Tag Archives: efs

03.17.26
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What Would You Do?

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

Happy St. Paddy’s Day to my Irish friends (I’m 1/2 Irish) and those that would like to be. May the luck of the Irish embrace you today.

As many of you know, we are always willing to provide to the pension and E&F communities a free analysis to highlight how a Cash Flow Matching (CFM) mandate could secure the promised benefits/grants for your fund and importantly, provide the necessary liquidity to meet future promises. In many cases, we will produce multiple runs covering a variety of periods usually 5-years to 30-years. Often the sponsor of the fund is shocked by the potential cost reduction of those future obligations.

We recently provided a large pension plan with several potential implementations, as they try to improve the fund’s liquidity profile, while also desiring to secure those future promises. Here are three scenarios that we provided to them and I’d welcome your feedback on what you would do.

Scenario #1 – Provide a CFM portfolio using the core fixed income allocation ($3 billion/15% of total assets) to match and fund the NET (after contributions) liability cash flows of benefits and expenses (B&E). In this scenario, we can cover the next 6-years of B&E through 6/30/32, covering $3.44 billion in FV benefits and expenses for $3.0 billion (a cost reduction of $443.3k or 12.88%). The YTM on the portfolio is 4.09 and the duration 3.09 years, with the average quality being A-. The remaining assets can continue to be managed as they currently are, but they now benefit from a 6-year investing horizon in which they are no longer providing any liquidity to meet monthly obligations.

Scenario #2 – Provide a CFM portfolio using the same $3 billion (only needed $2.96 billion) or 15% of the fund’s total assets, but implement the strategy using a vertical slice of the liabilities going out 30-years. In this example, we can cover 22% of the liability cash flows for the next 30-years. The FV of those liabilities are $6.3 billion (as opposed to the $3.44 billion using 100% CFM for 6-years). We can reduce the FV cost by $3.33 billion or 53%. The remaining 85% of the fund’s assets can be managed as they presently are, but they don’t benefit from the longer investing horizon, as they will be called upon to provide liquidity to meet the residual B&E.

Scenario #3 – 100% CFM covering net liabilities through 6/30/59. In this case we showed that we can cover 100% of the NET B&E for $9.9 billion in assets, while providing the plan with a $4.4 billion surplus. The FV of those B&E through 2059 are reduced by about $13 billion or 56%! The surplus assets now have a 33-year investing horizon to just grow and grow! A modest 6.5% annualized return for that period produces a surplus of $34.2 billion that can be used to fund B&E after 2059, enhance benefits, and/or reduce future contributions. An 8% annualized return produces a surplus >$75 billion. Oh, my! Also, in this scenario, the organization ONLY needs an annual 2.56% return on the remaining assets to fully fund ALL projected B&E well beyond 2059, as determined by our Asset Exhaustion Test (AET).

Importantly, these scenarios only work if the sponsoring entity provides the forecasted contributions, which in this case they have consistently done for the past 10+ years.

So, I ask once again, what would you do? Scenario 1 ($3 billion/15% of total assets) provides a 100% coverage for 6-years while reducing cost by 13%. Scenario 2 reduces the cost of FV B&E by 53% or $3.4 billion, but covers only 22% of the liabilities, while Scenario 3 reduces the FV cost by 56%, while securing the net promises through 2059 for a cost of $9.9 billion resulting in a surplus of $4.4 billion.

I guess that there is a fourth scenario which is to do nothing, but why would you want to continue to ride the proverbial performance rollercoaster that only guarantees volatility and not success when you can secure a portion of the liabilities, significantly reduce the cost of those future promises, improve liquidity, and “buy time” for the residual assets to just grow unencumbered?

As the Irish say – “May the most you wish for be the least you get“.

11.18.24
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It Doesn’t Have to be This Way

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

The Financial Times (FT) recently published an article highlighting the struggles of Ivy League schools trying to manage liquidity in the face of an extended downturn in the performance of private markets. Collectively, this august group of institutions continues to underperform the average return for higher education endowments of 10.3% for fiscal year 2024, with only 6 of 8 universities outperforming. This follows an even more challenging fiscal 2023 in which all 8 universities failed to top that year’s 6.8% average return. This difficult period in which distributions have dried up considerably, is forcing some, including Princeton, to issue bonds in order to support the operations of the schools. Haven’t we seen this story play out before?

Despite the troubles, there seems to be this reluctance to alter a strategy first adopted nearly four decades ago when Yale began to invest heavily in these strategies. In the article, Roger Vincent, former head of private equity at Cornell University said, “Everybody still believes in having as big an allocation to private equity as possible.” Really? Why? No asset class will always outperform. The problem with private equity at this time is the fact that too much money has chased to few quality deals driving up the costs of acquisition and lowering future returns. In the process, managers have become reluctant to reduce valuations in order to sell these portfolio companies which has crushed liquidity.

As I’ve written on many occasions, assets shouldn’t be lumped into one bucket focused on return either to meet benefit payments, or in this case, a spending policy. There should be two buckets – liquidity and growth. If the Ivies had structured their portfolios with this design in mind, they would have had sufficient liquidity when needed and issuing bonds wouldn’t have been necessary. Endowments and foundations would be well-served to adopt this structure. Liquidity can be managed through a cash flow matching (CFM) process, which will ensure (barring any defaults) that the cash will be on hand monthly, quarterly, and/or annually depending on the needs of the organization.

I’ve witnessed too many times throughout my 40+ year career investment ideas that got overwhelmed by cash flows. We’ve had booms and busts in real estate, equities (Dot Com era), quantitatively managed equities, gold/commodities, emerging markets, Japan, hedge funds, and on and on and… Why would “investors” believe that private equity would be immune to such action? Again, if an investment is deemed to be all weather, money will naturally flow to that “opportunity” thus reducing future prospects. One way to minimize the short-term impact of these cycles is to build in a liquidity strategy that bridges these troubled times.