Strategies for institutional businesses to navigate unstable markets

Keith McDonagh

This post is sponsored by MassMutual.

Organizations need to have clear long-term goals and take a balanced approach to risk, returns and liquidity, especially when it comes to navigating volatile markets. Companies should review their balance sheets and income statements as well as how assets and liabilities are matched in order to remain flexible and meet their goals.

In this piece, we talk with Keith McDonagh, MassMutual’s head of Institutional Solutions, about ways institutional businesses can prepare for volatile markets and mitigate risks.

What steps can businesses and institutions take to prepare for economic stress and volatile markets?

Whether in times of stability or volatility, the critical first step for any organization is to have a clear understanding of its long-term objectives. In the current environment, those who adopted a balanced approach regarding return, risk and liquidity – in concert with their long-term business objectives – tend to weather the storms and emerge stronger on the other side.

We recommend a few strategies that work well for institutional businesses:

Review your balance sheet and income statement regularly. It is important to understand your level of flexibility when it comes to deploying capital efficiently. For example, how would things change in your business if demand changed by 10% to 20%?
Are your assets well matched to your liabilities? Misaligned assets and liabilities can put pressure on the balance sheet at a time when companies need more flexibility and liquidity.
Reduce the volatility associated with your benefit costs. Benefit costs tend to increase in times of economic stress, for example, workers compensation, unemployment costs, pension funding and others. Are you currently using the right combination of investment selections and insurance assets to position you for success when you need it most?
Consider evaluating your retirement plan’s investment options. A market downturn could delay retirement for your employees and drive up liabilities for your enterprise. Having the right investment options can provide additional stability and help protect assets in volatile markets.

How can companies remain focused on creating long-term gains instead of reacting to short-term market moves?

It’s important to remember that risk is an inherent component of financial solutions. Risk is often what generates return in the capital markets over time. For pension plan sponsors, an example of strategically managing risk is a liability driven investment (LDI) approach. Experience tells us that LDI is an effective strategy at managing funding status risk by aligning the duration of a plan’s assets to its liabilities. In fact, a review of the funded status of clients who employ our recommended LDI strategies – each customized for their plan’s needs – shows that their plan funding fares better in times of market turmoil.

For example, two of our full-service pension clients, both with equities in their portfolios, were presented with the same recommendation to implement an LDI approach. Both were looking to maintain a well-funded plan, and the LDI strategy would allow them to align plan assets and liabilities. One client adopted the LDI approach, while the other client decided to wait. After a pullback in equity markets, the client who applied the LDI approach remained well funded, taking pressure off the balance sheet – a critical benefit. The one who delayed the LDI approach experienced a widened funding gap.

Given current volatility in the capital markets, what can pension plan sponsors and other institutional investors do to strategically manage risks and achieve long-term goals?

First and foremost, institutions and plan sponsors need to periodically review the alignment of their financial strategies with the nature of their plans and businesses. Alongside this review and the actions outlined above, experience and expertise matter in these markets. A partner who has succeeded over the long-term through various economic cycles can provide much-needed perspective. As with past periods of market uncertainty, selecting the right partner helps you think through various options to meet near-term and long-term needs to achieve your objectives.

Having weathered economic storms for more than 168 years, MassMutual is uniquely positioned with valuable financial experience garnered along the way. Because we think in terms of decades, not quarters, we understand that thoughtful risk management is an important component of durable institutional and retirement solutions. By balancing risk and return, our plan sponsors and clients can be better equipped to make informed decisions during periods of volatility.

What is important to consider when choosing a financial partner?

Experience, expertise, financial strength and stability are among the most important traits. These traits come from a company that has thrived through market ups and downs. Having endured through the Civil War, two World Wars, the Spanish Flu pandemic, the Great Depression and the financial crisis of 2008, MassMutual delivers financial security for our customers in the most volatile of times. Throughout these disruptive times, we’ve been there to provide stability and security to our customers, time and again. We have built our success by staying focused on what matters — earning our clients’ trust and delivering solutions to help meet their complex financial needs — while maintaining financial strength and stability for the future.

Keith McDonagh is head of Institutional Solutions at MassMutual. These businesses involve the design and delivery of solutions for companies seeking to manage the risks associated with pension liabilities, retirement solutions, financial returns, protection needs and increased employee benefit costs. With more than 25 years of financial services industry experience, he has held a variety of senior leadership roles in domestic and international businesses across the insurance, investment and banking sectors.

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