Markets: What is Happening?

Financial markets have been weak in 2020, with the Standard & Poor’s 500 Index (S&P 500) at -20% year-to-date. (As a reminder, this follows a +31.5% performance in 2019).

Despite monetary support by the U.S. Federal Reserve (Fed) greater than that during the Global Financial Crisis, reduction of interest rates to zero, and helpful programs to make sure the markets can function properly, the market continued to decline through Monday March 23rd.

Now, after a proposed fiscal stimulus package over $2 trillion including assistance to small businesses, to the most impacted industries (e.g., airlines) and individual taxpayers, markets have started to improve, for now.

Most importantly, investors continue to be concerned about the human toll, and economic impact, of COVID-19 to sectors/industries/geographies, and how long it will last. Right now, very few investment categories are positive in 2020, with notable exceptions being U.S. government bonds and gold.

How have the Pension Boards funds performed?

The Stable Value Fund has been the bedrock retirement investment it is designed to be, with slightly positive performance backed by insurance guarantees by providers such as Prudential. However, the long-term return potential is lower for this fund than others.

The Bond Fund has performed relatively well, with slightly negative performance year-to-date, benefitting from the decline in interest rates. (As rates decline, bond prices increase.) Adept interest rate and risk management in the largest portion of the portfolio (core U.S. fixed income; consisting of mainly U.S. government, and green and other corporate bonds) has been offset by diversifying exposures to high yield, bank loans, and emerging markets debt.

The Balanced Fund and Target Annuitization Date (TAD) Funds, which have allocations to the Bond Fund as well as to equities (and in a few of the TAD funds, Stable Value), have held up better than equities alone, showing the benefits of diversified retirement portfolios. A lower-than-normal allocation to equities at the start of the year, coupled with market declines, has provided a better opportunity to re-enter the market. The Pension Boards’ investment team has been taking some of the profits generated in our bond portfolio, and adding to equities, as the markets are starting to look more attractively priced. This has happened over the past week.

The Equity Fund has declined but has held up slightly better than global market benchmarks and peers, due to good active portfolio management, especially by managers in international equities, such as T. Rowe Price in emerging markets and Walter Scott in international developed markets. Interestingly, emerging markets equities, part of the Equity Fund portfolio, have held up better than U.S equities in the recent selloff. Your investment team has also been adding diversifying securities with lower equity exposure, such as hedge funds. This is a unique and positive element of the Equity Fund.

The Global Sustainability Index Fund (GSIF) is also negative for the year-to-date, as equities in the U.S. and other developed countries have faltered. A focus on sustainable business practices and lower exposure to fossil fuels than market benchmarks has been a benefit, however.

The Basic Annuity was essentially protected from interest rate declines starting in 2016, with the addition of sophisticated risk and monitoring tools and the hiring of a new manager, Voya. As a result, the funded status (our assets to the present future value of all our promises to annuitants) is still high and stable.

In the Participating Annuity, the funded status (again, our assets compared to our future promises to you, our annuitants) has declined with the market, but we have newly approved tools in place to be opportunistic in this environment. While equity assets have declined in price, the bond portion of the portfolio has held up better. Determination of any changes in 2021 monthly payments will not be made until November 2020, giving the markets time to recover.

What is our investment process at the Pension Boards?

We continue to work diligently on your behalf. Our nine-person internal investment team has experience through many prior market downturns, is working with our investment consultant through daily updates, and with external investment managers to protect your assets and provide potential upside when opportunities arise.

What should you do?

As a retirement investor, you should focus, always, on the appropriate asset allocation, or mix among stocks, bonds, and cash/stable value investments, and your long-term retirement objectives. It is rarely wise to react to shorter term market movements. The easiest way to avoid that is to invest in the Target Annuitization (TAD) Fund nearest to your retirement date. Again, these funds are more aggressive early in your career, and become more conservative as retirement approaches, by owning less equities and more bonds and stable value investments.

Our capable and responsive Member Services staff is available to you. Please contact the Pension Boards at 1.800.642.6543 with questions about fund information, performance, strategy, and approach.

If you have questions about your unique financial situation, please contact us and we will put you in immediate touch with a financial planning professional at no cost to you through our partnership with EY.

We will get through this together and will do it well, thoughtfully, and with the deepest care for you, our members.