepare ahead of the “event”, will be the ones that are healthy when the tide begins to rise again. Prudent risk management matters much more than chasing returns. The real test of an investment strategy for a pension system isn’t during bull markets—it’s during highly uncertain ones, when hidden vulnerabilities become impossible to ignore. Will your fund pass an audit?