Financial markets have had a weak start to 2020, with the Standard & Poor’s 500 Index (S&P 500) registering the weakest three-month period since the last three months of 1987, which included a 22.5% one-day decline. This quarter, the index was down 19.6%. (As a reminder, this follows a +31.5% performance in 2019).
As the market declined rapidly in March, the U.S. Federal Reserve (Fed) provided monetary support greater and even more timely than that during the Global Financial Crisis; reduced interest rates to zero; and put in place focused programs to make sure the markets can function properly.
The now-passed fiscal stimulus package of over $2 trillion includes meaningful assistance to small businesses, to the most impacted industries (e.g., airlines) and individual taxpayers, helping the markets to improve as March ended.
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. There is no doubt that the economic toll will be felt most severely over the next few months, with all the shutdowns, lack of activity and layoffs. In the coming months, we will hear about the impact on company earnings. The U.S., being a consumption and service economy, will be hurt deeply.
The Stable Value Fund has been the bedrock retirement investment it is designed to be, with slightly positive performance of 0.39%, 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 flat performance year-to-date of 0.23%, 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, with performance of -15.80% to 0.53% for the TADs, and -12.42% for the Balanced Fund, 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 added to equities in March, as the markets are starting to look more attractively priced. The Balanced Fund is now slightly overweight to the equity target percentage of 55%.
The Equity Fund has declined, but has held up slightly better than global market benchmarks and peers, with a performance of -21.89% versus the global equity benchmark MSCI ACWI (All-Country World Index) of -22.44%, 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. We added to our hedge fund allocation, believing there will be opportunities for managers in this environment. Finally, we are assessing whether to add more funds to a few well-placed fundamental stock pickers, to take advantage of lower prices in attractive companies with durable franchises.
The Global Sustainability Index Fund (GSIF) is also negative for the year-to-date with a return of -19.75%, 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 essentially has been protected from interest rate declines since 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 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 annuity payments will not be made until November 2020, giving the markets time to recover.
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.
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 an Ernst & Young financial planner, available at no cost to you through our partnership with EY. Visit the EY Navigate™ website (https://pbucc.eynavigate.com/) or call the EY Navigate™ Financial Planner Line at 1.877.927.1047, Monday through Friday from 9:00 a.m. to 8:00 p.m. (ET).
We will get through this together and will do it well, thoughtfully, and with the deepest care for you, our members.