Tag Archives: cash-sweep

07.07.25
by

Don’t Engage in a Cash Sweep – Dividends Matter!

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

We’ve already shared with you the importance of dividends to the long-term return of the S&P 500 by referencing studies conducted by Guinness Global Investors.

According to the Guinness study, which was last updated as of April 2020, the contribution to return of the S&P 500 from dividends and dividends reinvested for 10-year periods since 1940 was a robust 47% down insignificantly from 48% a decade ago. Extending the measurement period to 20 years from 1940 forward highlights an incredible 57% contribution to the total return of the S&P 500 from dividends. Importantly, this study is on the entirety of the S&P 500, not just those companies that pay dividends. If the universe only included dividend payers, this analysis would reveal strikingly greater contributions since roughly 100 S&P 500 companies are not currently paying a dividend.

As if this study isn’t enough to convince you of the importance of dividends to the long-term return of stocks, Glen Eagle Trading put out an email today that referenced a recent Wall Street Journal article, titled “Why Investors Are Right to Love Dividends”. The article highlighted the fact that recent studies show S&P 500 dividend-paying stocks returned 9.2% annually over the past 50 years, which is more than double the 4.3% return of non-dividend payers, with lower volatility. Then there is this study by Ned Davis which broke down the contribution of dividends for the 47-years ending December 21, 2019.

Once again, it becomes abundantly clear why investing in companies paying dividends is a terrific long-term strategy. It also begs the question, why do many plan sponsors and their advisors regularly “sweep” income from their equity managers to meet ongoing benefits and expenses? In doing so, instead of structuring the pension plan to have a liquidity bucket to meet those obligations, this activity diminishes the potential long-term contribution to equities from dividends. As longer-term returns are reduced, greater contributions are needed to make up the shortfall compounding the problem.

Please don’t sweep interest and dividend income or capital distributions for that matter, establish an asset allocation that has a dedicated liquidity bucket that uses cash flow matching to secure and fund ongoing benefits and expenses. The remainder of the assets not deployed in the liquidity bucket go into a growth bucket that benefits from the passage of time.

05.02.25
by

Enhancing the Probability of Achieving the ROA

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

We are often confronted by plan sponsors and their advisors with the objection of using cash flow matching (CFM) because the “expected return” is lower than the plan’s return on asset assumption (ROA). Given that objection, we often point out that each asset class has its own expected return. The ROA target is developed by weighting each asset class’s exposure by the forecasted return. In the case of the bond allocation, the YTW is used as the target return.

If the plan sponsor has an allocation to “core” fixed income, there is a fairly great probability that our CFM portfolio, which we call the Liability Beta Portfolio (LBP), will outyield the core fixed income allocation thus enhancing the probability of achieving the ROA. This is accomplished through our heavy concentration in A/BBB+ investment grade corporate bonds that will outyield comparable maturity Treasuries and Agencies, which are a big and growing percentage of the Aggregate Index. In most cases, the yield advantage will be 50-100 bps depending on the maturities.

Ron Ryan, Ryan ALM’s Chairman, has produced a very thoughtful research piece on this subject. He also discusses the negative impact on a plan’s ability to achieve the ROA through the practice of sweeping dividend income, interest income, and capital distributions from the plan’s investment programs. Those distributions are better used when reinvested in the investment strategies from which they were derived, as they get reinvested at higher expected growth rates. The CFM program should be the only source to fund net benefits and expenses, as there is no forced selling when benefits and expenses are due.

There is no viable excuse to not use CFM. The benefits from this strategy are plentiful, especially the securing of the promised benefits which is the primary objective for any pension plan. We encourage you to visit RyanALM.com to read the plentiful research on this subject and other aspects of cash flow matching.