As I had hinted in my previous report 6/4/2012, that May could be problematic, the portfolio struggled last month, losing ground in its effort to remain in the black for this fiscal year. Victimized by a weak domestic equity market and continued turmoil overseas, the portfolio lost 5.8% in May and dipped into negative territory for the fiscal year to date by nearly 3%. It will take a very solid June to get back to even for the year in which case it would still fall short of its target 8% range.
However, monthly returns are only important to the degree they impact the Fund’s longer term outlook and performance, which is generally minimal. Pension plans by nature have a long term, 25-50 years, focus and operating time frame to meet its present and future obligations. For the past 25 years, the Fund’s performance stands at 9%.
May has proven to be a troublesome patch the past several years, lending support to the old market adage of “sell in May and go away”. Large and small equity portfolios struggled with the S&P off 6% and the smaller market, Russell 2000 Index down near 7%. The Fund’s domestic team of managers collectively slightly underperformed their benchmark. Non-US and global markets were weaker, down about 12% as conditions in those areas suffered from soft economic forecasts coupled with political uncertainties. There seems little likelihood this will improve to any meaningful extent for the near term.
The best relative performer among our active equity managers for the past twelve months remains Minneapolis based, Fifth Third Asset Management, which oversees an all –cap ( i.e. broadly based), domestic portfolio. The best performing asset class, over this same stretch, is real estate which currently represents about 10% of the portfolio. The Fund’s private equity holdings, which are less than 2% of the current portfolio, enjoyed solid returns primarily due to the success of several holdings within its venture capital component.
Meantime, fixed income markets, which generally perform counter to equities and serve as a more stabilizing effect especially in troubled times, edged higher by 1% in May and ahead by 8% for the fiscal year to date. However, bond prices are experiencing downward pressure from the expectation that higher interest rates are inevitable. To date, bonds are catching some favorable winds from the Fed’s monetary policy aimed at easing credit markets. This tug of war, so far led by continued strong demand for US credit instruments, particularly government debt, has resulted in bonds continuing to enjoy their nearly three decade long bull market. But… most observers see this favorable environment giving way to inflation winds that build pressure to raise rates which would eventually adversely impact bond values.
The remainder of the portfolio is invested in real estate and private equity holdings that are generally less liquid and priced on a quarterly basis. But a more liquid piece, within equity related real estate, was lower by 4% in May.
Looking forward, June has been evidencing some rebound, although it is still a long way to go until month end, which also marks the close of the Fund’s fiscal year. Last year, you will recall that the Fund enjoyed a 25% positive return. Through May, our three year return for the portfolio is 11%. Even with the disappointment of the past twelve months, the average annual return for this period, 2010-12, will reflect a nice rebound following the extremely difficult markets of 2008-09 and illustrates the value in remaining focused on the longer term and avoiding these short-term uncertainties.
This article was written by the SPTRFA Executive Director, Paul Doane.