Mendocino County Employees' Retirement Association
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September 30, 2015 Mendocino County Employees’ Retirement Association Investment Measurement Service Quarterly Review The following report was prepared by Callan Associates Inc. ("CAI") using information from sources that include the following: fund trustee(s); fund custodian(s); investment manager(s); CAI computer software; CAI investment manager and fund sponsor database; third party data vendors; and other outside sources as directed by the client. CAI assumes no responsibility for the accuracy or completeness of the information provided, or methodologies employed, by any information providers external to CAI. Reasonable care has been taken to assure the accuracy of the CAI database and computer software. Callan does not provide advice regarding, nor shall Callan be responsible for, the purchase, sale, hedge or holding of individual securities, including, without limitation securities of the client (i.e., company stock) or derivatives in the client’s accounts. In preparing the following report, CAI has not reviewed the risks of individual security holdings or the conformity of individual security holdings with the client’s investment policies and guidelines, nor has it assumed any responsibility to do so. Advice pertaining to the merits of individual securities and derivatives should be discussed with a third party securities expert. Copyright 2015 by Callan Associates Inc. Table of Contents September 30, 2015 Capital Market Review 1 Active Management Overview Foreword 9 Domestic Equity Overview 10 International Equity Overview 11 Domestic Fixed-Income Overview 12 Asset Allocation and Performance Foreword 14 Actual vs. Target Asset Allocation 15 Asset Allocation Across Investment Managers 16 Investment Manager Returns 17 Quarterly Total Fund Attribution 21 Total Fund Ranking 25 Total Fund vs. CAI Public Fund Sponsor Database 26 Domestic Equity Domestic Equity Composite 30 Vanguard S&P 500 Index 34 Dodge & Cox Stock 37 Boston Partners 40 Harbor Cap Appreciation 43 Janus Research 46 Fidelity Low Priced Stock 49 Royce Total Return 52 Morgan Stanley 55 Janus Enterprise 58 Prudential Small Cap Value 61 AB US Small Growth 64 RS Investments 67 Managers Inst Micro Cap 70 International Equity International Equity Composite 74 EuroPacific 79 Harbor International 83 Columbia Acorn International 87 Oakmark International 91 Mondrian International 95 Table of Contents September 30, 2015 Domestic Fixed Income Domestic Fixed Income Composite 100 Dodge & Cox Income 103 PIMCO 106 Real Estate RREEF Public 110 RREEF Private 111 Cornerstone Patriot 112 Callan Research/Education 113 Definitions General definitions 117 Disclosures 123 Capital Market Review Capital Market Review ΧΑΛΛΑΝ ΙΝςΕΣΤΜΕΝΤΣ ΙΝΣΤΙΤΥΤΕ ΧΜΡ Πρεϖιεω Τηιρδ Θυαρτερ 2015 This “Preview” contains excerpts from the upcoming Χαπιταλ Βροαδ Μαρκετ Θυαρτερλψ Ρετυρνσ Μαρκετ Ρεϖιεω (CMR) newsletter, which will be published at the end of the month. -7.25% U.S. Equity (Russell 3000) -12.10% Non-U.S. Equity (MSCI ACWI ex USA) Νοσεδιϖε U.S. Fixed (Barclays Aggregate) 1.23% Non-U.S. Fixed (Citi Non-U.S.) 1.71% Υ.Σ. ΕΘΥΙΤΨ | Λαυρεν Ματηιασ, ΧΦΑ Cash (90-Day T-Bills) 0.01% Sources: Barclays, Citigroup, Merrill Lynch, MSCI, Russell Investment Group The irst negative quarter for U.S. equities since 2012 had a seemingly solid start, but took a nosedive through August and September. Macroeconomic issues drove the sullen results, Α Λιττλε Λονγερ το Λιφτοφφ including China’s weakening economy, the Fed’s delay of inter− est rate increases, and commodity price declines. The U.S. econ− Υ.Σ. ΦΙΞΕ ΙΝΧΟΜΕ | Kevin Machiz, CFA, FRM omy is exhibiting some vigor—consumer conidence remained Interest rates moved lower in the third quarter amid a broad- high and fueled spending; employment showed strength with based light to quality—apprehension over China’s economy and record-low jobless claims; and housing appeared solid with new commodity prices appeared to be the primary sources of con− home sales at healthy levels. Energy prices impacted the envi− cern. The yield curve lattened signiicantly as yield spreads wid− ronment negatively and positively—commodity-related compa− ened across non-Treasury sectors and the Βαρχλαψσ Αγγρεγατε nies felt pain while consumers felt wealthier. Ινδεξ rose 1.23%. Χοντινυεδ ον πγ. 2 Χοντινυεδ ον πγ. 4 Στυmβλινγ Dραγον Ρεδ Σχαρε ΝΟΝ−Υ.Σ. ΕΘΥΙΤΨ | Kevin Nagy ΝΟΝ−Υ.Σ. ΦΙΞΕ ΙΝΧΟΜΕ | Kyle Fekete Non-U.S. markets were pummeled in the third quarter (ΜΣΧΙ ΑΧWΙ εξ ΥΣΑ Ινδεξ: -12.10%), as concerns over China’s Developed sovereign bonds performed well relative to U.S. growth convinced many investors to take a “risk off” approach. bonds as interest rates fell due to mounting concerns over a Fears about China’s slowdown came to a head in August slowing global economy. The Χιτι Νον−Υ.Σ. Wορλδ Γοϖερνmεντ when Chinese monetary authorities unexpectedly devalued Βονδ Ινδεξ earned 1.71% for the quarter, but is down 4.22% the renminbi. Attempts to dampen the ensuing volatility were year-to-date. Hedged in U.S. dollars, the Index is up 2.01%, out− not enough to prevent knock-on effects spreading throughout performing the unhedged investors primarily due to broad-based the world. weakness against the U.S. dollar. The “safe-haven” German bund gained nearly 2% with the yield inishing at 0.58%.Energy- The pain was felt by both developedΜΣΧΙ ( Wορλδ εξ ΥΣΑ related currency weakness in Canada and Australia translated Ινδεξ: -10.57%) and emerging markets ΜΣΧΙ( Εεργινγ into disappointing returns on an unhedged basis (both down Χοντινυεδ ον πγ. 3 Χοντινυεδ ον πγ. 5 Κνοωλεδγε. Εξπεριενχε. Ιντεγριτψ. Υ.Σ. Εθυιτψ: Νοσεδιϖε Θυαρτερλψ Περφορmανχε οφ Σελεχτ Σεχτορσ Χοντινυεδ φρο πγ. 1 Russell 1000 Russell 2000 10% Underlying U.S. fundamentals were impacted by tough global 4.68% 0% markets. The strong U.S. dollar challenged domestic compa− -0.30% -0.80% -4.78% nies’ ability to grow, negatively affecting earnings and expec− -10% tations going forward. Volatility of stocks, as measured by -16.78% -20% -18.35% the daily VIX, peaked for the year in August and remained -21.91% elevated throughout the quarter. At the same time, stock cor− -30% relations also increased to almost two times their long-term -32.77% -40% average, making it more challenging for active management Utilities Consumer Materials Energy to navigate the decline. Asset lows continued to show a pref− Staples erence for passive, which remains a sizable portion of U.S. Source: Russell Investment Group equity assets under management. Large and small cap stocks showed strong divergence in Ρυσσελλ 2000 Ινδεξ Ρυσσελλ 1000 returns ( : -11.92% and Ρολλινγ Ονε−Ψεαρ Ρελατιϖε Ρετυρνσ (vs. Russell 1000) Ινδεξ: -6.83%) while mid cap fell in betweenΡυσσελλ ( Μιδ− Χαπ Ινδεξ: -8.01%). Growth maintained its lead over value in Russell 1000 Growth Russell 1000 Value Russell 1000 most capitalizations, but small cap stocks were an exception 30% (Ρυσσελλ 2000 Γροωτη Ινδεξ: -13.07% and Ρυσσελλ 2000 ςαλυε Ινδεξ: -10.73%). Micro caps fared the worst (Ρυσσελλ 20% Μιχροχαπ Ινδεξ: -13.77%). 10% Underlying sector results varied and dictated which style ended 0% up on top—large cap Materials and Energy sectors declined, -10% and both small and large cap Health Care trailed. The magni− tude of Health Care underperformance was stronger in small -20% cap due to biotechnology, resulting in small cap growth trailing -30% value; the opposite was true in large cap. In general, defensive 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 areas of the market held up as investors shifted to a “risk-off” Source: Russell Investment Group mentality. Commodity price declines and slow global growth were major factors behind Materials and Energy results. As is typical in high-volatility periods, large cap outperformed small and high quality beat low. and unemployment was at its lowest level since 2008. Though The U.S. equity market experienced an incredibly dificult quar− active management struggled versus the benchmarks, year-to- ter, but a few positive glimmers shone through: second-quarter date results are favorable. U.S. equity continues to be the best GDP was revised up to 3.9%, consumer spending increased, house in the global economy’s neighborhood. 2 Νον−Υ.Σ. Εθυιτψ: Στυmβλινγ Dραγον Ρολλινγ Ονε−Ψεαρ Ρελατιϖε Ρετυρνσ Χοντινυεδ φρο πγ. 1 (vs. MSCI World ex USA U.S. Dollar) Μαρκετσ Ινδεξ ΜΣΧΙ MSCI Pacific MSCI Europe MSCI World ex USA : -17.78%). Value lagged growth as the 40% ΑΧWΙ εξ ΥΣΑ Γροωτη ΜΣΧΙ ΑΧWΙ εξ (-10.77%) bested the 30% ΥΣΑ ςαλυε − (-13.60%). Small cap stocks rode the wave of vola 20% tility better than large cap due to less exposure to Energy, b ut 10% were still deep in the red ( ΜΣΧΙ ΑΧWΙ εξ ΥΣΑ Σαλλ Χαπ 0% Ινδεξ: -10.02%). In developed countries defensive sectors -10% fared best, with Consumer Staples (-1.49%), Utilities (-4.23%), -20% and Health Care (-5.26%) providing the most protection. -30% Materials (-19.67%) and Energy (-16.83%), bludgeoned by -40% falling commodity prices, were the worst performers. 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Source: MSCI European stocks regressed ΜΣΧΙ( Ευροπε Ινδεξ: -8.69%) Japanese carmakers were hurt by reports of slowing sales in as hand wringing over a possible “Grexit” abated only to beChina; a massive explosion at the port of Tianjin in August tem− replaced by turmoil in China. Denmark (-2.41%) did best, dueporarily shut down Toyota’s largest Chinese production facil− primarily to strong domestic performance from Consumer ity. Energy and Materials were laggard sectors in the Index Discretionary (+8.54%). Nearby Norway was crippled by −fall (-28.24% and -19.35%, respectively). Financials (-17.73%) ing oil prices and posted the largest loss (-19.13%). Europeanfollowed as Japanese banks were battered by large losses in sectors mirrored the story in the rest of the developed world,their equity portfolios.