Tag Archives: alm

05.29.24
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What A Ride!

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

In 1971, Bread produced the song If. The song starts off with David Gates singing the lyrics, “if a picture paints a thousand words”. Looking at the graph below, I think that Bread and David could have used a number far greater than 1,000 to describe the impact that this picture might produce.

It never ceases to amaze me how momentum builds for an idea driving perceptions to depths or altitudes not supported by the underlying fundamentals. We see it so often in our markets whether discussing bonds, equities, or alternatives. In the case above, the “Street” became convinced that the US Federal Reserve was going to have to drive US interest rates down as our economy was about to collapse. A “please do something” cry could almost be heard from market participants who thrived on nearly four decades of Fed support. They were so accustomed to the Fed stepping in anytime that there was a wobble in the markets that it became part of the investment strategy.

It got so silly, that fixed income managers drove rates down substantially from the end of October to the end of 2023. In the process, they created an environment that was once again very “easy” and supportive of economic growth. But, that wasn’t the end of the story. I can recall a near unanimous expectation that there was going to be anywhere from 4-6 cuts in the Fed Funds Rate and perhaps more during 2024. We had analysts predicting 250 – 300 bps of rate cuts. Was the world ending?

I’ve produced more than 40 blog posts since March of 2022 that used the phrase “higher for longer” in describing an economic and inflationary environment that I felt was to robust for the Fed to reduce rates. Of course, there were many more posts in which I questioned the wisdom of the deflationary and lower rates crowd where I didn’t precisely utter those three words. Well, fortunately for pension America and the American worker, the US economy has held up in far greater fashion than predicted. The labor market remains fairly robust keeping Americans working and spending.

While inflation remains sticky and elevated, US rates have remained at decade highs providing defined benefit sponsors the opportunity to take substantial risk from the plan’s asset allocation framework through asset/liability strategies (read Cash Flow Matching) that secure the promises at substantially lower cost. As the chart above highlights, expectations for rate cuts have fallen from 4-6 or more to fewer than 2 at this point, as only a -31 bps decline is currently priced in. We’ve seen quite a repricing in 2024, and I suspect that we might need to see more, as “higher for longer” seems to be the approach being taken by the Fed.

While this is the case, plan sponsors would be wise to secure as many years of promised benefits as possible. Plan sponsors and their advisors let 2000 come and go without securing the benefits only to see two major market declines sabotage the opportunity and your plan’s funded status. Riding the asset allocation rollercoaster hasn’t worked. Is the car that you are riding in nearing the peak at this time?

03.08.24
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A Contrarian Approach That is Becoming More Common?

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

I suspect that some (perhaps) many folks in our industry are becoming a little tired of my constant drum beat requesting a change in how pension plans are managed. I’m sorry if that is the case, but I have a reason to speak out often, if not loudly. My goal/mission, and that of Ryan ALM, Inc., is to protect and preserve defined benefit plans for the masses. I believe wholeheartedly that DB plans are superior to any other retirement program since they provide the monthly promise with little involvement from the participant, who may have particularly wonderful skills used in their day-to-day lives, but investing isn’t likely one of them.

By espousing Cash Flow Matching (CFM) as an important investment strategy, particularly in this period of attractive interest rates, we are bringing pension management generally and asset allocation strategies specifically back to its roots. The SECURING of the pension promise must be the primary objective for plan fiduciaries. Better yet, it should be accomplished at a reasonable cost and with prudent risk. As I’ve discussed before, a CFM strategy brings an element of certainty to the management of pensions that have embraced uncertainty through asset allocation strategies that are subject to the whims of the markets.

The riding of the asset allocation rollercoaster in pursuit of a performance objective does little to secure the pension promise, but it certainly adds to annual volatility of both the funded status and contribution expenses. Is that the outcome that the sponsors of these plans and the participants want? Heck no! Are we at Ryan ALM tilting at or own windmills? I sure hope not.

I’ve been heartened recently to read several articles favoring a return to pension basics, including the focus on the pension promise to drive asset allocation through a CFM implementation. I’m not afraid to be a lone wolf, and nearly 1,400 blog posts support that claim, but it is comforting to have some company, as being a contrarian outside of the “herd” has been described as being as painful as chewing off one’s left arm – OUCH! In one specific instance, Stephen Campisi, recently posted his article on LinkedIn.com, in which he espoused a similar bifurcated approach – liquidity and growth buckets – to pension asset allocation. He also reminded everyone that “aiming” at the correct objective was essential. In this case, he correctly cited that the objective was the promise that had been given to the participant.

Nothing would please me more than to have the entire industry once again realize the significant importance of the defined benefit plan and its role in securing a dignified retirement. Eliminating the rollercoaster cycles of performance will go a long way to preserving their use. Adopting a CFM strategy that secures the monthly promises at a reasonable cost and with prudent risk is the first step in the process. I look forward to you jumping on our bandwagon.

02.29.24
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Willingness and Ability to Customize

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

Coalition Greenwich, a division of CRISIL, has released a report on the top trends in asset management for 2024. Among the categories discussed was the establishment of “Strategic Partnerships” among one’s clients. There were four categories in which 499 respondents to the survey were asked to rate from most influential when hiring an investment management organization to least influential. The categories included willingness to provide customization, fees, commitment to knowledge transfer, and finally brand recognition.

Not surprising, the willingness to provide customization achieved the top ranking in importance, with 72% indicating that it was either the most or very influential in the decision to bring on a manager and that product. We often read about a manager’s willingness to customize a solution, but what does that mean in reality? Ironically, Ron Ryan produced, just today, an article on the importance of creating custom liability indexes for LDI assignments. This was written primarily in response to a series of LDI-related research pieces that discussed “custom benchmarks” but used generic indexes.

In order to successfully implement an LDI strategy, especially one using Cash Flow Matching (CFM), the benchmark needs to be a custom solution that uses the client’s specific liabilities, as each pension plan has a unique set of liabilities, like snowflakes. The liabilities are future values that need to be priced at some discount rate(s) into present values (market values) similar to the plan’s assets. It is only then that an appropriate LDI strategy can be implemented.

Every client of Ryan ALM, Inc. gets a custom solution. There are no “off the shelf” products. Fees, which received the second highest ranking in importance, had 68% of the respondents rating this category as most or very influential. Despite the highly customized products, we at Ryan ALM, Inc. provide our services at low fees. We believe that the primary objective in managing a defined benefit plan is to SECURE the promised benefits at a reasonable cost and with prudent risk. Everything that we do as an investment firm is focused on that belief. Custom solutions and low fees – that doesn’t seem like the norm in our industry. We are proud to be different!