Tag Archives: Asset allocation

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?

06.17.26
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Pension Problem: Gross versus Net Liabilities

By: Ronald J. Ryan, CFA, Chairman, Ryan ALM, Inc.

Most pension plans are focused on gross liabilities as expressed by the funded ratio (total assets / total liabilities) and funded status (total assets – total liabilities). But the truth is plan assets are to fund NET liabilities after contributions. Contributions can be quite large especially for public pension funds. Pension assets need to know what they are funding… answer = NET liabilities. Unfortunately, actuaries do not calculate NET liabilities, nor do they include contributions as an asset to calculate the funded ratio / status. These oversights have an impact on asset allocation, especially if it is focused on the true economic funded status of solvency. The Ryan team created the first Custom Liability Index (CLI) in 1991 that has become a core product of Ryan ALM. Our CLI will calculate NET liabilities as a term structure, so assets and the plan sponsor know the liquidity needed and when to fund NET liabilities. 

GASB accounting requires a test of solvency (asset exhaustion test or AET) for public funds (which should be a requirement for all types of pensions) that includes contributions as a future asset to help fund the future liability cash flow schedule. Assets are grown at the return on asset assumption (ROA) to see if they can fully fund projected benefits – projected contributions (net liabilities). At the point that assets are exhausted, GASB requires a bifurcated discount rate using AA 20-year municipal rates. Ryan ALM modifies the GASB AET to calculate the ROA needed to fully fund net liabilities. We find that our calculated ROA is usually much lower than the ROA assumption currently being used. Our calculated ROA should be the hurdle rate for asset allocation instead of the common practice of choosing an ROA based on an asset only forecast of returns by asset classes. Our modified AET should be the first step in asset allocation after the CLI is built.

Bonds are the only asset class with the certainty of cash flows. That is why bonds have always been used to defease and immunize liabilities. Our Liability Beta Portfolio™ (LBP) is a cost optimization model that will fully fund NET liabilities at the lowest cost to the plan sponsor. We strongly believe that the bond allocation should be used to fully fund NET liabilities chronologically. In the process, an extended investment horizon is created buying time for the Alpha assets to grow unencumbered. We have found that converting the plan’s core fixed income allocation to a cash flow matching portfolio will normally cover the plan’s next 10+-years of benefit payments. Instead, some pension plans use a “Cash Sweep” to fund current liabilities which significantly damages the total return produced by those growth assets. Let bonds fund NET liabilities with certainty through our LBP… and sleep well at night.        

“Where is the knowledge we have lost in information?” T.S. Eliot

06.12.26
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Try Clapping With One Hand

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

The only reason that your DB pension plan exists is because a promise was given to your participants that they would receive a monthly benefit for life upon meeting some requirements such as years employed and retirement age. The promise wasn’t based on whether your particular pension fund achieved the annual return on asset assumption (ROA). If the ROA was achieved – great. Contributions would be as forecasted by your actuary. If not, it would be time to ante up more in annual contributions. But at the end of the day, you remain on the hook to make that monthly payment.

Given that reality, does it make sense that the primary focus is on the ROA and not the promised benefits? Regrettably, for most of Pension America, the annual ROA is the goal. However, pursuing that objective only guarantees volatility and not success. On the other hand, we, at Ryan ALM, Inc., believe that the primary pension objective is to SECURE the promised benefits at a reasonable cost and with prudent risk. By securing that promise, you eliminate uncertainty and volatility in the funded status.

Here’s the rub, the pension liabilities are the domain of the actuaries, while asset allocation falls to the asset consultants. How often do those entities communicate? How often do you as the plan sponsor know how that promise you made is behaving? Does it make sense to you that assets are constantly being measured while the liabilities may get a once per year update 4-6 months delayed? Wouldn’t it make much more sense to have both the assets and liabilities updated at the same time so that asset allocation adjustments could be made as necessary?

Think about a bridge with two primary supports. One of the supports are representative of the actuaries and the other one is the asset consultants. To get from one side of the pension canyon to the other side, there needs to be a connector. What entity is that? It is not your investment managers, who are focused on a generic benchmark and not your plan’s liabilities. Ryan ALM believes that we can be that entity, as we provide a turnkey system of sustainable solutions to make sure that each pension fund that we support understands the promises that have been made, develops the correct cash flow roadmap, and carefully constructs the necessary match between liability cash flows of benefits and expenses with the asset cash flows (principal and interest) from IG bonds to SECURE those monthly promises.

Our mission is to secure your promises at both low cost and with prudent risk. It is not to have you sit firmly on the rollercoaster of market returns with the hope that the plan’s asset allocation will deliver a return near the ROA. The current breakdown in communication between actuaries and asset consultants is like trying to clap with one hand. As hard as you try, it just won’t work. Let Ryan ALM be your bridge. With us you’ll receive a monthly Custom Liability Index (CLI) based on your fund’s forecasted liabilities, monthly liquidity chronologically as far into the future as your allocation to a cash flow matching (CFM) mandate covers, time for the residual assets (alpha assets) to grow, low cost management fees, ongoing monitoring of the relationship of assets to liabilities, and a stable funded ratio and contribution expenses for that portion of the plan. We connect assets to liabilities through our proprietary turnkey system of four products. Think of us as the maestro leading the orchestra. Both hands are working for you and your participants.

06.05.26
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It is Our Mission!

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

The individual professionals on the Ryan ALM, Inc. team have both a personal and professional mission which drives us every day! What is that mission? We are driven with the goal of protecting and preserving defined benefit pension plans, which we believe are the only true retirement plans. Any other “retirement” vehicle pales in comparison. Yet, our industry has adopted practices which we believe are detrimental to the long-term stability of these critically important plans.

Pursuing an objective focused on return has created an environment that has these DB plans on a perpetual rollercoaster of performance, ultimately creating unnecessary instability and uncertainty as it relates to both contributions and funded status. As a reminder, we believe that the primary objective in managing a DB pension plan is to SECURE the promised benefits at a reasonable cost and with prudent risk. It is not a performance objective.

Recently, I reviewed a pension plan that believed its biggest challenge was improving returns. After examining its cash flow needs, we discovered the larger issue was liquidity. By addressing liquidity first, the trustees reduced risk, a key action in these uncertain times, while improving confidence in their ability to meet future benefit payments. Furthermore, most trustees I speak with are wrestling with the same issues—liquidity, uncertainty, and how much risk is appropriate at this stage of the investing cycle.

Through Cash Flow Matching (CFM), a dedicated investment-grade bond portfolio in which we carefully match asset cash flows of principal and interest against the liability cash flows of benefits and expenses, we are able to bring certainty to your cash flow needs through enhanced liquidity. I’d be happy to walk through your plan’s cash flow profile and show you how a cash flow matching approach would support your current asset allocation.

Every pension plan is different, but every trustee shares the same responsibility: ensuring promised benefits are paid. Markets will do what markets do. Interest rates will rise and fall. Economic uncertainty will come and go. The question is whether your pension plan is structured to withstand those events without jeopardizing the promises made to participants.

If you’re not completely certain that your fund is structured appropriately, let us at Ryan ALM work with you to protect and preserve your DB plan, as it is our collective mission. Your fund’s participants will appreciate knowing that their promised benefits have been secured for some period of time. If you’d like a second opinion on your plan’s liquidity profile, cash flow needs, or overall asset allocation strategy, let’s talk. A 30-minute conversation may help you see risks—and opportunities—that aren’t visible through a funded ratio or return assumption lens.