Global financial markets bounced back strongly in the second quarter creating whiplash after the first quarters’ significant declines. U.S. markets sprung back the strongest, with the Standard & Poor’s 500 Index (S&P 500) having the biggest quarterly gain since 1998 despite continued economic concerns. This quarter, the index increased by 20.54% after a decline of -19.6% last quarter.
The significant amounts of U.S. Federal Reserve (Fed) monetary support, reducing interest rates to zero, and U.S. government fiscal support ($2.4T, 11.8% of Gross Domestic Product (GDP)), along with increased levels of government support globally, resulted in markets rebounding worldwide. Fixed income returns also continued to be positive, with riskier credit strategies and emerging market debt leading the way.
On the other hand, the economy continued to diverge from financial markets. The spread of the Coronavirus (COVID-19) continues to create economic and financial hardship and loss. As we enter the second half of the year, volatility will likely remain due to low visibility on fundamentals of companies, the full economic impact of COVID-19, the U.S. presidential election, and discussions on U.S. China trade.
All Pension Boards Funds are in the top half of their peer groups for the year-to-date, net of all fees, according to Lipper, a well-known fund rating service. We hope you agree this is a significant achievement in this period of high volatility and uncertainty. The appreciation of several Funds in the quarter is notable and stands in stark contrast to the difficult first three months of 2020.
The Stable Value Fund has been the bedrock retirement investment it is designed to be, with slightly positive performance of 0.38% for the quarter, 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 continued strong performance in the quarter of 5.09%, benefitting from solid asset allocation and security selection. As the market returned to a risk-on posture, diversifying exposures to high yield and emerging market debt propelled the fund further.
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), bounced back strongly, with performance of 0.74% to 12.80% for the TADs, and 11.98% for the Balanced Fund, showing the benefits of diversified retirement portfolios. The increased allocation to equities at the end of last quarter, coupled with equity market strength, resulted in the strong performance. The Balanced Fund is now slightly overweight to the equity target percentage of 55%.
The Equity Fund had strong performance up 17.96% but was not quite able to keep up with the global equity market benchmark (MSCI ACWI Index) which was up 18.78%, mainly due to continued weakness with managers focused on value oriented strategies, such as Fiduciary Management large cap and Lazard emerging market equity.
The Global Sustainability Index Fund (GSIF) was also positive for the quarter with a return of 18.60%, as equities in the U.S. rebounded. A focus on sustainable business practices and lower exposure to fossil fuels than market benchmarks continue to be a benefit.
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 (our assets compared to our future promises to our annuitants) has improved with the market and we have newly-approved tools in place to be opportunistic in this environment. 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).
Thank you for your confidence in the Pension Boards and we look forward to being in communication as the year develops.