Global equity markets continued to be positive in the first quarter, led by the U.S. but with a shift to both smaller company and economically sensitive stocks. Sectors that led in the quarter included financial and industrial companies as economic activity continued to improve and interest rates increased.
The increase in vaccinations, economic recovery, and unprecedented fiscal and monetary stimulus packages around the globe have kept markets elevated. Large-cap stocks (S&P 500 Index) returned 6.17% in the quarter and year-to-date (YTD), and small-cap stocks (Russell 2000 Index) continued their strong run, up 12.70% in the period. International developed stocks (MSCI EAFE Index) were up 3.48% for the quarter and YTD, and emerging market equities (MSCI EM Index) were up 2.29% for the quarter and YTD.
Fixed-income returns were negative overall, with returns being negatively impacted as rates increased. The U.S. 10-year Treasury yield started the quarter at 0.92% and ended at 1.74%. First quarter performance for the Barclays Government Credit Index, a proxy for the broad U.S. fixed-income market, was down at -4.28%; bank loans were up 1.78%; high yield bonds were up 0.86%; and emerging market debt declined -4.74%.
The Stable Value Fund has been the bedrock retirement investment it is designed to be, with slightly positive performance of 0.42% for the quarter and 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 had negative returns of -3.33% for the quarter and YTD, adversely impacted by rising interest rates. As rates have increased, diversifying exposures to bank loans and high-yield bonds have been beneficial.
The Sustainable Balanced Fund, which has allocations to both sustainability-focused equity and fixed-income managers, performed positively, up 1.76% for the quarter and YTD. This relaunched, best-in-class fund, which replaced the Balanced Fund, focuses exclusively on managers who specialize in incorporating Environment, Social, and Governance (ESG) criteria, which assess the fund’s societal or environmental impact.
The 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 0.43% to 6.41% for the quarter and YTD.
The Equity Fund had a good quarter, up 4.84%, in line with the policy benchmark, benefiting from outperformance by small cap and value managers.
The Global Sustainability Index Fund (GSIF) was also positive for the quarter with a return of 5.45%, as equities in the U.S. were very strong. 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) is healthy and has continued to improve early in 2021 with the market advance. The fund has also benefitted from adept management of interest rates, with newly-approved tools in place since 2020.
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. As of January 1, 2021, there are now two new TAD Funds (2045 and 2050) available. Again, these funds are more focused on growth early in your career, and become more conservative as retirement approaches, by owning fewer equities and more bonds and stable value investments.
Additionally, we want to remind you of the new relaunch and conversion of our Balanced Fund into the new Sustainable Balanced Fund, with a new slate of exciting sustainability-focused managers put in place in the first few months of 2021.
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).