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%

 

 

Portfolio Performance: June 2012

August 7, 2012 by admin | 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.

Please note that our office has recently relocated and our new address is: 2550 University Ave W STE 312 N Saint Paul, MN 55114.

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