Second Quarter 2020 Performance Report
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Q2 Second Quarter 2020 Performance Report Pueblo County Employees’ Retirement Plan August 24, 2020 Dale A. Connors, CFA Senior Consultant Andrew C. Fiegel, CFA, CAIA Senior Consultant This presentation is accompanied by additional disclosures which can be found on the last pages. All information herein is confidential and proprietary. CONTENTS 1 Capital Markets Exhibits 15 Pension Plan Analysis 39 Benchmark History 40 Manager Roster 41 Fee Schedule 42 Endnotes Second Quarter 2020 Capital Markets Exhibits This presentation is accompanied by additional disclosures which can be found on the last pages. All information herein is confidential and proprietary. 1 A Return to Risk Capital Market Returns (%) Equities Rally • Risk assets swung back sharply in the second -13.0 quarter as U.S. stocks experienced their best ® Russell 2000 25.4 quarter in more than 20 years. -30.6 -3.1 S&P 500 20.5 -19.6 Monetary Policy Boosts Credit Markets • Unprecedented central bank efforts led to a -9.8 return to order in the credit markets. These MSCI Emerging Markets 18.1 -23.6 measures resulted in credit spreads moving back towards normalized levels. -11.3 MSCI EAFE 14.9 -22.8 Fiscal Response Supports the Economy -3.8 Bloomberg Barclays High Yield 10.2 -12.7 • After the COVID-19 pandemic brought business around the world to a halt in the first quarter, -19.4 investors became optimistic that the downturn Bloomberg Commodity Index 5.1 will be relatively brief given stimulus measures. -23.3 2.9 • Economic indicators have improved as the world Bloomberg Barclays Aggregate 6.1 re-opened businesses, but a resurgence in Bond COVID-19 cases poses new risks — leaving the 3.1 investment outlook highly uncertain. Q2 2020 Q1 2020 YTD 2020 Source: Morningstar Direct, S&P Dow Jones Indices, Russell, MSCI, Bloomberg Finance, LP This presentation is accompanied by additional disclosures which can be found on the last pages. All information herein is confidential and proprietary. 2 Equity Market Recovery By the Numbers S&P 500 Drawdown and Recovery-to-Date • The S&P 500’s second quarter return of 20.5% was the best quarter since 60.0 51.0 1998 and only the fourth time since 50.0 1945 the index produced a quarterly 40.0 return of at least 20%. 30.0 The S&P 500 fell 34% 39.3 20.0 between February 20 and • In each of the previous three March 23. 10.0 occurrences, the next quarter was 0.0 positive. -10.0 • There has been a common theme Through June 30, the index Total Return (%) -20.0 To fully recovery, the index recovered 77% of its losses before, during, and after the COVID-19 needs to gain 51% from its -30.0 and needs to gain 8% to drawdown: the dominance of growth- March 23 lows. return to previous highs. -40.0 -33.8 oriented equities. -50.0 • While the appetite for risk returned to Drawdown Return Required for Full Recovery-to-Date (Feb 19 to Mar 23) Recovery (Mar 23 to Jun 30) the market, cyclical and value stocks continued to lag. Source: S&P Dow Jones Indices Quarters with S&P 500 Returns Greater Than 20% Since 1945 Returns by Investment Style: Russell U.S. Indices March 23 to June 30 Quarter Current Quarter Subsequent Quarter Value Core Growth Q2 2020 20.5% -- Large 30.0% 39.2% 45.5% Q4 1998 21.3% 5.0% Mid 42.3% 46.5% 51.4% Q1 1987 21.3% 5.1% Small 37.4% 44.4% 49.9% Q1 1975 22.9% 15.4% Source: S&P Dow Jones Indices Source: FTSE Russell, Indices used: large cap value: Russell Top 200 Value Index, large cap core: Russell Top 200 Index, large cap growth: Russell Top 200 Growth Index, mid cap value: Russell Mid Cap Value Index, mid cap core: Russell Mid Cap Index, mid cap value: Russell Mid Cap Value Index, small cap value: Russell 2000 Value Index, small cap core: Russell 2000 Index, small cap growth: Russell 2000 Growth Index This presentation is accompanied by additional disclosures which can be found on the last pages. All information herein is confidential and proprietary. 3 Fed Actions Support Corporate Debt Markets Fed Corporate Bond Purchases ($, M) as of June 18, 2020 Option Adjusted Spreads as of June 30, 2020 Individual 14 1 Securities 2 3 4 HY ETFs $221.3 12 11.0 $835.8 10 IG ETFs $5,969.9 8 6 6.3 OAS (%) 4 2 1.4 0 1/20 2/20 3/20 4/20 5/20 6/20 Total Fed Corporate Bond Purchases to Date: $7 billion Barclays Credit Index Barclays High Yield Index Remaining Federal Reserve Capacity: $743 Billion Source:, Board of Governors of the Federal Reserve System Source: Bloomberg Finance, L.P. Fixed Income Returns (3/23/20 – 6/30/20) – Riskier Bonds Rebound Federal Reserve Corporate Bond Purchase Comments 25% • Fed’s purchases of corporate bonds and ETFs have supported the credit 20% markets leading to decreased yields and sizable returns since March 23. 20% 17% • Going forward, the Fed has substantial assets in its arsenal to continue corporate bond purchases. 15% 10% Date Federal Reserve Announcements & Actions 10% Fed announces they will begin buying investment grade 1 March 23 corporate bonds and bond ETFs 5% 1% Fed announces bond buying program will include some 2 April 9 0% below investment grade bonds (fallen angels) US Treasury Municipals Corporates High Yield 3 May 12 Fed begins buying corporate bond ETFs Fed announces purchases of individual investment grade Source: Barclays, Board of Governors of the Federal Reserve System 4 June 15 corporate bonds in addition to ETFs This presentation is accompanied by additional disclosures which can be found on the last pages. All information herein is confidential and proprietary. 4 Stimulus Programs Support Financial Assets Federal Reserve Balance Sheet Assets ($, B) Cumulative Budget Deficit ($, B) $8,000 $2,500 COVID Fiscal Stimulus $7,000 Programs $6,000 $2,000 Health Markets Care $14B $5,000 $219B $4,000 $1,500 Business $3,000 $68B $1,000 $2,000 Individuals $1,000 $411B $500 $0 2020 Deficit Mar-20 Apr-20 May-20 Jun-20 2019 Deficit Other U.S Treasuries Mortgage Backed Securities Loans & Relief Programs $0 Loans & Relief Programs Includes Credit Facilities, Liquidity Facilities & Central Bank Liquidity Swaps Oct Nov Dec Jan Feb Mar Apr May Monetary Policy Response Fiscal Policy Response • The impact of COVID-19 on the U.S. budget deficit has been • The Federal Reserve continued to expand their balance sheet profound, with its impact seen in the months of April and May. throughout the second quarter with the purchase of Treasuries and mortgage backed securities, as well as the expansion of Loan and • The fiscal year-to-date budget deficit as of May 2020 is $1.9 trillion Relief Programs targeting COVID-19 disruptions. - $1.2 trillion larger compared the same period in 2019. • Loans and Relief Programs expanded from $28 billion on March • During the April-May period, receipts were lower by $351 billion 18 to a peak of $640 billion on June 10. These programs included (primarily due to declines in income and payroll taxes received). support for corporate bond markets, money markets, central bank • Over the same April-May period, expenditures were $763 billion liquidity swaps, and support for consumer and business lending higher – the majority of which were COVID-specific fiscal stimulus programs. programs. Funds were allocated to support individuals, businesses, health care and capital markets. Source: Board of Governors of the Federal Reserve System Source: Congressional Budget Office This presentation is accompanied by additional disclosures which can be found on the last pages. All information herein is confidential and proprietary. 5 Market Overview International Emerging U.S. Equity Global Equity Fixed Income Hedge Funds Commodities Developed Markets Bloomberg HFRI Fund MSCI Emerging Bloomberg Russell 3000® MSCI EAFE MSCI ACWI Barclays Weighted Markets Commodities Aggregate Composite 25 22.0 19.2 20 18.1 14.9 15 10 9.0 6.1 5.1 5 2.9 0 -5 -3.5 -3.5 Rate of Return (%) Rate of -6.3 -10 -9.8 -11.3 -15 -20 -19.4 -25 Second Quarter 2020 Year-To-Date 2020 Source: Morningstar Direct, S&P Dow Jones Indices, Russell, MSCI, Hedge Fund Research, Inc., Bloomberg Finance, L.P. This presentation is accompanied by additional disclosures which can be found on the last pages. All information herein is confidential and proprietary. 6 S&P 500 Scorecard Sector Returns Sector Weights Div. P/E 15-Yr Communication Consumer Yield(1) Ratio(2) Avg.(3) Services Utilities Discretionary 11% 30.5% 3% 11% Technology 1.1% 30.0x 20.3x 15.0% Energy 3% Healthcare 32.9% Consumer Discretionary 1.2% 33.7x 19.6x Materials 15% 7.2% 2% Consumer 20.0% Communication Services 1.3% 24.1x 20.1x Staples -0.3% 7% Industrials 13.6% Health Care 1.7% 23.2x 20.7x -0.8% 8% 20.5% Real Estate S&P 500 1.9% 23.2x 17.6x 3% -3.1% Technology Financials 27% 8.1% 10% Consumer Staples 2.9% 24.3x 19.5x -5.7% Source: Morningstar Direct, S&P Dow Jones Indices 26.0% Materials 2.3% 23.6x 18.4x YTD 2020 Sector Contribution -6.9% Technology 3.5% Real Estate 3.3% 30.0x 39.6x 13.2% -8.5% Cons. Discr. 0.7% Utilities 3.6% 19.4x 17.4x 2.7% 0.0% Comm. Services -11.1% -0.1% Health Care Industrials 2.2% 18.4x 17.8x 17.0% -14.6% -0.2% Materials -0.3% Real Estate Financials 2.7% 12.8x 14.5x 12.2% -23.6% -0.4% Utilities Energy 5.8% 23.3x 15.7x 30.5% -0.4% Cons.