Portfolio Performance: June 2012

August 7, 2012 by Staff | Comments Off on Portfolio Performance: June 2012

The Saint Paul Teachers’ (SPTRFA) Portfolio battled to a performance draw during a quite volatile fiscal year that ended June 30. It was a twelve month period of mixed struggles and high points. The year ended about where it began with the Fund returning 0.3% for the twelve months. That was short of the Plan’s investment target return of 8% per year. However, its longer term return, which remains the important focus for the Board, remained above an annualized 9%.

In early August, the Board completed two days of its annual Summer Workshop during which it continued its examination of steps it might want to consider to further insure the Fund’s financial sustainability with a major emphasis on potential adjustments to the investment portfolio. Such changes would be designed to best address future challenges that the markets may present, including the strong likelihood of rising interest rates and continued volatility. Volatility and risk are necessary components of portfolio management, for without them, important growth and return potential becomes very limited. Therefore, managing that risk becomes a key element for the SPTRFA Board’s focus in its investment planning and decisions.

The past twelve months were a text book case of “ups and downs”. The fiscal year opened with one of the worst quarterly stretches in market memory, as domestic and non-US markets were roiled by growing concerns of a worsening global slowdown. Investors dumped equities in favor of the safer haven of bonds, as a result. The next two quarters witnessed a solid rebound among stocks globally while bonds, which were less sanguine, were also positive, as investors shifted between these so-called “risk on” and “ risk off” moods. But by springtime, the old market adage of “sell in May and go away” again proved true as the largely European fiscal nightmares took center stage amid worries that a global double dip recession was at hand. As a result, stocks tumbled in the fourth quarter virtually wiping out any of the gains of the preceding nine months and ended the year with a very slight 0.3% gain.

The year’s best performing asset class was the Plan’s real estate assets that gained about 11%, while bonds contributed 8%. Those two asset classes represent about 30% of the portfolio. Domestic equities, the largest class, struggled in the final quarter, especially the Plan’s smaller and mid-sized capitalized portfolios, as investors sought perceived safer ground among larger cap stocks and bonds. As a result, the portfolio gave back most of its equity gains earned during the first nine months. For the fiscal year, domestic stocks reported a 1.0% gain to slightly under-perform the benchmark. However, it was the non-US equities, buffeted by the double whammy of slowing global demand and mounting credit concerns, that proved the most harmful, returning a negative 12% over the twelve months, with emerging markets being especially hard hit.

The Plan was coming off two very strong performance years, in 2010 and 2011, the latter of which was a 25% gain, one of the Plan’s best years ever. The Fund’s three year annualized return remains a very solid 12.5%. During the year, the Board’s target return, based on its recently completed actuarial “Experience Study” and legislative action, was reduced from 8.5% to 8%. Even with the near term expected challenges to equity and fixed income markets, the Board remains convinced that its long term annualized 8% target rate of return will be achievable.

Portfolio Performance: May 2012

June 22, 2012 by Staff | Comments Off on Portfolio Performance: May 2012

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.