Editor’s note: This is the final post in a four-part series on investment insights. Part 1 can be viewed here, Part 2 can be viewed here and Part 3 can be viewed here.
Can you boil down the coming year into 10 short points? Probably not. But the pain of 2020 brought some key issues into clearer focus, including risk management, rates and how it all impacts your funded status. So then, in 280 characters or less, here we go:
Low interest rates / current market environment
1. Markets have screamed over the past five years. Some funded statuses haven’t. Any commonality for those that did? #hasouradvicechanged? #howsyourfundedstatus
2. In such a low-rate environment, do you still go long-duration? Depends: Do you have a view on rates? How confident are you of your view? And your view on the correlation of equity to treasury? And equity to spread? #howboundiszerobound #zeroisjustanothernumber #whatinstead?
3. Spread as a % of discount rate is not always analogous to spread risk as a portion of total surplus risk. In fact, it’s often the contrary. That’s why long treasury is such a compelling part of a best-in-class LDI composite. And it doesn’t hurt that it’s cheap, relatively straightforward, and if done right, capital efficient. #golong #LDI-or-die
Interrupted funding sources
4. Strictly based on funding relief, some plans have a five-year contribution pattern that looks like: zero, zero, zero, zero, $1 billion. Many are now considering $200M, $200M, $200M, $200M, $200M. In the end, if both contributed a billion, which one does the sponsor prefer? #spreadoutthepain #regshaveconsequences #avoidbareminimum #PBGCdrag
Creating more resilient plan portfolios
5. How did March 2020 make you feel? If it didn’t hurt, congratulations. You are in the tail of the materiality distribution. If March gave you the cold sweats, then it’s time to recalibrate your risk budget before the next event. #howwelldoyousleepatnight #takeyourfinancialmedicine
6. Keep a close eye on the $20 billion club. In 2019, we saw assets and liabilities peak, while contributions plunged. And that was before COVID-19 volatility? What will the results of 2020 tell us? #FebruaryReading10ks
7. Active v passive? Unfair question. We regularly see portfolios with a high percentage of the portfolio allocated to active that have less active return/risk than those with low allocations to active. Active risk and return is driven by much more than dollars allocated. #restatethequestion #twoarebetterthanone #proceedtonumbereight
8. How about restate the question first, to: how much active risk do I want? Be sure to think in terms of target alpha, target active risk, and percent of my portfolio necessary to get that. Incidentally, the answer to the active-risk question is increasingly, “Less than I have had historically.” But this is only half of the equation. #proceedtonumbernine
9. What do I do with the rest of the growth assets once I answer number eight? The answer to this question is increasingly, some combination of three components: (1) Old-school cash-funded passive. (2) Same passive exposure, but thru derivatives cash overlay to accommodate rebalancing, liquidity and to limit manager disruption. (3) Factor exposures in a completion portfolio. #everydecisionisactive #factorcompletionturnsheadwindsintotailwinds
10. Path matters. For cashflow-negative systems (think most mature DB), it’s not about return, it’s about ending wealth. You don’t spend return. You spend ending wealth. We believe a path with lower volatility—even if it has slightly lower returns—is a path worth taking. #lostdollarsdontgrow #sayitwithme #pathmatters
It’s easy to make a top-ten list. But in 2021, just like any year, navigating these and other issues is really about implementation. The devil is in the details. Some serious planning with the right solutions provider can help keep those devils at bay.