Investment Update – 3rd Quarter 2014
A very strong August for the market was bookended by weak performance in both July and September. Investors are grappling with the ramifications of improving economic conditions in the U.S. that are leading to a wind down of Federal Reserve accommodative policy. While good news, it comes at a juncture where stock valuations on the whole already reflect the fact that we are more than 5 years into this bull market. Concerns about weaker global economic growth have led to a sudden strengthening in the U.S. dollar relative to many major currencies. For companies that derive significant revenue in international markets, a stronger dollar can be a significant headwind.
The S&P 500 index rose 1.1% in the third quarter. Small Cap stocks, as measured by the Russell 2000 index, underperformed, falling 7.4%. The Russell 3000 index was flat for the quarter. Longer term, one-year returns were 19.7%, 3.9% and 17.8%, respectively. The DJIA increased 1.9% for the quarter and 15.3% for the year. The NASDAQ rose 2.2% for the third quarter and 20.6% for the year.
Declining global growth and geopolitical risk boosted demand for U.S. Treasuries with the Barclays Aggregate returning 0.2% during the third quarter. For the one-year period, the index rose 4.0%.
Deteriorating economic fundamentals and decline in commodity prices in the Eurozone led to a decline in the MSCI EAFE. The index returned -5.8% in the third quarter. For the one-year period, the MSCI EAFE gained 4.7%.
Declining growth and inflation in the Eurozone led to a fall in emerging Europe and the Middle East. Falling commodity prices and platinum mine strikes impacted South Africa. Meanwhile, Latin American equities fell driven by weaker markets in Brazil. Overall, the MSCI EM index declined 3.4% over concerns regarding Chinese growth and Federal Reserve rate hike expectations. For the one-year period, the index increased 4.7%.
ACERA is a long-term investor with a well-diversified, conservative portfolio. For the quarter ending September 30, 2014, ACERA’s Total Fund returned -2.2%, ranking in the 93rd percentile and finished the third quarter at a market value just above $6.7 billion. Domestic Equities returned -1.1%, International Equities returned -5.9%, and Fixed Income returned -0.4% during the third quarter. ACERA’s Real Estate managers composite and Private Equity and Alternatives Return Leading Strategies (PEARLS) composite returned 3.1% and 4.2%, respectively, during the third quarter. The Real Return Pool composite decreased 9.9% during the third quarter.
 Real Estate and PEARLS composite returns are subject to a quarter lag in reporting results.