We are pleased to share with you the KCS Third Quarter update.  In this edition you will find our insights on the global markets and the performance of assets and  liabilities, while also reporting on our team expansion and continuing support of the industry through conference appearances.  Enjoy!  Please don’t hesitate to reach out to us if we can help you in any way.  Here’s the link: http://www.kampconsultingsolutions.com/images/kcs3q14.pdf

Amazingly, bond yields are plummeting for US debt. The 10 year yield is at 1.96% this morning, having closed at 2.52% on 9/30/14. We have been stressing to plan sponsors throughout the last two years that they convert their fixed income exposure into a beta portfolio, and to get away from forecasting rates. As you know, most fixed income analysts were calling for higher rates at the beginning of the year. We, at KCS, have been calling for falling rates. But, we also stressed that we didn’t want to be in the interest forecasting game either.

Our strategy is to create a beta portfolio that cash matches near-term liabilities.  With this approach,we remove interest rate sensitivity, improve liquidity, extend the investing horizon for the alpha assets, and begin to de-risk the plan through a glide path to full funding.  The beta / alpha portfolio would have stabilized the asset / liability mismatch found in most DB plans, while helping plans avoid the chase for yield, by dipping down in quality in the high yield and bank loan segments, which have come under a ton of pressure.

We are ready to help you – call us!

We are pleased to share with you our latest edition in the KCS Fireside Chat series.  This article pertains to the use of the ROA (return on asset assumption) as a DB plan’s primary objective.

Click to access kcsfcoct14.pdf

We hope that you continue to find our articles insightful and importantly, useful.  Please don’t hesitate to call on us for any assistance.

At the age of 55 I am getting to that point (regrettably) that it is becoming more and more difficult to do the things that I did as a younger man. However, this article’s title isn’t referring to my inability to touch my toes without straining most muscles in my body. No, I am referring to the stretch for yield by institutional investors that just my strain, tear, rip, and snap their portfolio’s fixed income exposure.

The holy grail for most public fund and Taft Hartley plan sponsors remains the ROA (return on assets assumption). As such, as interest rates continued to fall in the US, plan sponsors either exited fixed income or they sought higher yielding, less liquid fixed income alternatives in an attempt to generate a return that approximated their ROA. We’ve already discussed on many occasions the negative impact on the asset / liability relationship from reducing fixed income within a plan’s portfolio. There are short duration liabilities that can be immunized with lower yielding fixed income instruments that don’t need to have a return anywhere near the ROA.

In the second instance, the reach for yield has created crowded trades that may be difficult to unwind, potentially exacerbating any loss. We are beginning to see the higher yielding segments of the US credit markets twitch. In the week ended Wednesday, August 6th, EPFR reported that mutual fund flows from high yield funds was -$7 billion, which is the largest withdrawal since 2010, and the largest as a % of AUM ever. Furthermore, the flight to quality that has pushed the yield on 10-year Treasuries to a 52 week low of 2.39% (as of this morning), has also seen it’s yield spread to high quality credits expand beyond 100 bps for the first time since June.

Don’t be shocked if higher yielding credits in ETFs and mutual funds continue to see outflows. The fear of Federal Reserve tapering, geopolitical uncertainty (Ukraine / Russia and Iraq), and Europe’s inability to generate sustained economic growth are creating angst among the investing community. If you want to alleviate this uncertainty, KCS has developed an investment approach to convert your alpha assets (ROA-driven) into beta assets (liability focused) that will help stabilize your funded ratio, potentially reduce contribution costs, and use your fixed income exposure more wisely. Why risk injury trying to exit the credit markets with everyone else.

We are pleased to announce that August 1, 2014 marks the third anniversary for Kamp Consulting Solutions, LLC. KCS has spent the last three years fighting to keep defined benefit plans active. We continue to bring a different message to the marketplace that both assets and liabilities need to be managed together to accomplish the objective of maintaining a healthy retirement program for the plan’s beneficiaries.

Furthermore, we are excited to be part of a coalition that is bringing Double DB to the marketplace. DDB is a “fixed cost” defined benefit plan that is superior to the myriad hybrid plans that have been introduced into the market. This plan design just may provide the impetus for plan sponsors to maintain their current DB plan.

We are excited about what we’ve accomplished in our first three years, and very much look forward to helping plan sponsors and plan beneficiaries during our fourth year.