Perspectives Contributor:

David G. Eichhorn, CFA

May 5, 2022

The Disparity Among Risk Parity Managers: A Framework for Assessing Risk Parity Performance

Evaluating risk parity manager performance is complicated, so we set out to do it and did not find solid evidence of alpha for the cohort of managers. What we did find is a method for identifying what we believe is not only a more relevant benchmark for risk parity managers, but also...

January 4, 2022

A Surprisingly Dull Update To Mortality Assumptions

In October, the Society of Actuaries (SOA) released mortality Scale MP-2021, giving us another opportunity to quickly reflect on the impact of mortality assumptions on pension valuation and management. For all points on this chart, we have modified our own input assumptions since our last SOA mortality scale update post...

October 4, 2021

Getting Into The Right ZIP Code On Mortality Assumptions

NISA is excited to announce a collaborative effort with Club Vita to help plan sponsors get a better assessment of the impact of mortality assumptions on their pension plans. A formal press release on this will be issued in the next few days. This effort leverages the data and mortality...

June 8, 2021

95 is the new 105: Why plans should consider accelerating their glidepath

Increased funded status, newly legislated funding relief and historical contribution credit balances have created clearer skies and calmer waters for plan sponsors as we look forward over the next several years – from a contribution perspective. What a difference a year makes. On March 31, 2020, the average corporate pension...

March 30, 2021

The Strategic Case for High Yield in Hibernation and LDI Portfolios

NISA has consistently argued that risk assets play a useful role in end-state/hibernation portfolios, in moderation. While every hibernation portfolio needs to be designed based on its specific circumstances, a reasonable starting point to consider would be a portfolio comprised of 20% return seeking assets and 80% hedge assets –...

February 19, 2021

Another Extension of Funding Relief?

A few clients have asked us recently for our thoughts regarding the potential for additional funding relief for single-employer DB plans. While we certainly aren’t Washington insiders, our common reaction was that we did indeed expect relief because 1) relief provided under prior legislation is scheduled to begin phasing out...

October 5, 2020

A Very Normal World…of Interest Rates

Very little currently could be described as “normal,” but curiously (and perhaps surprisingly) we think interest rates have made the very short list of all things normal in 2020. In a recent Webinar, we discussed various market-based assessments of the potential future direction of interest rates. The data presented that...

August 19, 2020

Willing to Concede the S&P at 3750+? Equity Protection Strategies, Enter Stage Left

The combination of near all-time highs for the US large cap stocks and recent pricing of equity options at various strikes provides market participants with an interesting potential payoff profile over the next year. Specifically, investors can retain upside on the S&P 500 through 3,763, or 12.9% higher than its...

July 16, 2020

The Siren Song of Manager Diversification

Recent market gyrations once again remind us of the importance of risk management in all aspects of an investor’s portfolio. One common risk management tool is the use of multiple managers in a given asset class, with the goal of manager diversification in mind. Yet, pervasive positive correlations among active...

July 2, 2020

The Dynamic Duo: Interest Rate Levels and Volatility

When volatility increases for a particular market (e.g., interest rates, credit spreads, or equity), the potential pain felt by the wrong move or satisfaction felt by the right move can be amplified. Over the last few months we have seen risk increase across a multitude of markets. Our last piece...

April 7, 2020

Are Static Hedge Ratios Really Static?

Authors’ note: The timing of this piece may seem curious in these crazy times – specifically, a post that explores how “bond math” leads to increasing interest rate exposures in a low rate environment. We aren’t sure which reason is more appropriate to describe the timing; the fact that we...

March 24, 2020

Quick Post on Rebalancing

I know this is not the time for a long note on rebalancing theory and best practices. That said, current market conditions will make upcoming rebalancing challenging and expensive – maybe more so than at any time in memory. So here are the cold, hard facts. Each point has further detail...

December 18, 2019

Ignore Mortality at Your Own Risk

For the fifth year in a row, the updated Society of Actuaries mortality tables have reduced the size of pension liabilities: While this short note is becoming a little repetitive (as evidenced by our Groundhog Day movie reference from last year), it provides a good opportunity to highlight some key...

August 21, 2019

Global Bond Yields Plunge to Record Lows

Bond yields have fallen dramatically around the world this month, driven by the latest escalation of the trade war as well as signals that aggressive monetary stimulus will be forthcoming from central banks. Longer-tenor government bond yields in the US and Europe have fallen by 30-60 basis points this month,...

December 21, 2018

Groundhog Day Meets Mortality Assumptions

Perhaps it would have been more fitting if the Society of Actuaries published their updated pension mortality improvement scale, MP-2018, on February 2. (For readers unfamiliar with the 1993 movie, Phil (Bill Murray) is stuck in a time loop, reliving one particular day – Groundhog Day.) By our estimates, the...

October 24, 2018

Implementing Your Beta

When envisioning any new strategy, it is human nature to skim over the details. Previous posts in this series outlined the strategic rationale and practical applications of a different way to think about and approach asset allocation. As sometimes happens, it is easy for the “what” and “why” of a...

September 27, 2018

Small Balances, Big Bias?

Small balance annuity buyouts have been increasingly popular in the last few years – and for good reason. Given the fixed PBGC premium1 charged per participant, these participants represent the most costly balances for a sponsor to carry2. NISA’s position on annuity purchases has long been that they are better suited...

September 25, 2018

Rebuilding Beta

In our previous post, we outlined a framework for evaluating asset allocation decisions and suggested that asset owners could enhance returns by separating investments into headline exposure (“overlay”) and committed capital (“underlay”) components. To better understand this approach, it may be helpful to provide some rationale of market drivers and...

September 7, 2018

Breaking Down Your Beta

Like visiting the doctor periodically, it is important for an investor to assess the overall health of her portfolio from time to time. At times, some of the most seemingly mundane parts of the checkup, for example a routine blood test, can be the most important and impactful. With that...

July 26, 2018

Separating Annuity Buyout Fact From Fiction

In recent weeks we have read a handful of commentaries suggesting that pension plans should take advantage of a “window of opportunity” to complete annuity purchases with insurance companies. They argue that plan sponsors should increase annuity purchases and offer lump sums and even consider fully terminating their pension plans....

December 18, 2017

Sharing an Interesting Analysis

Sometimes you come across a piece of analysis that is interesting enough to feel compelled to pass it on. I had this reaction while reading AQR’s recently published paper titled “The Illusion of Active Fixed Income Diversification,” which examined the excess returns of active bond managers and concluded that a majority of...

July 28, 2017

The Beginning of the End for LIBOR

The end is nigh for the London Interbank Offered Rate. The CEO of the British markets regulator, the Financial Conduct Authority, announced yesterday that LIBOR will be phased out by the end of 2021. Though headlines proclaiming the “death of LIBOR” may catch some by surprise, this announcement is merely...

May 25, 2017

Does the Size of a Company’s Pension Affect its Stock Price?

Summary We examined the statistics behind the claim that large pensions drag down a company’s valuation and accordingly how annuity buyouts allow a sponsor to remove this discount from their stock price. As you might have guessed, this conclusion rests on some erroneous assumptions and interpretations, and what makes for...

January 5, 2017

Trumponomics – Two Scenarios for Fiscal Stimulus

Changes in yields can provide insights into the market’s views on the potential results of anticipated policies of the Trump Administration. One of the more interesting dynamic relationships is that between TIPS and nominal Treasury yields, which offers guidance regarding real growth and inflation expectations. The graph below depicts changes...

December 7, 2016

Equity Spread Duration is Bubbling Up

Summary In recent months we’ve observed that equity’s effective spread duration (ESD) seems especially pronounced—for example, the S&P 500’s ESD is currently about 25 years vs. its ten-year average of about 15 years. We thought it would be worthwhile to dig a little deeper to understand this dynamic. In a...

October 20, 2016

The Topography of Pension Risk

Last week, we participated in the annual P&I Pension Settlements Strategies conference. We will share the full materials in an upcoming post, but I thought one exhibit was worthy of special attention. One key point in our presentation was that pensions are not inherently risky. Rather, asset allocation drives the...

July 26, 2016

Grading Rates on a Curve

Can rates in the U.S. only go up from here? With Treasury yields reaching historical lows recently, it may be tempting to think of U.S. rates as having hit a floor. Yet before making tactical adjustments, it may be prudent to examine rates not just in absolute but in relative...

June 29, 2016

Have Cash – Will Carry: Another Simple Strategy to Help Enhance Cash Yields

As the (seemingly) never-ending search for yield continues in year eight of the “low for long era,” an oldie but a goodie comes to mind. The cash and carry trade, which undoubtedly raises fond memories from your “Intro to Derivatives” course, has caught our eye recently. As a brief reminder,...

May 11, 2016

Bonds Without Borders

It may pay to be a little more cosmopolitan when it comes to your bond portfolio. Yield differences between comparable maturity instruments in different countries can offer opportunities to enhance returns, particularly for longer-term investors. By buying foreign bonds and using currency forwards to lock in future exchange rates, investors...

April 22, 2016

Prix Fixe vs. A la Carte (or, Asset Classes vs. Risk Premia)?

When you go to a restaurant for a nice meal, do you prefer to order from the prix fixe menu or go the à la carte route? With prix fixe, the chef has selected the entire meal for you, so you can be reasonably confident you’ll get something satisfying. But...

March 29, 2016

Risk Premia Strategies – Beta Overlay 2.0?

The advent of investable risk premia indices brings beta overlay to a new level. These tools allow investors to adjust the pre-packaged factor weights of traditional asset classes toward a different weighting scheme based on priced factors and investors’ preferences. For some time now, investors have recognized that separating alpha...

February 8, 2016

Rebalancing? Don’t Forget Derivatives

January’s steep drop in equity prices and rise in bond prices mean that many institutional investors are thinking about the same thing: rebalancing. With such a divergence in returns between equities and bonds, asset owners are understandably looking to get their portfolios back in line with their allocation targets. The...

January 11, 2016

Here’s an Idea to Potentially Enhance Your Cash Returns

Returns will be hard to come by in 2016. That is perhaps the least controversial prediction we can offer for the New Year. Though modest, we do have one suggestion for potentially improving an investor’s overall return: consider substituting Treasury Floating Rate Notes (FRNs) for T-bills/Short Term Investment Fund. FRNs...

January 4, 2016

The Great Migration Toward Fixed Income

Since the New Year is always a time for reflection, and we are pension geeks, we thought it would be interesting to take a look at how the biggest defined benefit corporate plan sponsors have shifted their plan allocations over the last decade. Using company filing data gathered for our...

December 17, 2015

Live (Less) Long and Prosper?

Working in the pension industry, it can be confusing to know which side to root for when new longevity projections come out. And when the Society of Actuaries released new mortality projections in October1 that predicted lower life expectancies than previously indicated, our reaction was decidedly mixed. While as human...

December 3, 2015

The Full Picture on Partial Buyouts

We hear annuity buyouts frequently discussed as a silver bullet to reduce pension plan risk. Whether buyouts are the right de-risking option was the main topic at the October Pension & Investments’ Pension Settlements Strategies Conference, which we cosponsored for the third year in a row. Judging by the interest...