First Quarter FY 2013
September 24, 2012 by admin | Comments Off on First Quarter FY 2013
First Quarter FY 2013 Performance Summary
Markets generally reverted to a “risk on” approach in the September quarter, following the opposite “risk off” tone of the prior three months. This was in sharp contrast to the opening quarter of a fiscal year ago (July-Sep 2011), which many managers termed the most difficult stretch in memory.
Following a flat (0.3%) twelve month return for FY 2012, the Fund looks for a rebound this year and the First Quarter set a positive tone, with the Fund climbing 4.5%. It remains to be seen with the global unrest, the US presidential election, the “fiscal cliff”, excess global debt, uncertain corporate earnings, China’s engine slowing, and miniscule improvement in the US economy, if global markets can continue to find the necessary optimism.
Among the top performing asset groups in this latest Quarter were domestic small caps, which outperformed their benchmarks and returned over 7% with the portfolio’s non-US component adding 6.5%. However, it was the domestic large cap passive stocks, the Fund’s largest individual portfolio, which turned in the top returns climbing nearly 8%. A disappointment was that most of the active managers underperformed their respective benchmarks, so the portfolio, as a whole, lagged its target by about 50 basis points (0.5%) for the quarter. Saint Paul based Advantus, a REIT portfolio manager, outperformed its benchmark, the Wilshire Real Estate Securities Index, in the quarter. Nevertheless, real estate, last year’s top performing sector, struggled to stay in the black for the quarter.
Fears of rising interest rates continue to weigh heavily on bond prices with debt markets reflecting a 1.5% gain for the quarter. While this still annualizes out to a respectable return, few are expecting those levels to be maintained. However, other managers believe that even with all the hype about the prospect of declining bond prices, as yields and inflation creep higher, it could still be many months to several years before this prolonged bull market period for bonds is finally put to bed. This nation’s Central bank is taking extraordinary steps to pump further liquidity into the system with no immediate end in sight as it tries desperately to boost economic activity. Additionally, some argue that with significant government borrowing scheduled to finance prior overspending binges, it is an advantage to keep interest rates depressed, thereby saving governments billions in borrowing costs. For these reasons, moving away from fixed income vehicles, in expectation that previous 6-8% returns would more likely become 1-3% annualized returns, could still be premature. Currently, the Fund’s fixed income component target allocation is 20%. Actual invested funds are slightly below that level due to comparatively stronger equity performance.
The Fund’s gradual transition to increased global exposure is helping the portfolio’s recent overall performance with the rebounding non-US markets complementing a strong domestic quarter. “Global” portfolios refer to investments incorporating all developed nations. The US currently constitutes about 45% of global markets. An appropriate benchmark for these investments is the Morgan Stanley (MSCI) World Index. In addition, the Board recently rebalanced and added assets to certain of its smaller capitalization stock portfolios, which have proven to be standout performers during the market’s “risk on” periods.
The most disappointing performances in the past quarter came from the Fund’s actively managed domestic All-Cap portfolio, managed by Minneapolis based Fifth Third Bank. It did add nearly 4% but its benchmark Russell 3000 Index climbed 6.2% in the quarter. The other struggling manager in the quarter was a global “thematic” portfolio managed by Lazard. Its 3.0% gain for the quarter again lagged its benchmark All Country World (incorporating developed and non-developed markets) which rose 6.4% for the quarter. Both portfolios are being monitored closely by the Board.
Portfolio Asset Mix: 9/30/12 * ($891 Million)
Domestic Large Cap 27% S&P Index, R1000G, Barrow Hanley (LCG), Fifth Third (All Cap Core),
Domestic Small/Mid 17% Advantus (REIT), Boston Co (SMID), Dimensional (SCV), Wellington (MCG)
Non-US (EAFE) 15% JPMorgan (EAFE Plus), Morgan Stanley (EAFE)
Global 9% Lazard (Thematic), Morgan Stanley (Global Focus)
Emerging Markets 4% Cap Guardian
Fixed Income 18% BlackRock Gov’t Credit Index, BlackRock Debt Index
Real Estate 8% UBS Trumbull Open End Core Fund
Alternatives 1% North Sky, RWI I and II
Cash 1% USBank, Clifton Group (derivatives)
*This is prior to the 10/1/12 shift of ½ the JPM portfolio from Non-US to Global. Following that action, the global allocation (which includes the emerging market portfolio) has become 14% and Non-US is closer to 10%.
Long Term Target Portfolio (based on approved 2012 Asset Liability Study)
Global/Domestic Equity 55%
Global/Domestic Fixed Income 20%
Inflation Hedged (real assets) 11%
Private Equity/Alternatives 9%
Hedge Funds 5%