Investment Update – 2nd Quarter 2014

Investment Update

There is a growing realization that monetary policy on an extraordinarily easing mode can have negative effects on risk taking and how that will get recalibrated over the next two years as policy makers move to normalization.  The good news has been in U.S. job growth. Despite lower than expected GDP stats for the first quarter, the labor market in the U.S. seems to have moved to a firmer footing.

Globally, we witnessed the growing crisis in Iraq and continued issues within the Ukraine.  Domestically, during the quarter, the Fed lowered its forecast for 2014 GDP growth, and real wage inflation slipped into negative territory.  Despite those very real risks and challenges, central bank policy continues to matter most to the market.

The S&P 500 index rose 5.2% in the second quarter. Small Cap stocks, as measured by the Russell 2000 index, rose 2.0%. Overall, the Russell 3000 index returned 4.9%. Longer term, one-year returns were 24.6%, 23.6%, and 25.2%, respectively. The DJIA increased 2.8% for the quarter and 15.6% for the year. The NASDAQ rose 5.3% for the second quarter and 31.2% for the year.

Due to investor demand for yield, lower-rated credit, and longer-maturity bonds, the Barclays Aggregate out-performed during the second quarter returning 2.0%. For the one-year period, the index rose 4.4%.

Robust employment and growth metrics helped boost U.K. equities.  New easing measures from the European Central Bank led Europe ex-UK equities to rise in the second quarter.  Japanese equities also rose during the second quarter as Prime Minister Shinzo Abe introduced a plan to cut corporate tax rates.  Overall, the MSCI EAFE returned 4.3% in the second quarter. For the one-year period, the MSCI EAFE gained 24.1%.

More certainty over Federal Reserve monetary policy and declining political turmoil provided tailwinds to emerging market equities. Asian EM performance was particularly strong as Chinese policymakers introduced a mini-stimulus package in April and markets in India rallied on potential reforms by Prime Minister Modi and the Bharatiya Janata Party. Overall, the MSCI EM index rose 6.7% and 14.7% for the one-quarter and one-year period, respectively.

ACERA is a long-term investor with a well-diversified, conservative portfolio. For the quarter ending June 30, 2014, ACERA’s Total Fund returned 3.6%, ranking in the 45th percentile and finished the second quarter at a market value just above $6.9 billion.  Domestic Equities returned 3.2%, International Equities returned 4.2%, and Fixed Income returned 3.4% during the second quarter.  ACERA’s Real Estate managers composite and Private Equity and Alternatives Return Leading Strategies[1] (PEARLS) composite returned 2.4% and 3.6%, respectively, during the second quarter. The Real Return Pool composite returned 4.9% during the second quarter. 


[1] Real Estate and PEARLS composite returns are subject to a quarter lag in reporting results.