"In the middle of every difficulty lies
an opportunity." –Albert Einstein
What is happening?
The recent slide in global equity markets in the quarter ending September 30, 2015, focused around emerging markets and China, has reminded us of the volatility in 2008 and 2011, when difficulties were centered around the U.S. and Europe, respectively.
In our update to you at the end of August, we wrote, "Bottom line: we don't believe that domestic economic data indicates impending doom for the U.S., and figures and sentiment seem to indicate that it's less likely that stocks are in for a more significant retrenchment, as of now. A few specifics: the U.S. economy is very unlikely to enter a recession with housing and job improvement so healthy. Interest rates are low, lower inflation benefits the consumer, and lower commodity prices can benefit the broad economy. Globally, leading indicators of growth in Europe and Japan are also positive, despite a weaker emerging world, and China."
While the third quarter was negative for global stocks and other risk assets, it does appear that much of the damage has been done, and subsequent rallies in October have been significant. While it is too early to tell whether this rebound will hold, and while China may remain a continual source of anxiety for global markets, accommodative monetary policy around the globe continues to support markets. Additionally, as we pass through the traditionally difficult periods of September and October, it is likely we are set up for a year-end rally.
What have we been doing?
In August, we wrote: "Our mission is to invest for your retirement, and not for the next month. When prices are volatile in the short run, caused by short-term investors and participants, we should keep calm, carry on, and add value for you. Our partner managers must be nimble enough to pick up bargains to benefit your performance versus the markets...that's why we engage them on your behalf. Most importantly, they should help us take the longer view when markets become too focused on the short-term noise, or fear."
In the summer issue of Employee News and Views, we highlighted William Blair, a domestic equity manager focused on finding favorable returns from the universe of U.S. small- and mid-capitalization (SMID) public companies. Through September, Blair is one of two managers to produce positive results for the year, up over 2% with the S&P 500 down more than 5%.
We have met recently with a number of other Pension Boards' equity managers – San Francisco- based Dodge and Cox, a Pension Boards manager since 2006, and Edinburgh-based Walter Scott, a Pension Boards manager since 2003. Combined, the two firms manage over $200 million on behalf of Pension Boards participants and have registered significant outperformance, net of fees, over the long term for our Funds. Historically, we have used in-person meetings to gauge the manager's conviction and risk-reward optimism for markets and their positioning. Although Walter Scott's portfolio is down 6% for the year through September and Dodge and Cox is down 12%, we remain confident in their expected positive future contributions. Both managers take a long-term investing approach, and we came away from the meetings newly convinced that the strategies in place, and opportunistic repositioning in the recent period, will be beneficial to results going forward. In broad market selloffs, it is too easy to get consumed by the immediacy of negative headlines and sentiment; during these periods, it is important to remain committed to a thoughtful approach augmented by thorough analysis oriented to making sure managers are staying the course and not succumbing to short-term concerns. We are confident with the suite of managers working hard to position your retirement funds and with the steps undertaken before, and during, the recent sell-off.
As always, we remain committed to working diligently on your behalf, and will continue to keep you informed.