Steve Peacher: Thanks everybody for dialing into this segment of “Three in Five,” this is Steve Peacher from SLC Management and today I’m really excited to have with me Tim Boomer, who's head of client solutions at SLC Management. Tim is an actuary and actually really good guy as well so Tim thanks for joining.
Tim Boomer: Hey Steve glad to be here, I hope, having an actuary on the show doesn't hit your listenership too badly.
Steve Peacher: So, some questions today regarding pension funds and how they're investing their assets in this environment. You know, since the start of the pandemic returns in asset classes, especially equities, have been much stronger than many might have projected. And interest rates have actually, at least as of today, are much lower than people might have expected, given what inflation's doing. How does all that shakeout for pension funds and their funding levels?
Tim Boomer: Right, I think it's really been a bit of a rollercoaster over the last 18 months Steve and I think many plan sponsors are probably very relieved with where they've come out of that. You know, if we look back to the end of 2019 which seemed a long time ago now, many plan sponsors or the average plan was probably in the low 90s, in terms of funded status. And then we sort of pandemic hit and first what happened really was is equities fell, we saw rates rise and that offset, or rather discount rates rise as corporate spreads throughout, and offset a little bit the impact on plan sponsors. When we get to the middle of last summer that the rates would come back in discount rates were low again and the average plan was down in low 80s, which was a big hit for many plan sponsors. Since then we've really seen a reverse of that and, as you said, equity markets have been strong you know year over year I think we're looking at 40% and for the last 12 months. And that's really put a lot of plans back close to fully funded. I think one of the key things is, though different plan sponsors will have experienced that in very different ways, so plan sponsors who were heavily invested in risk assets, probably have a more volatile ride, but maybe came out of it better in the end. Those who had de-risked had a lot more stable journey and lot more predictable results through that period. I also think when people chose to rebalance probably had a big effect on the status. So, people had good discipline around rebalancing and we're buying equities at the lows and moving back into that maybe they came out a little better than those kind of stuck to their guns.
Steve Peacher: As you've seen plan sponsors navigate in this environment have you seen any big shifts in allocations within their portfolio?
Tim Boomer: I think when whenever we see funded status improvements, we really see people looking to take risk off the table. Most plan sponsors today they have an end game in mind. And that end game might be and utilization with an insurance company, it might be running the plan in a hibernation mode over a longer period of time, but generally people are moving towards a lower risk state, so what we tend to see is de-risking coming from two places: we see pension plans, who have a pre-set glide path, and that’s when the funded status improves they're allocating more away from risk assets hedging assets and we've definitely seen those flows from our existing clients. I think the other thing that happens is after a period of significant volatility like we just went through, there's a lot of people who may get sat on the sidelines and we're waiting for an opportunity to de-risk or have been comfortable with a level of risk they had. And with a period like the last 18 months it really shows you how impactful volatility can be on the pension plan on the balance sheet. And that's probably brought some people off the sidelines who are looking to de-risk. So we've seen a lot of interest from new clients who are looking to take their first steps into de-risking or who are looking to extend duration and take a little bit of risk out of the plan.
Steve Peacher: So, if you think about this increase focused on de-risking, move toward more liability hedging assets, that means more fixed income. So, what do you see within the fixed income portfolio plan sponsors thinking about now is those become maybe more important in the overall strategy?
Tim Boomer: Yeah, I think that’s a great question Steve. I think one of the probably the biggest thing we hear about within a fixed income portfolio is diversification, so as the fixed income portfolio becomes a larger segment of the overall asset allocation more plan sponsors are taking a deeper look at that and looking at how managers align with each other, they're looking for managers to provide diversify sources of alpha outperforming different environments and we get out more and more, and that probably translates even outside the fixed income portfolio into people looking for alternative sources of credit to hedge their liability. So, that can mean you know I think historically the LDI world has talked about hedging assets and talked about growth assets in a very black and white way, and there's probably a lot of asset classes that fall in those grey areas in between. And I think that's getting more attention as people look to diversify that hedging strategy, so I put things in as an allocation in that grey area like high yield or direct lending probably more towards the growth side as an alternative to equities while still providing you some hedging benefits. In the middle of you've got things like infrastructure, real estate debt, and they can provide you steady yields and a lower environment, but still provide you some excess return potential relative to the liabilities. And then probably more towards the hedging side, we're seeing a lot of interesting things like investment grade private credit as a way for pension plans to exploit some of their you know illiquidity, which they're comfortable taking while still picking up some additional premium relative to the liability. So, I think what we're really seeing is some of the tools which may have been historically have been used by life insurance companies to back long term liabilities are now becoming more available to plan sponsors and they're looking to use that to build out a more sophisticated LDI strategy.
Steve Peacher: Thanks. Tim, I got one more one more question, but having nothing to do with pension funds, so I know that you're an enthusiastic surfer and I know you're actually involved in an organization that actually involves veterans and surfing, which is great. But my question is: you live in New England, and increasingly there are sightings of Great White sharks around New England. So, how do you avoid being, you know, bait for a Great White when you’re out surfing the waters of the New England coast?
Tim Boomer: So, great question Steve, I like that you said, ‘enthusiastic surfer’ not ‘good surfer’, because that definitely describes where I’m at. I'm lucky enough to have never seen a shark in the water. I was surfing in Mexico a little while ago and I saw a fin pop up next to me, at which point I screamed and a small boy next to me pointed out that it was a turtle that was holding his arm out of the water. So I'm going to take that as my nearest shark sighting and hope I don't get any closer to one.
Steve Peacher: Great, well I’ll let you ply the waters with your surfboard, and I’ll watch from the beach. But thanks a lot Tim for taking the time today, and thanks everybody for tuning into this episode of “Three in Five.”
Tim Boomer: Cheers, Steve.
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