Retirement System Pension Plan Investment Performance Review Quarter Ended June 30, 2014

Transcription

1 Retirement System Pension Plan Investment Performance Review Quarter Ended June 30, 2014 Investment Advisors John Spagnola, Managing Director Joseph Federico, Analyst PFM Asset Management LLC Two Logan Square, Suite th & Arch Streets Philadelphia, PA (215) (215) fax

2 Financial Markets & Investment Strategy Review

3 The Economy First-quarter gross domestic product (GDP) contracted at an annual rate of 2.9%, the first downward move in three years. The harsh winter weather was a primary contributor, and most economists expect a recovery as 2014 further unfolds. The U.S. unemployment rate fell from 6.7% in March to 6.1% at the end of the second quarter. While the U.S. is adding jobs at a steady pace, the reduction in unemployment can also be traced to an increase in the number of Americans who are no longer actively looking for work. The housing market continued to show modest strength during the quarter. New-home sales for May rose 18.6% from the prior month, marking a six-year high, while existing-home sales rose 4.9% from the prior month. However, the pace of housing starts remained well below pre-recession levels. Mortgage applications for purchase are down 17.6% year over year and mortgage applications for refinancing are down 56.5% year over year. QoQ % Change; Seasonally Adjusted Annualized Rate 6% 4% 2% 0% -2% -4% -6% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 U.S. Real GDP Growth (Seasonally Adjusted) Post Recession Average = 2.1% Q1 Q2 Q3 Source: Bureau of Economic Analysis. Dark blue bars indicate actual numbers; gray bars indicate forecasted estimates. Q4 Q1 Q2 Q3 Q4 Q1 2.5% Q2 4.1% Q3 2.6% Q4-2.9% Q1 Bloomberg Survey of Economists Q2 Q3 Q4 Q1 The Dow Jones Industrial Average and S&P 500 Index reached new highs at the end of the quarter; overall, there was low volatility in the stock markets. 400K Change in Nonfarm Payrolls 10% Treasury prices rose during the second quarter, marking two consecutive quarters of price rallies a pattern that has not occurred since K 0K 8% 6% Global central banks seem to be going their separate ways in terms of policy decisions, as the European Central Bank (ECB) cut interest rates amid little to no inflation while the Federal Reserve (Fed) continued to scale back its quantitative easing program. Geopolitical uncertainty continued to be at the forefront, as tensions in Ukraine, Iraq, and Syria caused investors to move toward assets that are perceived to have less risk. Unemployment Rate: 6.1% -200K 4% -400K 2% -600K 0% Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Change in Non-Farm Payrolls (left axis) Unemployment Rate (right axis) Source: Bureau of Labor Statistics

4 What We re Watching Driven by investor confidence that the economy would strengthen for the rest of the year, the U.S. equity market regained its footing in the second quarter after a modest rise in the first quarter. Non-U.S. developed- and emerging-markets equities also strengthened. Economic data coming out of China has continued to be soft, including industrial production, fixed investments, and retail sales. Nonetheless, the Chinese economy appears to be improving with the help of the government s stimulus programs, including infrastructure spending and relaxed bank lending rules. Political and military conflicts and tensions in Ukraine, Iraq, and Syria, as well as territorial disputes in Northeast Asia, continue to demand investor attention. After rising in 2013, interest rates have confounded investors by falling in The Fed has continued to taper its quantitative easing program, determining at its most recent meeting to reduce bond purchases by another $10 billion a month. Investors anticipate that the federal funds rate will not rise until the second half of Should the Fed act sooner, this could derail the equity market rally and cause extreme turmoil in the bond market as it did in PFM Asset Management LLC (PFMAM) remains optimistic about the U.S. economy and equity markets. We continue to see some incremental upside potential for The job market continues to show improvement, and we expect it to continue making progress for the rest of 2014, barring external shocks or monetary and fiscal policy errors. Recent economic data and leading economic indicators suggest that the U.S. economy should continue to grow. At this time, there are few if any signs of a pending recession. This has been and remains our baseline scenario. Recent economic data suggest that growth in Europe will continue to be soft for the rest of the year. The ECB cut its short-term rate and lowered the deposit rate on excess reserves to -0.1% to help fight possible deflation in Europe. $ Millions Weekly Mutual Fund Flows Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Total Bond Market Domestic Equity Source: Bloomberg Fed Funds Target Rate 6% 5% 4% 3% 2% 1% 0% 6/30/04 6/30/05 6/30/06 6/30/07 6/30/08 6/30/09 6/30/10 6/30/11 6/30/12 6/30/13 6/30/14 Source: Bloomberg

5 1 Quarter Market Index Performance June 30, 2014 Year To Date DOMESTIC EQUITY Russell 3000 Index Russell 1000 Value Index S&P Russell 1000 Growth Index Russell Midcap Value Index Russell Midcap Growth Index Russell 2500 Index Russell 2000 Value Index Russell 2000 Index Russell 2000 Growth Index Year 2 Years 3 Years 5 Years 7 Years 10 Years INTERNATIONAL EQUITY MSCI EAFE (net) MSCI AC World Index (net) MSCI AC World ex USA (Net) MSCI EM (net) ALTERNATIVES FTSE NAREIT Equity REIT Index FTSE EPRA/NAREIT Developed Index Bloomberg Commodity Index Total Return FIXED INCOME Barclays Aggregate Barclays U.S. Government/Credit Barclays Intermediate U.S. Gov/Credit Barclays U.S. Treasury: 1-3 Year Barclays US Corp: High Yield Credit Suisse Leveraged Loan index Barclays Global Aggregate Ex USD JPM EMBI Global Diversified CASH EQUIVALENT 90 Day U.S. Treasury Bill Source: Investment Metrics. Returns are expressed as percentages. Please refer to the last page of this document for important disclosures relating to this material.

6 U.S. Equity U.S. equity markets experienced positive performance, with the S&P 500 Index up 5.2% for the quarter and 7.1% for the year. The Dow Jones Industrial Average closed above 17,000 for the first time and the S&P 500 Index also reached a new milestone for all-time highs. The downward trend in equity volatility seems to have slowed down after falling over 20% for the year S&P 500 Index Performance by Sector Quarter and 12 Months Ended June 30, 2014 Large-cap equities, as measured by the Russell 1000 Index, continue to outperform their small-cap counterparts. Large caps were up 5.1% for the quarter and 7.3% for the year. Small-cap equities were up nearly 2.1% for the quarter and 3.2% year to date (as measured by the Russell 2000 Index). The best-performing sector for the year continues to be Utilities, up 16.4% for the year, followed closely by the Energy sector, up 11.7% for the year. Price movement has overtaken earnings growth in U.S. equity names on aggregate, as measured by the growth in the price-to-earnings (P/E) ratio of the S&P 500 Index. This P/E multiple expansion is slightly augmented in smallercap stocks, especially growth-oriented names, as investor optimism typically outpaces earnings during cycles of macroeconomic growth Consumer Consumer Information Energy Financials Healthcare Industrials Discretionary Staples Technology Materials Telecom Utilities QTR YR Source: Standard & Poor s QTR 1 YR P/E Ratios of Major Stock Indices * Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Source: Bloomberg S&P 500 S&P Year Average Russell 2000 Russell Year Average *P/E ratios are calculated based on 1-year-forward estimates and adjusted to include only positive earnings results for consistency.

7 Non-U.S. Equity Developed markets outside of North America produced a 4.1% return as measured by the MSCI EAFE Index (net) MSCI ACWI ex-us Sectors Quarter and 12 Months Ended June 30, 2014 Norway, Hong Kong, and Canada each had returns in the high single digits, while Ireland had the largest decline, falling 9% Japan returned 6.7% as Prime Minister Abe continued his tax rate reforms and the Government Pension Investment Fund announced it will increase its stock purchases Emerging-markets equity, as measured by the MSCI Emerging Markets (EM) Index, returned 6.6% with strong contributions from Turkey, Russia, India, and Taiwan. 0.0 Consumer Discretionary Consumer Staples Energy Financials Healthcare Industrials Info Tech Materials Telecom Utilities QTR YR QTR 1 YR Qatar and the United Arab Emirates were upgraded from frontier to emerging by the MSCI EM Index during the quarter. Source: Bloomberg P/E Ratios of MSCI Equity Indices* The Energy sector had a strong boost from rising oil prices over Middle East concerns Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 EAFE EAFE AVG EMERGING EMERGING AVG Source: Bloomberg *P/E ratios are calculated based on 1-year-forward estimates and adjusted to include only positive earnings results for consistency.

8 Fixed Income Yields fell across the long portion of the curve as the 30-year U.S. Treasury ended at 3.4% and the 10-year U.S. Treasury at 2.5% back where it was a year ago. Beginning in July, the Fed will only purchase $35 billion in Treasuries and mortgage-backed securities on a monthly basis. The Barclays Capital U.S. Aggregate Bond Index posted a 2% return for the quarter. Long-term Treasuries, as measured by the Barclays Capital Long U.S. Treasury Index, gained 4.7%. In the investment-grade space, BBB-rated corporates had the highest return, up 3.2% as measured by its segment of the Barclays U.S. Corporate Index. The Barclays Multiverse Index, which includes the Global Aggregate Index and Global High Yield Index, rose 2.5%. U.S. Treasury Yield Curve 4.0% 3.17% 3.5% 3.36% 3.0% 2.53% 2.5% 2.0% 1.63% 1.5% 1.0% 0.5% June 30, % March 31, 2014 June 30, % 3mo 2yr 5yr 10yr 20yr 30yr Source: Bloomberg Returns for Fixed-Income Segments Quarter and 12 Months Ended June 30, The ECB introduced a negative deposit rate of -0.1% on excess reserves to encourage lending Barclays U.S. Aggregate Barclays U.S. Treasury Barclays U.S. MBS QTR 1 YR Barclays U.S. Corporate Barclays U.S. High Yield Source: Bloomberg

9 Alternative Asset Classes U.S. real estate investment trusts (REITs) gained 7% in the second quarter, as measured by the FTSE NAREIT Equity REIT Index. A return of 3.3% in April was followed by subsequent gains of 2.4% and 1.1% in May and June, respectively. Property sectors with shorter leases, primarily Lodging and Apartments, were the top performers for the quarter, while Industrial Properties fared the worst. FTSE NAREIT Sectors Quarter Ended June 30, 2014 Diversified Storage Healthcare Lodging Private real estate, as measured by the NCREIF Index of 7,300 properties nationwide, increased 2.7% during the first quarter of 2014 (second-quarter data not yet available). A 1.4% value appreciation supplemented a 1.3% income gain. Commodities gained approximately 0.1% as measured by the Dow Jones- UBS Commodity (DJ/UBS) Index of 19 raw materials futures. Over the trailing 12-month period, the DJ/UBS Index was up 7.1%. Commodity-related equities, as measured by the S&P North American Natural Resources Sector Index, gained 13.4% during the quarter, attributable primarily to the strong performance of oil and gas companies. Source: Bloomberg Industrial Office Shopping Centers Apartments Regional Malls Returns for Alternative Assets Quarter and 12 Months Ended June 30, 2014 Hedge funds once again finished the quarter in positive territory, as the HFRI Fund Weighted Composite Index returned nearly 2.1%, slightly outpacing core fixed income but trailing large-cap equities. All sub-strategy indices aside from short-biased strategies were up for the quarter and year to date Private equity fundraising was up relative to the first quarter of According to Preqin, private equity funds raised $127 billion in aggregate in the second quarter, with 127 funds reaching a final close. Venture and Buyout were the two most active sectors, with 51 and 40 funds closing within each sector, respectively. North America-focused private equity funds led the way, closing 107 funds representing capital commitments of $69 billion. Europe was a distant second, with 45 funds closing on $39 billion of capital. Uncommitted capital, known as dry powder, is currently at an all-time high of $1.2 trillion Sources: Bloomberg and Hedge Fund Research, Inc U.S. REITs Global REITs Commodity Futures QTR 1 YR Commodity Equities Hedge Funds

10 PFMAM Investment Strategy Overview For Third Quarter 2014 Asset Class PFMAM Investment Preference Comments U.S. Equities Large Caps Small Caps We remain overweight U.S. equities, driven by continuing improvement in the U.S. economy and reasonable valuation. After strong performance, the valuation for small-cap stocks looks less attractive but is offset to some extent by accelerating U.S. economic growth. Non-U.S. Equities Fixed Income REITs Developed Markets Small Caps Emerging Markets Long Duration, Interest- Rate-Sensitive Sectors Credit-Sensitive Sectors We are also positive on non-u.s. developed markets due to improving economic growth and reasonable/below-average valuation, offset by concerns over the tax increase in Japan and sluggish growth in the euro zone. Small-cap stocks look attractive based on valuation and improving economic growth. We exited emerging-markets equities in early 2013 due to deteriorating fundamentals. We are monitoring developments in emerging markets closely to determine an attractive re-entry point. We are underweight long-duration, interest-ratesensitive fixed income. We expect to remain underweight for We are overweight credit-sensitive segments due to an improving economy and low default rates. We may further add to these segments in We may also add a short duration fund. Returns from real estate are expected to be more muted going forward as prices have fully recovered and face headwinds from rising interest rates. Please refer to the last page of this document for important disclosures.

11 Disclosures The views expressed within this material constitute the perspective and judgment of PFM Asset Management LLC at the time of distribution and are subject to change. Any forecast, projection, or prediction of the market, the economy, economic trends, and equity or fixed-income markets are based upon current opinion as of the date of issue, and are also subject to change. Opinions and data presented are not necessarily indicative of future events or expected performance. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources believed to be reliable. No representation is made as to its accuracy or completeness. This material is intended for informational purposes only and should not be relied upon to make an investment decision, as it was prepared without regard to any specific objectives or financial circumstances. It should not be construed as an offer to purchase/sell any investment. References to particular issuers are for illustrative purposes only, and are not intended to be recommendations or advice regarding such issuers. PFMAM is registered with the Securities and Exchange Commission under the Investment Advisers Act of PFMAM s clients are state and local governments, non-profit corporations, pension funds, and similar institutional investors. It is not possible to invest directly in an index. The index returns shown throughout this material do not represent the results of actual trading of investor assets. Third-party providers maintain the indices shown and calculate the index levels and performance shown or discussed. Index returns do not reflect payment of any sales charges or fees an investor would pay to purchase the securities they represent. The imposition of these fees and charges would cause investment performance to be lower than the performance shown PFM Asset Management LLC. Further distribution is not permitted without prior written consent. PFM Asset Management LLC

12 Plan Performance Review

13 Asset Allocation & Performance Bartlett City Retirement Plan June 30, 2014 Allocation Market Value ($) 1 Quarter Year To Date 1 Year Performance(%) 2 Years 3 Years Since Inception Inception Date TOTAL FUND 58,562, /01/2009 Blended Benchmark /01/2009 Blended Benchmark January 2011 to Present - 33% Russell 3000 Index, 21% MSCI EAFE (net), 3% FTSE NAREIT Equity REITs, 3% Bloomberg Commodity Index, 40% Barclays Aggregate August 2009 to December % Russell 3000 Index, 21% MSCI AC World ex USA (net), 3% FTSE NAREIT Equity REITs, 3% Bloomberg Commodity Index, 40% Barclays Aggregate Returns are net of mutual fund fees. Returns are expressed as percentages.

14 Account Reconciliation Bartlett City Retirement Plan June 30, 2014 QTR Return On Net Flows Investment 04/01/ /30/2014 TOTAL FUND 55,588,985 1,000,000 1,973,355 58,562,340 YTD Return On Net Flows Investment 01/01/ /30/2014 TOTAL FUND 52,232,423 3,433,122 2,896,796 58,562,340 1 Year Return On Net Flows Investment 07/01/ /30/2014 TOTAL FUND 47,205,154 3,433,122 7,924,064 58,562,340

15 Account Reconciliation Bartlett City Retirement Plan June 30, Years Return On Net Flows Investment 07/01/ /30/2014 TOTAL FUND 40,179,073 5,109,927 13,273,341 58,562,340 Since Inception (9/1/2009) Return On Net Flows Investment 09/01/ /30/2014 TOTAL FUND 26,508,517 10,757,559 21,296,264 58,562,340

16 PERFORMANCE EVALUATION AND REPORTING SERVICES INFORMATION DISCLAIMER PFM Asset Management LLC has exercised reasonable professional care in the preparation of this performance report. However, information in this report on market indices and security characteristics, as well as information incorporated in the Market Commentary section, is received from sources external to PFM Asset Management LLC. PFM Asset Management LLC relies on the client's custodian for security holdings and market values. Transaction dates reported by the custodian may differ from money manager statements. While efforts are made to ensure the data contained herein is accurate and complete, we disclaim all responsibility for any errors that may occur.