Author Archives: russkamp

01.15.14
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Asset Consulting Firms and Their Consultants Aren’t Commodities

The environment for asset consulting firms is quite challenging.  Historically, there have been few barriers to entry, and measuring the value-add provided by the asset consulting firm has been difficult to gauge.  As such, hiring decisions have often come down to price, with the low bidder more often than not winning the assignment.  For those firms fortunate to be given an assignment, the life cycle of the relationship is generally fairly long (about 7 years), as it usually takes a departure of the consultant or a major screw up before the relationship is terminated.  This practice has to change.

Given the current state of defined benefit plans in the US and abroad, this is not the time to fiddle while Rome burns. It is imperative that asset consultants be judged for the value that they bring to a relationship, and they should be compensated based on that value-add.  There are many services that consultants provide, but the importance to the success or failure of a plan varies widely.  Establishing the right plan benchmark is critical, and it isn’t the ROA. We believe that it should be the plan’s specific liabilities. The investment structure and asset allocation that flows from a greater knowledge of the liabilities are key decisions that drive most of the plan’s subsequent return. However, it seems to us that most of the time (80/20 rule) is spent on trying to identify value-added managers. Get the wrong asset allocation and the best performing managers in the weakest asset class won’t help you much.

Let’s see if the industry can refocus on the importance of DB plans, so that we can stabilize the retirements for both our private and public workers.  As such, let’s begin to evaluate consulting firms that can improve the funded ratio and funded status, while minimizing contribution costs. These are the important metrics when evaluating a consulting firm and their consultants.  Experience matters in this industry.  We pay great homage to it on the asset management side of the business.  Why isn’t this as critical when evaluating asset consultants?  Remember: asset consultants have a greater impact on your plan than any individual manager does!

01.10.14
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KCS told you this 15 months ago

KCS told you this 15 months ago

Mr. Bernanke said recent government spending cuts and tax increases have worked against the Fed’s efforts to encourage more spending, investment and hiring.
“With fiscal and monetary policy working in opposite directions, the recovery is weaker than it otherwise would be,” Mr. Bernanke said, stepping up arguments he has made about recent government efforts to reduce near-term budget deficits.

These comments were taken from the attached WSJ article from January 3, 2014

This article was brought to my attention by my son, Ryan, who also reminded me that KCS had reported nearly 15 months ago that the fiscal drag created by both deficit reduction and tax increases would combine to damp economic activity and the recovery from the great recession.  Economists estimate that the US economy grew in 2013 at roughly 2.1%, which is very modest given this many years into the “recovery”. 

As a reminder, KCS produces a monthly investment article on a variety of topics.  In addition, we occasionally produce a piece titled “Burning Issues”.  In the October 2012 Fireside Chat, and again in the January 2013 Burning Issue, we highlighted the potential drag from fiscal tightening.  Both articles are available on the KCS website at http://www.kampconsultingsolutions.com.

GDP= C+I+G+(X-M), where C=consumption, I=Investment, G=government spend (deficit) and X-M=net exports

The consumer has been, until recently, reworking their balance sheets, and have reduced debt to roughly 92% of earnings. Corporate investment has been tame, but appears to be growing at a faster pace, and this should continue through 2014.  Net exports remain a large drag on GDP, but trade imbalances have improved.  The fiscal deficit has been cut nearly in half through spending cuts and tax increases.  We are unlikely to see greater fiscal cuts in 2014, so the drag on GDP may be lessened.

We, at KCS, are expecting GDP growth to be slightly greater than current forecasts (2.7%).  In fact, it would not surprise us to see GDP growth exceed 3% – 3.5% in 2014. Our hope is that greater investment will continue to strengthen the US labor market, increasing wage growth and spurring demand for goods and services. If this scenario materializes, our GDP forecast may be understated.

01.09.14
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Rethink the Use of Fixed Income in a Defined Benefit Plan

With the closure of the first quarter, we’d like to remind you of a blog post that we first published in early January.  Our thoughts are still relevant, especially given the market action within fixed income during the quarter and what is transpiring in US fixed income today.  The 10-year Treasury has rallied 2% today, and we think that it may continue to move lower.  The following paragraphs are what we originally posted.

What I’d like to highlight today is a new use for a plan’s current fixed income exposure. In day two of the conference, I attended a panel discussion titled, “Opportunities in Fixed Income and Credit Markets”.  The panel was occupied by 4 senior investment pros (plan sponsor, consultant, and investment managers).  They generally discussed the likelihood that interest rates were going to rise (I’m beginning to wonder if there is anyone out their who doesn’t think that rates will rise), and the implications of that movement on traditional fixed income portfolios.  Most of the panelists talked about various sub-sectors (mortgages, asset backs, bank loans, etc) and which ones might hold up better. There was discussion about shortening duration, etc. They also talked about fixed income’s traditional role as an anchor to windward, a risk reducer, and a provider of liquidity.

However, only one individual mentioned taking a step back to truly contemplate the “role” of fixed income.  He didn’t provide any further perspective, which is why I’m addressing the issue here and today.  I believe (as do my partners at KCS) that a plan’s liabilities should be the focal point of any pension discussion.  As such, they need to be the primary objective for the plan, the driver of asset allocation decisions and investment / portfolio structure.  The asset class most similar in characteristic to liabilities is fixed income.  As such, fixed income needs to play a prominent role in a defined benefit plan.

Instead of worrying about the implications from a rising interest rate environment on an LDI strategy that currently consists of long duration corporates, change the emphasis to matching near-term liabilities, by converting your current fixed income portfolio into a Treasury STRIP portfolio that matches cash flows with projected benefits (Beta portfolio).  First, you are improving liquidity.  Second, duration is shortened in an environment that may not be conducive to long bonds.  Third, you are lengthening the investing time horizon for the balance of the corpus, which will allow asset classes / products with a liquidity premium a chance to capture that performance increment (Alpha portfolio). Finally, the funded status and contribution costs should begin to stabilize.  As the Alpha portfolio outperforms liability growth (hopefully), siphon excess profits and extend the beta portfolio.

This is a proactive move to restructure the fixed income portfolio in an environment of uncertainty.

Lastly, I am not of the general school of thought that interest rates are definitely going to rise, and soon.  I believe that we still have slack demand in our economy, brought on by underemployment, which will keep inflation in check and provide room for stable to slightly lower rates.

01.09.14
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Ryan ALM Pension Newsletter

Ryan ALM Pension Newsletter

The Ryan Pension Letter December 2013 
Ryan ALM Pension Letter is a quarterly newsletter that measures pension asset growth vs. pension liability growth based on ASC 715, PPA spot rates, PPA MAP-21, GASB and market discount rates. Ryan ALM Pension Letter also reviews a wide range of topical subjects related to pensions and global economic events.

Ryan ALM is a KCS strategic partner providing custom liability indexes to the KCS DB clients.  Ron’s work is cutting edge.  Enjoy!

01.06.14
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KCS’s January 2014 Fireside Chat: 2013 – A Year In Review

KCS’s January 2014 Fireside Chat: 2013 – A Year In Review

“My role in society, or any artist’s or poet’s role, is to try and express what we all feel. Not to tell people how to feel. Not as a preacher, not as a leader, but as a reflection of us all.” (John Lennon) 

 

As we gaze back on 2013, as we do following any year, we reflect on both the positives and negatives that impact our lives, our families, friends and colleagues, our community, our industry, our country and the world. We wonder why these events occur, why we may or may not have been involved, and whether or not there was anything that we could have done to alter the outcome through our collective experience. (please click on the link to continue to read the latest FC)

01.02.14
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EBRI / ICI information on 401(k) balances

As we enter the new year we at KCS resume our quest to try to maintain defined benefit plans as the primary retirement vehicle.  Why? Well, for one, DC alternatives were never intended to be the primary source of retirement income, but a supplemental form for higher wage earners.  Second, we have been concerned for quite some time that most individuals are neither comfortable or capable of managing their 401(k).  As a result, most participants have not been able to build a retirement nest egg large enough to support even a meager retirement.

How bad are things?  According to EBRI / ICI at year-end 2012, “the average 401(k) participant account balance was $63,929 and the median account balance was only $17,630, with wide variation reflecting the many variables in retirement saving, including participant age, tenure, salary, contribution behavior, rollovers from other plans, asset allocation, withdrawals, loan activity, and employer contribution rates. Older participants and those with longer tenure tend to have higher 401(k) balances at their current employers. For example, at year-end 2012, the average account balance among 401(k) plan participants in their 60s with more than 30 years of tenure was $224,287.”

The $224,287 looks like a large #, but in reality, if the rule of 5% applies for safely spending an annual sum, this asset pool is only providing the beneficiary with about $12,000 per year in addition to what they may receive from Social Security, and before personal savings.  In addition, about 21% of all DC participants that can borrow from their plans (loans) do so putting further strain on these meager balances.

12.16.13
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If a Picture paints a thousand words…

Federal Reserve Banks’ reserve balances explode!

Fortunately for you I’m not sharing a recording of me singing the Bread classic, “If a picture paints a thousand words”.  However, I am sharing an incredible chart on the failure of QE.  As we, at Kamp Consulting, have shared in previous posts, QE by itself is not stimulative, as the swap of bonds for reserves actually removes liquidity from the economy, as higher yielding bonds are removed for lower yielding paper.  For QE to be stimulative, there needs to be a second derivative effect achieved through cooperation from the banks via lending.  The link (picture) that we share today highlights the fact that the reserves received through the QE bond swap have not been lent at the pace necessary to produce the outcome that QE intended.

The markets are fearing tapering, but we suggest that their concern is unfounded.  There has been little stimulus provided by the QE program to date.  “Exaggeration is a blood relation to falsehood and nearly as blamable. ” ~Hosea Ballou

12.09.13
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Retire the US Treasury debt on the Federal Reserve’s balance sheet

An interesting idea floating around, most recently heard through Mark Grant, is that the US Treasury should retire the Treasury debt currently held on the Federal Reserve’s balance sheet.  Mark believes that the retirement of $1 trillion of the slightly more than $2 trillion in Treasury notes and Bonds on the balance sheet would eliminate near-term debt ceiling discussions and potentially reduce rates in the short-term.  We at Kamp Consulting Solutions like this idea very much.  Chuck DuBois, a former partner of mine while we were both at Invesco, has been touting this idea for a while, too.  We believe that the entire debt could be retired at once, but there are many investors who like the idea of holding US Treasury bonds and notes for investment purposes.

There are many market participants who fear that the retirement of the US debt would be inflationary, but in reality the swap of bonds with reserves actually reduces liquidity because the bonds are higher yielding.  Furthermore, many of the bonds are being used as longer-term investments, and it is likely that the reserves received in the swap would be reinvested in longer-dated securities and not used for short-term economic activity.

I’m tired of hearing about the debt ceiling, and the debates in DC as to whether this artificial ceiling should be raised.  I suspect that you may be, too.  Let’s retire some of the debt today, and eliminate this conversation from happening for a while.

12.03.13
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Paradigm Shift or Back to the Future?

Paradigm Shift or Back to the Future?

Is the sun setting on the traditional advisory asset consulting with the dawn of the Outsourced Chief Investment Officer (OCIO)?  As biased advisory asset consultants, we really don’t believe that the day of reckoning is upon us! There remains a role for traditional asset consultants, but certainly an asset consultant’s role is evolving, and it is likely to continue.  Consultant specialist roles have been around since the early to mid 80’s, when both venture and real estate consultants first emerged, followed by consultants focusing on the broader alternative landscape.   KCS’s focus as the liability aware consultant is a unique specialty, too.  However, in most cases, the plan sponsor or asset owner retains day-to-day discretion over the asset base. With plan and fund sponsors outsourcing discretionary responsibility, the specialist role has been taken to a new level.

11.12.13
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Jobs, Labor Force and the Economy

I hate sounding like a broken record, but the recent announcement that 204,000 jobs had been created continues to mask serious flaws in the “recovery” since the recession supposedly ended in 2009. For many Americans, especially those with only a high school diploma (or worse), there hasn’t been a recovery.  Jobs are not plentiful, while wage growth remains stagnant. In fact, the US economy has 1.2 million fewer jobs today than at peak employment prior to 2008.  Nearly five years into the recovery and we still have 1.2 million fewer jobs – that is staggering.  Unfortunately, our labor force continues to shrink, as defined by the labor participation rate of 62.8%, marking a 35 year low.  We still have more than 11 million unemployed in the US and more than 90 million age-eligible individuals are out of the labor force for one reason or another.

Of the jobs being created, many, if not most, have been in lower paying industries, and a significant percentage are part-time.  With so many individuals out of work, there is little pressure on wages.  With no sustained wage growth, there remains muted demand for goods and services.  Is it any surprise that GDP growth since the recession has been as muted as we’ve witnessed?  The 2.8% GDP growth in the third quarter was mostly smoke and mirrors.  If it weren’t for the fact that inventories had to be rebuilt, we would have seen below trend growth again.  Who is going to be buying these goods?  According to a Morgan Stanley report, this holiday season is shaping up to be the weakest since 2008.  Is it any surprise that retailers are opening their stores on Thanksgiving (I personally think that is shameful)?

As a country we can’t afford to have an entire segment of our population not participating in the economy.  These individuals are losing more than a wage.  Regrettably, their lack of participation in the labor force today has grave consequences for them in their later years.  With the demise of the defined benefit plan, funding retirement falls squarely on one’s own shoulders.  For those without a current means of support (no job), they are certainly not in a position to fund a defined contribution plan.  In addition, their social security benefit is based on their highest 10 years of contributions.  Again, no job, no contribution.  This is a vicious cycle!

In order to stimulate the economy, create jobs, raise wages and increase aggregate demand for goods and services, we need to continue with the federal stimulus until the private sector once again participates to the extent that it has historically.  Driving down the federal deficit at this point is only working to stagnate the economic recovery, and doom an entire segment of our population to long-term unemployment and economic hardship.