Tag Archives: Asset allocation

09.02.26
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Still Think That They Are Performance Drivers?

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

Bonds enjoyed a nearly 4-decade bull market as U.S. interest rates plummeted from historic highs to an environment of negative real rates. It was unprecedented. As a result, bonds were perceived to be performance drivers. But are they?

We are often told by plan sponsors or their advisors that they can’t invest in a cash flow matching (CFM) strategy because de-risking the portfolio will negatively impact the fund’s ability to achieve the annual return on asset (ROA) assumption. Is that reality?

Facts:

  • The Aggregate bond index has produced a -0.29% annualized return for the 5-years ending August 31, 2026!
  • A CFM portfolio would have generated a return commensurate with its YTW (or YTM) during that 5-years. Shorter maturity (1-5-year defeasement) CFM portfolios were yielding about 1.6% at that time. That equates to a nearly 2% per year return advantage. Still think that CFM is a drag on performance?
  • U.S. inflation remains elevated. A CFM portfolio is the perfect pension inflation hedge since it is fully funding liabilities that have inflation in the projected benefits to be funded.
  • The direction of U.S. rates is uncertain, although rates have been trending higher, putting more strain on core fixed income strategies that tend to underperform when rates rise.
  • For the 28-years prior to the bond bull market (1953-1981), U.S. rates rose. Are we in a secular long-term rising rate environment?
  • Bonds should only be used for their cash flows of interest and principal upon maturity, which can be modeled to match and FUND a pension plan’s liabilities (benefits and expenses), with certainty barring any defaults.

Plan sponsors have not had this level of U.S. interest rates in roughly 20-years, providing them with a wonderful opportunity to protect the improved funded status, while securing the liquidity necessary to meet those pesky monthly obligations. Will this opportunity go unheeded just as the one presented in 2000 did? We know that failing to protect and preserve DB plans in 2000 was followed by two major equity market corrections that crushed pension funding and caused contributions to skyrocket. Do you think that sponsors of DB plans have the financial wherewithal to see contributions escalate once more? I don’t!

We recommend converting your current core fixed income allocation, with all of its interest rate risk, to a cash flow matching bond portfolio, that will carefully match and fund all of the monthly obligations as they come due. A CFM portfolio matches interest and principal against future obligations, and in doing so, eliminates interest rate risk as future values are not interest rate sensitive. If you owe a plan participant $2,000 in benefits next month, it is $2k whether interest rates are at 2% or 10%. The higher rates reduce the future value cost of the promised benefits in present value $s. We are seeing roughly 6% YTMs in our recent 30-year assignments and a >50% reduction in the cost of those future benefit payments.

You could continue to use a core fixed income allocation with all of its uncertainty or you could create certainty within a portion of your plan that doesn’t exist today. I suspect that your participants would appreciate knowing that the promised benefits are secure no matter what transpires in global markets.

08.28.26
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About Time!

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

FINALLY!!!

Yesterday, there appeared a P&I article with the headline: “Ohio State Teachers says beating peers isn’t the point — paying benefits is”

YESSSSS! The only reason that a defined benefit pension plan exists is to fund a promise given to the participant. Managing a pension plan isn’t about achieving an ROA or beating a hybrid total fund index or eclipsing the performance of a peer group (silly concept). It is truly only about SECURING the liquidity necessary to match and fund benefits (and expenses) when they come due!

The pursuit of a return objective has only guaranteed volatility and NOT success. That is volatility of returns, contributions, and funded status. It is time to get off the performance rollercoaster.

The higher U.S. interest rate environment is providing plan sponsors with a great opportunity to de-risk and enhance liquidity through cash flow matching (CFM), which is designed to secure the liability cash flows (benefits and expenses) through the careful matching of asset cash flows (principal and interest) from bonds. 

An opportunity such as this hasn’t existed since 2000, when the average pension plan was well-overfunded and contribution expenses well-contained. It has been 26-years since the first market crash of the aughts began and public pension funds have only clawed back to an average funded status of 88% (Milliman). They can’t afford another crash that will only lead to a deterioration in the funded status and an escalation in contributions.

No one knows when that next correction may be just around the corner. Given that reality, don’t leave your pension plan vulnerable to this uncertainty. Put in place today a CFM strategy that will SECURE the promised benefits with certainty (barring an IG default), while buying time for the return-seeking assets to wade through the next market crisis. The time to act is now and not after the next market correction.

08.27.26
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Deja Vu All Over Again? Just Saying!

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

Yogi Berra, the great Yankee catcher, but also a NY Mets player/coach in 1965, is credited with the saying it’s “Deja Vu all over again”, which he supposedly uttered back in 1961. Are we potentially witnessing in 2026, with AI investments soaring and equity valuations that may be stretched, a replay to what transpired in March 2000? Now, I’ve heard many arguments that today’s technology companies aren’t your fathers’ or even your grandfathers’ but anytime I hear the phrase “this time is different”, I want to run and hide.

Let’s explore. At the peak of the dot-com bubble in March 2000, Information Technology represented approximately 35% of the capitalization-weighted S&P 500. That level of concentration within the S&P 500 was deemed extraordinary at that time. Remember when Cisco Systems was the largest stock in the S&P 500 index? What transpired from March 2000 to October 2002, proved incredibly painful to those investors that believed that “this time was different”. Unfortunately, it wasn’t! The result was a significant reduction in the weight of the technology sector within the S&P 500 from 2000-2002 by an incredible 21.7%. The technology bubble burst took down Tech’s exposure from roughly one-third of the index to about 13% by the 2002 bear-market bottom.

PeriodTechnology weight in S&P 500
1995~10%
March 2000~34.5%
Oct. 2002~12.8%

That leads to today’s discussion comparing March 2000’s Technology exposure versus August 2026’s broader “technology-related” weight when you include Meta, both classes of Alphabet, Amazon, and Tesla. As you can see by the information displayed below, roughly 50% of the S&P 500’s weight is now in technology-related entities.

ComponentS&P 500 weight
Official Information Technology37.15%
Amazon3.84%
Alphabet Class A3.06%
Alphabet Class C2.45%
Meta Platforms1.83%
Tesla1.55%
Broader technology exposure49.88%

In other words, today’s exposure is about 15.4 percentage points higher in technology than at the peak of the dot-com bubble.

However, the exposure to Technology and AI is not limited to the S&P 500 (equities), as massive investment in data centers (real estate) done through significant debt financing (fixed income) might be subjecting a pension plan’s entire asset allocation to significant risks.

Is your portfolio prepared for the next significant market correction?

08.21.26
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It’s Yield AND Principal

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

I hope that you’ve had a great week. I very much enjoyed my three days at the NCPERS Funding Forum in Chicago, where I spoke about bringing certainty to pension plans through cash flow matching (CFM) in an investment landscape providing abundant uncertainty.

As I mentioned during my talk, the only certainty in most pension plans today are the benefit payments that are due each month. How are plans managing that responsibility? Unfortunately, not well, as most cobble together liquidity through a cash sweep of bond interest, dividends, capital distributions, and sales of securities. The only contributor to that liquidity pot that makes sense is bond interest, as dividends and capital distributions should be reinvested in their potentially higher earning strategies, while sales of securities don’t always occur at advantageous times.

But can a pension plan generate enough interest income from their bonds to cover the necessary liquidity? NO! Following my talk on Wednesday morning, an experienced trustee questioned my promotion of CFM based on his math that would have the entire pension plan’s corpus needing to be in bonds for the YTM to produce enough interest (liquidity) to meet his fund’s monthly obligations. He did not realize that a properly constructed CFM portfolio would use both interest and principal from maturing bonds (no sales). The combination of interest and principal will be used to meet those pesky obligations each month (chronologically) when due without any collective deficits.

We often recommend that a pension plan convert their current active core bond portfolio from a benchmark focused strategy to a CFM portfolio now focused on meeting the monthly promises. But the allocation to CFM should really be a function of the plan’s funded status. Better funded plans don’t need to take as much risk as weaker funded plans. Negative cash flow plans, of which most public funds are today, especially need reliable cash flow to meet liquidity challenges. Again, the last thing any pension plan should be doing is forcing sales of securities to meet on-going cash needs.

As U.S. interest rates continue to rise, the YTM on CFM portfolios continues to rise. Longer-term CFM assignments, such as a 30-year period, are seeing YTMs in the 6%+ range. Given the average public fund ROA is roughly 6.6%-6.75%, pension plans can cover a significant percentage of their return target through a strategy providing certainty, barring any defaults (a rare IG event). Please don’t let this opportunity to secure the pension promises pass you by. We’ve seen this happen before and the outcome isn’t pretty.

08.17.26
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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.

08.06.26
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Is Your Asset Allocation Responsive?

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

We are happy to share with you Ron Ryan’s latest thoughts related to asset allocation and how it should be responsive and not strategic. We at Ryan ALM, Inc. have witnessed many investing cycles during our decades in the pension industry. We have seen well-funded defined benefit pension plans witness their funded status/ratio deteriorate quickly as markets retrenched. As Ron highlights in his latest thoughtful piece, public pension plans have made terrific strides to improve funding from roughly 71% to a recent high of 88.7% according to Milliman.

Given the improved funding, are U.S.-based pension plans de-risking? Unfortunately, no. They continue to operate with an objective to maximize the return on the assets and not with the more appropriate objective to SECURE the promises made to their members. The former objective continues these plans on a rollercoaster of returns. Regrettably, a return focus only guarantees volatility: volatility of returns leading to volatility of contributions and ultimately the funded status of the plan. It makes little sense.

Adopting an objective that is focused on securing the pension promises creates an element of certainty within the management of pensions not often found, if at all. By securing the promises, one dramatically improves the liquidity needed to meet those monthly obligations. It also creates a longer investing horizon for the assets not used to meet the plan’s liquidity.

We believe that Cash Flow Matching (CFM) is the only strategy that creates the necessary liquidity with certainty, as the asset cash flows of principal and interest are matched to the liability cash flows of benefits and expenses. There is no sweeping of the dividends and capital distributions, which should be reinvested in the products with higher potential returns and NOT used for distributions to beneficiaries.

As your plan’s funded status improves, respond by allocating more of the plan’s assets to CFM. Don’t let your winnings ride. Take risk form the plan’s asset allocation in a responsive way to positive changes in the plan’s funded status. Markets have been producing outsized positive returns, but standard deviations measure both upside and downside possibilities. Is your plan’s sponsor able to withstand a major market correction similar to what we’ve seen previously (2000-’02 and 2007-’09)? Will the likely increase in contributions be crushing?

Who knows what is going to happen with interest rates, inflation, the price of oil, equity markets, etc. Bringing some certainty to pension management should be everyone’s objective. If done correctly, everyone will be able to sleep well at night knowing that your future promises have been secured no matter what transpires in markets that remain out of our control.

07.31.26
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Why wait?

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

Due to great uncertainty brought on by the conflict in the Middle East and the war’s potential impact on the price of oil ($85.63 at 10:01 EST) that could drive inflation higher, U.S. long-dated Treasury yields continue to rise. In fact, the U.S. 30-year Treasury yield has not been this high (5.26%) since July 6, 2007, when the yield was at 5.28%. Where yields go from here is anyone’s guess, but I will share that oil, as represented by WTI, has risen 24.9% since June 30, 2026. Given the exposure that oil or oil-derived inputs have in more than 6,000 products, the significant rise in the recent price could impact inflation for quite some time, even if oil soon began to flow more freely.

We recently saw the average 30-year BBB+ bond trading at 110 bps above the prevailing 30-year Treasury. If that relationship is maintained, pension plans could potentially cover most of their desired return on asset (ROA) annual target (average public pension plan has a 6.75% ROA) through bonds. Should inflation spike once again, there is no telling how high U.S. interest rates could rise. Despite domestic equity’s apparent immunity to market fundamentals and geopolitical risks, there will come a time when higher U.S. yields become too attractive to ignore leading to the potential for rebalancing out of equities into fixed income. That action will likely lead to lower equity prices and falling bond yields.

So, I ask, why wait? Why wait to take risk from your current asset allocation before the markets act? Why not SECURE your benefit promises through cash flow matching (CFM) well into the future and reduce the volatility related to returns, contributions, and funded status? Why not take advantage of very attractive bond yields? As a reminder, core, active fixed income strategies are highly interest rate sensitive. Rising yields negatively impact bond prices, as seen in the performance of the Aggregate Bond Index, which is up only 0.1% annually for the 5-years ending June 30, 2026. However, a CFM strategy, which secures benefits that are future values, eliminates interest rate risk, as future values are not interest rate sensitive.

Public pension plans have done a good job of improving their funded ratios since bottoming after the Great Financial Crisis but remain only one market crash away from repeating this vicious cycle. Get off the performance rollercoaster. Secure your promises chronologically for some period into the future (your plan’s funded status should dictate the allocation). You and your participants will sleep much better knowing that the promises made will be kept.

07.29.26
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There Is No “One Size Fits All” Asset Allocation

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

I recently attended a public pension conference in which the following question was asked by the moderator: Should public pension funds once again adopt a 60%/40% asset allocation framework? As a reminder, there may be an average exposure that results from a review of all public fund data, but there is NO such thing as an appropriate or standard asset allocation. Given that every defined benefit plan has its own unique liabilities, funded status/funded ratio, different workforces, ability to contribute, etc., how could there be a standard exposure to any asset class, let alone a standard 60% equity/40% fixed income allocation.

I’m sure that this question originates through the belief that the pension objective is to achieve a return on asset (ROA) assumption, as if there is some magic combination of assets and weightings that will enable the pension plan to achieve the return target. However, as regular readers of this blog know, we, at Ryan ALM, think that the primary objective when managing a DB pension plan is NOT a return objective but it is to SECURE the promised benefits at a reasonable cost and with prudent risk.

Pursuing a return objective guarantees volatility – volatility of returns, contributions, and funded status. It does not guarantee success! Regarding the volatility of returns, the annual standard deviation for a pension plan’s asset allocation is roughly 12%-15%. Refocusing on the plan’s unique liabilities secures, through cash flow matching (CFM), the monthly promises (benefit payments) from the first month out as far as the allocation will cover. Through this process the necessary liquidity is provided each month, while also providing the additional benefit of extending the investing horizon for the remainder of the assets that are no longer needed as a source of liquidity. We refer to these residual assets as the alpha or growth assets that now can grow unencumbered.

These growth assets can be invested almost anyway that you want. You can decide to just buy the S&P 500 index at low fees or construct a more intricate asset allocation with exposures and weightings of your choice. Again, there is no one size fits all solution. We do suggest that the better the funded ratio/status of your plan, the greater the allocation to the CFM strategy. If your plan is less well funded today, start with a more modest CFM allocation, and expand it as funding levels improve. In any case, you are bringing an element of certainty to what has been historically a very uncertain process.

So, please remember that every DB plan is unique. Don’t let anyone tell you that your fund needs to have X% in asset class A or Y% in asset class B. Securing the benefits should be the most important decision. How you build the alpha portfolio will be a function of so many other factors related specifically to your plan and its governance.

07.14.26
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Ryan ALM’s TPA+ Approach

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

Asset allocation discussions have recently compared traditional pension asset allocation with a “new” approach referred to as the Total Portfolio Approach (TPA). We believe the distinction between traditional asset allocation and the total portfolio allocation is subtle but important. The two approaches begin with different questions.

Traditional asset allocation approaches ask: “How should we invest the assets to achieve the required return objective?”

A TPA approach asks: “How does every asset contribute to funding a pension plans liabilities (benefits)?”

In a traditional asset allocation framework the expectation is that long-term returns will eventual fund the promises. However, a pension plan doesn’t exist to outperform an index/benchmark. It exists to pay the promised benefits!

In the TPA approach, a pension fund will have a broadly diversified array of investments, but each investment has a specific purpose relative to the pension plan’s liabilities. There are no investment sleeves, but a single portfolio with the goal to fund the pension’s liabilities.

We, at Ryan ALM, Inc. believe that our approach, implemented over decades, goes one step beyond Total Portfolio Management.

Whereas a TPA asks: “What allocation best maximizes the performance of the entire portfolio?”

Ryan ALM asks: “What investment strategy best minimizes the cost and risk of paying future pension benefits?”

TPA shifts the focus from individual asset classes to the overall portfolio. Ryan ALM shifts the focus again—from the portfolio itself to the pension liabilities. Assets need to know what they are funding… net liabilities (projected benefits – projected contributions). Since the actuary does not calculate net liabilities, this becomes the first step and calculation of the Ryan ALM process. Our philosophy is arguably closer to Total Pension Management than Total Portfolio Management.

Ryan ALM’s liability-based investment philosophy shares important characteristics with TPA while also differing in a fundamental way.

Traditional Asset AllocationTotal Portfolio ApproachRyan ALM Liability-Based Investing
Optimizes asset-class weightsOptimizes the total portfolioOptimizes the funded status and liability outcomes
Benchmark relativeGoal relativeLiability relative
Focus on returnsFocus on total risk-adjusted returnsFocus on securing pension promises
Asset classes drive decisionsPortfolio drives decisionsLiabilities drive decisions

The Pension objective isn’t returns—it’s securing pension promises! Ryan ALM’s pension management is distinguished from both traditional asset allocators and TPA by highlighting and managing to the pension plan’s liabilities, and then paying those liabilities when required through Cash Flow Matching. No games and no uncertainty!

06.26.26
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Will You Be Wearing A Bathing Suit?

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?