Global financial markets continued to be positive in the third quarter, led by emerging markets. Despite investor concerns regarding lofty valuations (U.S. big tech) in September, the Standard & Poor’s 500 Index (S&P 500) remained positive for the quarter and year-to-date (YTD).
The unprecedented fiscal and monetary stimulus packages around the globe have kept markets strong for now. Large-cap stocks (S&P 500) returned 8.93% in the quarter and 5.57% YTD, and small-cap stocks (Russell 2000 Index) were up 4.93% in the quarter and down 8.69% YTD. International developed stocks were up 4.80% for the quarter and down 7.09% YTD, and emerging market equities were up 9.56% for the quarter and down 1.16% YTD. Fixed-income returns also continued to be positive, with riskier credit strategies and emerging market debt leading the way.
The economy rebounded strongly from its low, although the speed of recovery going forward will be predicated on the coronavirus and vaccine developments and further policy supports. Industries hard hit by COVID-19 continued to improve in the third quarter but may face increased pressure as the winter approaches with more closures and restrictions. In addition, there continues to be economic and policy uncertainty due to the upcoming U.S. presidential election.
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. The exception is the Stable Value Fund, which is still well ahead of its benchmark. 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 0.47% for the quarter and 1.24% YTD, 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 continued to have positive returns in the quarter of 1.35% and is up 6.75% YTD, benefitting from solid asset allocation and security selection. As the market returned to a risk-on posture, diversifying exposures to high yield and bank loans propelled the fund further.
The Balanced Fund and Target Annuitization Date (TAD) Funds, which have allocations to the Bond Fund as well as to the Equity Fund (and in a few of the TAD funds, to the Stable Value Fund), continued to perform positively, with performance of 0.53% to 5.63% quarter-to-date (QTD) and 0.33% to 2.87% YTD for the TADs, and 4.72% QTD and 2.71% YTD for the Balanced Fund, showing the benefits of diversified retirement portfolios. Allocations to equities were reduced in the quarter due to increased uncertainties, making the Balanced Fund closer to the equity target percentage of 55%.
The Equity Fund continued to rebound positively, up 7.52% quarter-to-date (QTD) but slightly below the policy benchmark, mainly due to continued weakness with managers focused on value-oriented strategies, such as Fiduciary Management (large cap) and Lazard (emerging market equity). The fund is down 0.93% YTD.
The Global Sustainability Index Fund (GSIF) was also positive for the quarter with a return of 7.10%, as equities in the U.S. continued the positive momentum of the second quarter. The fund is up 1.93% YTD. 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, which has given the markets time to recover.
We continue to work diligently on your behalf. Our nine-person internal investment team is working with our investment consultant through frequent 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 Date (TAD) Fund nearest to your retirement date. Two new TAD Funds (2045 and 2050) will be offered on December 31, 2020. 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 assist 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.