Investment Report West Springfield
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THE DE BURLO GROUP, INC. INVESTMENT ADVISORS • CAPITAL MANAGEMENT INVESTMENT REPORT WEST SPRINGFIELD MARCH 31, 2021 THE DE BURLO GROUP, INC. 50 FEDERAL STREET • 8th FL. • BOSTON • MASSACHUSETTS 02110 • PHONE 617.482.0275 • FAX 617.338.6077 West Springfield Retirement Board Investment Report for Quarter Ended March 31, 2021 For Meeting of April 27, 2021 The Economy Makes a Comeback, but it’s Far from Complete In late March, Fed Chair Jerome Powell once again credited the extraordinary efforts and “unprecedented” support of the central bank and Congress with the success of the economic recovery but was quick to state that the recovery was ongoing and “far from complete”. He went on to say, “…at the Fed, we will continue to provide the economy the support that it needs for as long as it takes.” The ambitious task of deploying an aggressive, effective, and equitable vaccination program coupled with renewed hiring aided by the scaffolding of supportive monetary and fiscal policy, is fueling America’s economic comeback and helping consumers to gain confidence. Analysts anticipate GDP growth to be 6.5% in 2022. More than 3 million vaccine doses are currently being administered daily in the U.S. Although these results are a sign of forward momentum, it is important to vaccinate 70% to 85% of the population in order to return to “normal”, according to experts. The pace of the vaccinations is also key as new variants continue to pose a threat to public health and to the economic recovery. Three Months Benchmarks* Ended 3/31/21 Dow Industrials 7.76% S&P 500 5.77% Russell 2000 12.44% NASDAQ Composite 2.78% MSCI Emerging Markets 1.95% MSCI EAFE Index 2.83% Crude Oil 21.93% Trade-weighted Dollar 2.85% Gold -10.04% 2 Year Treasury +4 basis points 10 Year Treasury +83 basis points Fed Funds Target Rate No Change * Please note the returns listed above refer to price changes only. In March, the ISM manufacturing index rose to its highest level since 1983, indicating that demand is rising significantly. However, the data also show that supply shortages are continuing to worsen, due to long lead times, wide-scale shortages of basic materials, and transportation difficulties. Many sectors, including construction, information, and food services, are also experiencing labor shortages. With demand only likely to strengthen further over the coming months as the economy reopens and the latest fiscal boost flows through, inflation is likely to increase over the remainder of 2021 and remain high as the fallout from COVID-19 continues to expose the fragility of the global supply chain. Analysts forecast that core CPI inflation could be 2.5% for 2022 and 2023. Meanwhile, Jerome Powell has acknowledged that although we may experience inflation as the recovery progresses, the Fed has the tools to grapple with this all but inevitable scenario. The better than expected 916,000 rebound in non-farm payrolls in March still leaves employment 8.4 million below its pre-pandemic peak from just over a year ago. To date we’ve recovered approximately 62% of the 22 million jobs that were lost when the pandemic took hold. Even with several months of strong jobs numbers, it would take us well into 2022 to achieve the levels of employment we had before the pandemic struck. Analysts anticipate a full recovery of the labor market by the second quarter of 2023. Consumers have more cash due to the latest round of stimulus checks and more places to spend their money as states are easing restrictions. This could result in a surge in spending boosting economic growth as the number of vaccinations is increasing and people are feeling more comfortable going out to stores and restaurants, which in turn leads to more hiring in these areas. Additionally, with households flush with stimulus cash, analysts are forecasting consumption to grow by 4% in 2022. As businesses are opening up, hiring is increasing in hospitality, leisure, and construction. Restaurants and bars added 176,000 jobs in March alone. Construction and schools added 110,000 and 190,000 jobs, respectively. While the unemployment rate fell to 6.0% in March, down from 6.2%, the labor force is still almost four million lower than in February 2020. Adding those workers to the figures would put the unemployment rate nearer to 8.5%. However, the labor force participation rate, while still below pre-COVID-19 levels, moved up slightly as many, women in particular, are now returning to the workforce. The Federal Reserve remains dovish as labor market conditions for those in the most disadvantaged communities are lagging and therefore, the economy has yet to reach the FOMC's broad-based and inclusive goal of maximum employment, which suggests the asset purchases will be maintained at the current pace for the rest of this year. Officials appear to be unworried by the possibility of a sustained rise in inflation and could wait until late 2023 before beginning to raise interest rates. The timing of a comprehensive infrastructure bill this year is uncertain and will likely be pared back. In addition, it will likely not pass until the next fiscal year, which begins in October. The content of the American Jobs Plan may also be revised to reflect compromises over the levels of planned corporate tax hikes, which pay for the additional spending. Compromising on corporate tax revenue while keeping the plan fiscally neutral would reduce the ultimate size of the bill. As we move forward The virus continues to have a significant human and economic impact across America and throughout the world. A continued consistent and coordinated response to the pandemic and an aggressive vaccination campaign from our leaders and public health officials will be necessary in order to keep the economy on the right track. Yet despite our best efforts, the course of the virus and our response to it, will ultimately determine how the economic recovery progresses both here in the U.S. and worldwide. 2 West Springfield Portfolio Summary (see table below) • The portfolio’s market value decreased by approximately $1.7 million. o Net contributions for the quarter totaled approximately $0.6 million. o Consequently, the investments depreciated in value by approximately $2.3 million. o As of the writing of this report in April, West Springfield’s portfolio is valued at approximately $154.13 million, up another $4.4 million as stocks have rallied higher after the end of March. • During the past three months, bonds depreciated substantially in value, while equities contributed positively to the results during the quarter. Interest income from bonds and stock dividends boosted the value of the entire portfolio by $325 thousand. ANALYSIS OF CHANGE IN MARKET VALUE FROM 12/31/20 TO 3/31/21 Market value at 12/31/20 $ 151,417,966 Realized losses net of realized gains this quarter $ (3,586,513) Unrealized gains year to date $ 933,993 Total of realized and unrealized losses and gains in year $ (2,652,520) Income received $ 325,547 Total investment returns $ (2,326,973) Net cash contribution $ 608,554 Market value at 3/31/21 $ 149,699,548 3 Asset Allocation Changes in the portfolio’s asset allocation this quarter are reflected in the table below. Allocation at 12/31/20 Allocation at 3/31/21 $ % $ % Cash 876,093 0.58% 2,795,506 1.87% Equity Domestic Stock 82,805,159 54.69% 75,379,106 50.35% International Stock 15,214,114 10.05% 16,521,372 11.04% Real Estate 0 0.00% 0 0.00% Total Equity 98,019,273 64.73% 91,900,478 61.39% Fixed Income Domestic Bonds 52,522,600 34.69% 55,003,565 36.74% International Bonds 0 0.00% 0 0.00% Below Invest. Grade 0 0.00% 0 0.00% Total Fixed 52,522,600 34.69% 55,003,565 36.74% Total 151,417,966 100.00% 149,699,549 100.00% • During the first quarter, the equity weighting moved lower, a result of trimming back several stock holdings • The fixed income weighting increased during the past three months as we added to the bond portfolio. • The portfolio’s stock weighting closed the quarter at 61.4% of the total portfolio, down 3.3% from 64.7%, and is currently positioned within the portfolio’s historical stock allocation range. o We sold a net amount of $6.1 million in stocks, and o stocks appreciated in value by approximately 0.2%, with international stocks accounting for most of the increase. • The fixed income allocation increased by $2.5 million during the quarter. o We bought a net amount of $5.2 million in bonds over the past three months, and o the fixed income holdings depreciated in value by approximately 4.4% which includes interest income of approximately $190 thousand. o Though the portfolio’s fixed income investments depreciated during the first quarter, significant bond purchases meant the fixed income allocation increased from approximately 34.7% to 36.7%. o The cash allocation ended the quarter 1.3% higher than last quarter. 4 Bonds – No Place to Hide! As indicated in the table below, bonds with durations of 3 years or longer produced negative returns during the first quarter. Nearly every event, headline, or announcement ultimately led to rising yields and falling bond prices. Democrats took both Georgia Senate seats and the blue wave hasn’t stopped. Crowds stormed the Capitol and Pelosi got her second impeachment of Trump. The $2 trillion stimulus package passed and another $2 trillion infrastructure deal is in the works.