Tag Archives: KCS

08.03.15
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Tsipras Fiddles While Greece Burns!

Unfortunately in this age of the 30 second soundbite we have a tendency to get bored with stories and events, often long before there has been resolution. This seems to be the case with Greece and it’s inclusion in the the Euro / Eurozone.

Most news reports these days are reporting that there is a “DEAL” already signed and sealed as it pertains to a third bail out for Greece when in fact, negotiations on a potential resolution only began last week.  Furthermore, key players, most notably the IMF, aren’t at the negotiating table, and they likely will stay away unless considerable debt relief is negotiated – not a very likely outcome.

While the negotiations begin, Greece’s economy is plunging further into depression. As reported earlier today, the seasonally adjusted purchasing managers’ index (PMI), fell to 30.2 in July from 46.9 in June. Any reading below 50 suggests contraction in the sector. Furthermore, new business decreased sharply in July, surpassing the previous record set in February 2012, while employment dropped for the fourth straight month in July, and at the steepest pace ever recorded during the 16-plus years of data collection. In addition, production dropped for the seventh straight month in July due to diminished output requirements as new orders plummeted and firms had difficulty in sourcing materials and semi-finished goods for use in the output process.

As if that isn’t bad enough, a quick recalculation of necessary funding for Greece raises the number from $92 billion to around $120 billion, which includes re-capitalizing the Greek banks. According to Mark Grant, the number for the banks is now about $43 billion, and it could be far worse as it appears that loans in default are growing at an alarming rate. Clearly, this will not sit well in Brussels and Berlin, and could bring about even more stringent demands than had been previously thought.

Given the plethora of depressing economic news, it isn’t surprising that the Greek stock market got destroyed today after reopening for the first time in five weeks since the beginning of the country’s capital controls and the announcement of the bailout referendum. The overall Athens Stock Exchange (ASE) index plunged by 22.87% as it opened. That leaves the market at a low not recorded since the middle of 2012.

According to an article in the LA Times, several key participants in the negotiations don’t hold out much hope for Greece’s economy even if a deal is finally completed.  Greece’s own prime minister, Alexis Tsipras, says he doesn’t really “believe in” the new bailout deal he’s hoping to secure for his country. Germany’s top finance official thinks a Greek exit from the euro currency would be better than another costly rescue package. As mentioned previously, even the International Monetary Fund (IMF) doubts a bailout will work without major debt relief from Athens’ creditors, few of which appear willing to offer any.

To hear these key players tell it, the rescue plan they’re currently concocting to save Greece from bankruptcy is either a bad idea or doomed to fail. Yet they’re pressing ahead anyway, despite the questions that their own public statements raise about their commitment to keeping Greece solvent, helping its economy grow and preserving its membership in the Eurozone.

08.03.15
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KCS August 2015 Fireside Chat – “Targeting Future Changes”

We are pleased to share with you the latest edition in the KCS Fireside Chat series.  This article touches on the burgeoning use of target date funds (TDFs).  However, all TDFs aren’t the same, and plan sponsors have an important responsibility to make sure that they stay on top of these funds from both an investment and fiduciary standpoint.  My colleague, Dave Murray, shares his expertise on these important investment vehicles.  Please don’t hesitate to reach out to us if we can provide any assistance.  Enjoy!

Click to access KCSFCAUG15.pdf

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06.30.15
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Market Volatility Giving You The Woollies?

I’ve witnessed many market declines during my more than 33 years in the investment industry, and I would be lying if I told you that I called the beginning, end, and ultimate magnitude of any of the sell-offs.  Market declines are part of the investing game.  But just knowing that isn’t enough, as unfortunately, they can have a profound impact on retirement plans and retirement planning, both institutional and individual, as they impact the psyche of the investors.

It is well documented how individuals tend to buy high and sell low. The market crash of 2007 – 2009 drove many individuals out of equities at or near the bottom, and many of those “investors” have kept their allocations to equities below 2007 levels. It hasn’t been that much better for the average institutional investor either.  We are aware of a number of situations (NJ for one) that plowed into expensive, absolute-return product at the bottom of the equity market only to see that portfolio dramatically underperform very inexpensive beta, as the equity markets have rallied since March 2009.

In some cases, the selling “pressure” was the result of liquidity needs, which lead to the tremendous explosion in the secondary markets for private equity, real estate, etc. in 2009.  The E&F asset allocation model, made so famous by Yale, was the undoing for many retirement plans, as the failure to secure adequate liquidity exacerbated market losses. Who knows whether the turmoil in Greece will lead to their exit (expulsion) from the Euro, but there is certainly heightened fear and volatility in the global markets? Are you currently prepared to meet your liquidity needs?

As we’ve discussed within both the Fireside Chats and on the KCS blog, the development of a hybrid asset allocation model geared specifically to your plan’s liabilities, can begin to de-risk your plan, while dramatically improving liquidity.  The introduction of the beta / alpha concept will provide plan sponsors with an inexpensive cash matching strategy that meets near-term benefit needs, while extending the investing horizon for the less liquid investments in your portfolio. By not being forced to sell into the market correction, your investments have a greater chance of rebounding when the market settles.

Traditional asset allocation models subject the entire portfolio to market movements, while the beta / alpha approach only subjects the alpha assets to volatility.  But, since one doesn’t have to sell alpha assets to meet liquidity needs given that the beta portfolio is used for that purpose, the volatility doesn’t matter. Don’t fret about Greece and its potential implications for the global markets and your plan. Let us help you design an asset allocation that improves liquidity, extends the investment horizon for your alpha assets, and begins to de-risk your plan, as the funded ratio and status improve.

08.19.14
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Delayed Gratification – Just How Important Is It?

The following Tweet was posted by Vanguard this morning – “Delaying gratification, avoiding debt, & saving are all central to a financial literacy program for student”. We all know that we are more responsible for funding our retirement than at any time in the last 60 years, but just because we know doesn’t mean we have the ability to do so.

Defined Contribution plans are the vehicles of choice for most private sector employers, if not their employees. However, funding these plans, even to meet the company match, is not easy for many (most) low to middle income households. At KCS, we’ve discussed the benefits of participating in a DB plan versus a DC plan since our founding.

But, if you have a job, don’t have substantial student loan our housing debt, and can afford to make sizable contributions into your retirement program, it is better to delay gratification and make those contributions as early and often as possible. Why? Because the math of compounding truly works.

For instance, if a 22 year old can make a monthly contribution of $833 for 10 years, the $99,960 in contributions growing at 4% / year will become $438,393.12 upon reaching age 65. Again, that is with making contributions for only the first 10 years. At that point, you’ve basically funded your retirement and now you can begin acquire some of the other assets that you’ve been deferring.

However, if you can’t fund your retirement upfront with sizable monthly contributions, but can only put in $194 / month for the next 43 years growing at 4% until age 65, your balance upon retirement would only be $256,648.87, or roughly $182,000 less in total assets. WOW!

Finally, just think about how little you’ll be able to accumulate in your account if you delay making contributions until the age of 32. For instance, if you can only make that $194 / month for the next 33 years your account balance at age 65 is only $154,500, more than $100,000 less than you would have had if you began contributing the $194 / mo for the prior 10 years.

So, DC plans need funding often and early to be successful, but having the financial wherewithal is not a given, and having the discipline is not easy.

07.24.14
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Of Course They Are Going To Pick Above Average Managers!!

I had the pleasure of attending the Opal Conference in Newport, RI the last few days. Opal’s “Public Funds Summit East: Navigating the Future” was well attended by public fund trustees, asset consultants and investment management professionals. I will provide a general overview in a later blog post, but I want to dedicate this text to an issue related to investment management fees.

I was particularly disturbed by a comment by an asset consultant when the issue of performance fees was raised. This consultant was troubled by the notion of paying performance fees to managers of any ilk because managers are chosen by his firm who can and will add value, so why pay more for their services? How naive!

Just prior to this panel’s discussion, we were implored by a plan sponsor to seek economies of scale, while also being cognizant of fees (all fees, and not just investment manager fees), as they can be destructive to a plan’s long-term health. I absolutely agree.

Even if a consultant thought that a manager had the above average ability to provide an excess return on a fairly consistent basis, why would they or their clients be willing to pay a manager their full fee without the promise of delivery? As a reminder, the “average” manager will return the performance of the market minus transaction costs and fees.

It is fairly easy to calibrate the performance fee with the asset-based fee based on the expected excess return objective. If the manager achieves the return target, the fees paid should be roughly equivalent, with perhaps the performance fee relationship paying slightly more as compensation for the manager assuming more risk. However, in no case should the performance fee reward a manager to a much greater extent than the asset based fee would have generated.

If the manager truly has the ability to add consistent value, they should be comfortable assuming a performance fee. Importantly, the plan sponsor shouldn’t fear the injection of more risk into the strategy, as the manager is not likely interested in jeopardizing their reputation for a few more basis points. In addition, there are easy ways to track whether this is happening.

Lastly, paying flat asset-based fees in lieu of creating a more incentive based compensation structure is just wrong. Plans should be happy to pay fees based on value-add, but should be infuriated when forced to pay an asset-based fee for the usual less than index return.

KCS has a white paper on this topic that can be accessed on the KCS website. Don’t hesitate to reach out to us if you’d like to discuss this issue in greater detail. Asset consultants are kidding themselves (and their plan sponsor clients) if they think that they will only pick above average managers!

06.17.14
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Unintended Consequences

Unintended Consequences

Recently I had the opportunity to speak at the Financial Research Associates’ conference in NYC on non-traditional fixed income. I had the pleasure of participating on a panel with an industry icon – Ron Ryan, Ryan ALM  He and I presented on the topic “Taking a Close Look at the Liability Beta Portfolio”.  However, before presenting our views on the proper use of fixed income in a defined benefit plan, especially in a low interest rate environment, Ron and I addressed the unintended consequences from accounting rules, both GASB and FASB, that have lead to an under-reporting of plan liabilities and an overstatement of plans assets.  Given both, it is obvious that funded ratios are overstated, too.

The IASB (International Accounting Standards Board) has moved to a mark to market accounting of both pension liabilities and assets.  It isn’t too far fetched to believe that the US will adopt these same standards in the near future.  Unfortunately, since GASB uses the ROA to value plan liabilities, it becomes clear as to why the pension community continues to focus on the asset side of the equation instead of the liability side, which should be driving asset allocation and investment structure.

Attached for your review is our presentation.  We encourage you to reach out to us if you have any questions or challenges.

 

 

06.10.14
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Where are the Economies of Scale?

Since its founding in August 2011, KCS has tried to highlight some of the issues facing the US retirement industry in the hopes that perhaps best practices could be identified and DB plans, as a result, SAVED.  I recently came across the “Status Report on Local Government Pension Plans” for Pennsylvania.  The report was released in December 2012, and it used information through calendar year 2011.

The following paragraph jumped out at me:

“Pennsylvania’s local government pension plans comprise more than 25 percent of the public employee
pension plans in the United States. There are now more than 3,200 local government pension plans in
Pennsylvania, and the number is continuing to grow. Seventy percent of the local government pension plans
are self-insured, defined benefit plans, and 30 percent are money purchase or other type plans. The pension
plans range in size from one to more than 18,000 active members, but more than 98 percent of the pension
plans can be characterized as small (less than 100 members). While 68 percent of the local government
pension plans have ten or fewer members, 32 percent have three or fewer active members.”

I find it hard to believe that anyone thinks that having more than 3,200 local government plans in PA is a good idea, especially when one considers that 98% of the plans have fewer than 100 employees. The local governments and their participants would be much better off pooling their resources into larger, more professionally managed DB plans that afford everyone the benefit or economies of scale. 

I suspect that there exist other states in the Union with a similar governance structure, but if we are to preserve the defined benefit plan as the retirement vehicle of choice, we need to reduce the cost of managing these plans.  Allowing thousands of defined benefit plans with fewer than 100 participants to exist is not sound governance.

06.02.14
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Could This Hybrid Plan Revolutionize the Pension Industry?

As we’ve seen recently in NJ with Governor Christie’s decision to withhold the State’s annual required contribution, public and private pension funds are under extreme funding pressure.  As a result, traditional DB plans continue to be terminated / frozen in rapid fashion, with new employees being migrated to defined contribution structures. Unfortunately, the complete shift in risk from the sponsor to the employee is proving to be a disaster, with most employees incapable of funding and managing their own retirement (median account balance for a DC participant is slightly more than $13,000).

Importantly, KCS is pleased to announce that we’ve entered into an alliance with Ed Friend, a long-tenured and highly successful actuary, Ryan ALM and Longevity Financial Consultants to bring to the marketplace a patent pending hybrid DB structure that provides the plan sponsor with a fixed cost feature. The product is called Double DB, and as a hybrid, combines elements of both DB and DC. We think that this new design could revolutionize the pension industry by making the use of defined benefit plans more economical for the sponsoring organization.

Please don’t hesitate to reach out to us if you’d like to receive more information on Double DB. We think that both employers and employees are better served utilizing the Double DB design.

05.03.14
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What are you paying for?

A reflection:

I was very fortunate to be hired into the investment industry in 1981. Two gentlemen, Larry Zielinski and Ted Swedock, took a huge leap hiring a not very qualified candidate out of undergraduate business school to fill a role as an analyst in a small consulting group.  I was the first-non consultant or assistant to be hired.  The role’s responsibilities were vast, and the experience that I gained was immeasurable.

But, the most important knowledge that was shared with me was a comment that Larry made on the first day that I began working at Janney Montgomery Scott’s Investment Management Controls division.  Larry told me that anyone or any company can produce vast quantities of paper and/or fancy reports.  A consultant is only worth their salt if they have the ability to interpret the information that they are passing on and at the same time are willing to make recommendations based on their interpretation.

As I sit back today and reflect on my nearly 33 years in this business, I can’t help but remember how important those words were that Larry uttered to me in October 1981.  I’ve tried to follow his lead since day one.  Initially, I didn’t have a clue about how most things truly worked in the investment industry. Today, as we build KCS, we continue to live by Larry’s example.  We can produce all the fancy reports in the world, but they aren’t worth the paper they are printed on if we also don’t share with our clients and prospects our recommendations as to a course that they should follow.  We are Fiduciaries, and we take that responsibility seriously.

As you may know, every month we produce at least one article on an investment subject. We don’t pull any punches.  If you want to know how we feel on a subject, just go to our website and look under the heading “Publications.”  Everything that we’ve produced is there.  I don’t know how many other consultants/consulting firms are regularly producing articles, but they should at least be willing to take a stand on those subjects most important to their clients.

At KCS, we are concerned about retirement security for most Americans.  We do believe that the demise of the defined benefit plan will produce negative economic and social consequences for a large segment of our population.   We don’t think that the status quo approach to managing DB plans is working.  We believe that our clients and their beneficiaries need new thinking and approaches on a variety of retirement subjects.  We’ve articulated those.  Has your consultant? So, I ask again, are you getting what you are paying for?