Tag Archives: aggregate-index

08.17.26
by

Question of the Day # 1769

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

Question from a pension plan sponsor: I often hear you espousing the use of Cash Flow Matching to replace the pension fund’s core fixed income mangers. Is it prudent to only have one manager in that space?

As always, thank you for that question. We are often asked to respond to this question. Simply put, YES! it is quite prudent and recommended to have one cash flow matching manager to represent the liquidity assets.  This is because there is one single liability cash flow schedule. If you had multiple CFM managers, their cash flows could potentially conflict with each other and not know what liabilities they are funding. Please remember that the primary objective in managing a pension plan is to secure the promises (benefits) at a reasonable cost and with prudent risk. It is NOT a performance objective.

If it were a performance objective than you might be right to want multiple fixed income managers, each representing an uncorrelated skill that when combined might be able to add alpha relative to a generic asset-focused index, but the only index that truly matters is your plan’s specific liabilities and the payment of those benefits when due.

In a CFM implementation, asset cash flows (principal and interest) from investment-grade bonds are carefully matched against the present value (PV) of those future liability cash flows of benefits and expenses. Our proprietary optimization process constructs a portfolio that matches your monthly liquidity needs at the lowest cost chronologically as far out as the mandate is funded. CFM is an exercise in bond math, which states that the longer the maturity and the higher the yield, the greater the cost reduction. We are not looking to produce an alpha relative to your liabilities, but we will because of the bias in our portfolio to A and BBB rated bonds that come with greater yields than the discount rate.

Investment-grade bonds are perhaps the safest investment one can make given that the frequency of defaults, which is <0.2% annually (2/1,000 bonds) as determined by S&P for the last 40+-years. It is only the possibility of a default that keeps this process from being absolutely certain.

Once a CFM portfolio is constructed, the cash flow relationship between assets and liabilities is locked in. It doesn’t matter if interest rates rise or fall because cash flows are future values and not interest rate sensitive. The YTW on day one of the portfolio is the likely return over the duration of the assignment – today we are constructing 30-year assignments with YTWs in excess of 6%. Can you expect that from your “active” fixed income managers, especially given the uncertain interest rate environment? For context, core fixed income managers benchmarked to the Aggregate index have likely delivered little to no return during the last five years, as the index was up 0.1% for the 5-years ending June 30, 2026. Using those managers to fulfill your liquidity needs opens up the possibility that you are locking in losses when bonds are traded to meet monthly benefit payments. There is no forced liquidity in a properly constructed CFM portfolio.

As always, we are happy to conduct a free analysis of what your cash flow needs look like and how CFM can help you secure those promises.

04.01.26
by

March Proves Challenging for Core Fixed Income

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

March was a difficult month for active core fixed income managers, as the Bloomberg U.S. Aggregate Index fell -1.8%. Uncertainty related to the impact of the Iran War on oil prices and subsequently inflation, pushed rates higher across the Treasury yield curve. The U.S. 10-year Treasury note saw yields rise 38 bps to 4.31%.

Agencies fell -1.7% in line with Treasuries, while the Corporate sector declined -2.0%. Corporate spreads ended March with an option adjusted spread (OAS) of 88.6 bps. The best performing Corporate sector was Financials (-1.7%), while Utilities performed worst at -2.2%.

The greatest risk managing bonds is interest rate risk. Given both geopolitical (Iran, Taiwan, Ukraine) and economic risks (oil, inflation, interest rates), now is the time to significantly reduce risk within your fund, whether that be a DB pension or E&F. Why continue to ride active fixed income through these uncertain markets? One can use a cash flow matching (CFM) strategy to SECURE and fund net liabilities chronologically well into the future. In the process, interest rate risk is eliminated as future benefits and expenses are not interest rate sensitive.

Furthermore, by securing near-term liabilities, the non-bond assets can now grow unencumbered providing more time to wade through these challenging times. I have no idea how long this conflict will last. I also don’t know how much damage has occurred and that which might still happen to oil production in the Middle East. Implementing a strategy that doesn’t rely on forecasting U.S. interest rates should be a high priority today.

Making the switch is easy. Rotate your current core fixed income assets from an active investment strategy to a CFM portfolio. There isn’t a need to revisit the fund’s asset allocation. We’ll even look for opportunities to take-in-kind some of your existing holdings. You’ll appreciate not having to search each month for the liquidity to meet the monthly promises that have been made to your participants, as the CFM strategy will provide all the liquidity that you need. Moreover, the Ryan ALM CFM model is skewed to A/BBB+ corporate bonds which should outyield most generic bond indexes that are skewed to Treasuries (e.g. the AGG).


05.13.25
by

Bonds Are NOT Performance Instruments

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

As we wrote a year ago this past April, it is time to Bag the Agg. For public pension plan sponsors and their advisors who are so focused on achieving the return on asset (ROA) assumption, any exposure to a core fixed income strategy benchmarked to the Aggregate index would have been a major drag on the performance since the decades long decline in rates stopped (2020) and rates began to rise aggressively in early 2022. The table below shows the total return of the Bloomberg Aggregate for several rolling periods with returns well below the ROA target return (roughly 7%).

For core fixed income strategies, the YTW should be the expected return plus or minus the impact from changes in interest rates. Again, for nearly 4 decades beginning in 1981, U.S. interest rates declined providing a significant tailwind for both bonds and risk assets. What most folks might not know, from 1953 to 1981 U.S. interest rates rose. Could we be at the beginning of another secular trend of rising rates (see below)? If so, what does it mean for pension plans?

Rising rates may negatively impact the price of bonds, but importantly they reduce the present value (PV) of future benefit payments. They also provide pension funds and their advisors with the option to de-risk the plan through a cash flow matching (CFM) strategy as the absolute level of rates moves closer to the annual ROA. Active fixed income management is challenging. Who really knows where rates are going? But we know with certainty the cash flows that bonds produce (interest income and principal at maturity). Those bond cash flows can be used to match and fully fund liability cash flows (benefits and expenses). A decline in the value of a bond will be offset by the decline in the PV of the plan’s liabilities. So, a 5-year return of -0.3%, which looks horrible if bonds are viewed as performance instruments may match the growth rate of liabilities it is funding. Using bonds for their cash flows, brings certainty and liquidity to the portion of the plan that has been defeased.

Are you confident that your active fixed income will produce the YTW or better? Are you sure that U.S. interest rates are going to fall from these levels? Why bet on something that you can’t control? Convert your active core bond program into a CFM portfolio that will ensure that your plan’s liabilities and assets move in lockstep no matter which direction rates take. Moreover, CFM will provide all the liquidity needed to fund benefits and expenses thereby eliminating the need to do a cash sweep. Assume risk with your growth assets that will now have a longer investing horizon because you’ve just bought plenty of time for them to grow unencumbered.