Home Hedge Funds Kodak uses LDI, alts to drive strong returns, funding ratio

Kodak uses LDI, alts to drive strong returns, funding ratio


Eastman Kodak Co.’s focus on liability-driven investing and alternative investments, especially hedge funds, has enabled the company to manage its pension liabilities while increasing its funded status.

Rochester, N.Y.-based Kodak’s investment performance over the past decade has been exceptional when adjusting for risk. According to SEC filings, the company has not had an investment loss since 2008. Annualized returns over the past 10 years have been around 10%, based on calculations from annual reports. Kodak’s returns were a very healthy 18.3% in 2021 and 13.5% in 2020. In comparison, the median ERISA plan in the Northern Trust universe returned 7.9% and 10.9% over the one- and 10-year periods ended Dec. 31, respectively.

“The gain for 2021 reflects higher expected returns for the U.S. private equity and hedge fund portfolios, and the gain for 2020 reflects strong stock and bond market performance as well as realized gains recorded from derivative investments,” the company’s 10-K said.

The asset allocation for the company’s $4.1 billion pension fund, according to the 10-K, is 44% hedge funds, which also includes U.S. Treasury futures contracts; 26% private equity; 8% global balanced asset allocation funds; and the remainder in fixed income (11%), equities (5%), cash (5%) and real estate (1%). LDI is implemented through the use of U.S. Treasury futures contracts, which are used to hedge a substantial amount of the plan’s interest rate risk.

Thomas Mucha, managing director, chief investment officer, pension investments worldwide, joined the company in 2011. “This has been my baby for 11 years,” Mr. Mucha said, referring to overseeing the company’s pension fund investments.

Keen attention to return and risk has led to top-decile performance and the No. 1 plan on a risk-adjusted basis, according to data provided to Kodak from its investment consultant. Over the past 10 years, the investments had an extremely enviable Sharpe ratio of a little under 1.7, Mr. Mucha said.

Previously, Mr. Mucha worked at the endowment office at Williams College and at hedge funds, including Bridgewater Associates LP.

As of Dec. 31, Kodak had $4.11 billion in pension assets and $3.13 billion in projected benefit obligations, according to the company’s 10-K. Kodak’s 131% funding ratio was the fifth highest in Pensions & Investments2022 Corporate Balance Sheet special report, which ranked the 100 largest U.S. defined benefit plan sponsors that are publicly listed. In 2007 before the Great Recession, Kodak’s pension plan was 143% funded, but the company had its funding ratio fall to 87% in 2012.

In 2021, the company’s funded status jumped about 24 percentage points, the “vast majority” coming from investment returns, according to Mr. Mucha.

Matt McDaniel, a Philadelphia-based partner and leader of the U.S. financial strategy group at Mercer, said, “Plans that embraced LDI well” have managed all the risks and a crazy world really well post-Great Recession. For plans that have not embraced LDI, “it has been a bumpy ride.” Kodak clearly falls into the first group, having been one of the earliest adopters of LDI in the early 1990s.

Speaking about the surplus funding, Mr. Mucha said “having a healthy pension plan is a strategic advantage.” It has enabled the company to continue to offer retirement benefits in an open plan for existing and even new employees. The current overfunding is “a cushion against future contributions,” according to Mr. Mucha who also said he is proud that the investment returns have enabled the company to not have to make any contributions in many years.

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