Investment Update – 3rd Quarter 2015
The third quarter of 2015 brought turmoil to many asset classes around the world amid concerns over global growth and the timing of the Federal Reserve’s first rate hike since 2006. Investors reacted to this uncertainty. Perceptions of risks rose and volatility spiked. As a result, the S&P 500 index declined 6.4%, Small Cap Stocks, as measured by the Russell 2000 index, dropped 11.9%, and the broader Russell 3000 index lost 7.2% for the quarter. For the 1-year period ended September 30, 2015, these indexes returned -0.6%, 1.2%, and -0.5%, respectively. The DJIA decreased 7.0% during the quarter and 2.1% for the trailing-12-month period. The NASDAQ declined 7.1% and rose 4.0% for the comparable time periods, respectively.
Volatility surged across all fixed income segments given the uncertainty over the near-term path of US interest rates. However, due to economic weakness abroad, the Barclays Aggregate index rose by 1.2% during the quarter and was up 2.9% for the trailing-12-month period.
Going into the quarter, developed international markets were expected to outperform their US counterparts (at least in local currency) because of expected improvements in international-market GDP and earnings growth, as well as lower valuations. However, these developed markets were unable to decouple from poor emerging market trends as uncertainty in the Eurozone, caused in part by another round of Greek-exit risks, made the seemingly favorable fundamentals less certain. Overall, the MSCI EAFE returned -10.2% in the third quarter and -8.3% for the twelve-month timeframe.
In emerging markets, China’s policy makers defended the yuan and the achievability of their growth forecasts to skeptical investors. Moreover, news emerged of weaker economic growth spreading to the rest of Asia, including those emerging markets dependent on China. As a result, the toll on emerging market returns was amplified beyond the negative impact of commodity price weakness. Overall, the MSCI EM index suffered a steep 17.8% decline in the quarter. For the year ended September 30, 2015, the index fell 19.0%
The volatility as well as the underperformance of the market had certainly impacted the ACERA Total Fund. For the quarter ending September 30, 2015, ACERA’s Total Fund returned -6.1%, ranking in the 90th percentile and finished the third quarter at a market value of $6.5 billion. Domestic Equities returned -7.6% (53rd percentile), International Equities returned -12.2% (65th percentile), and Fixed Income returned -1.5% (78th percentile) in the quarter. ACERA’s Real Estate managers composite and Private Equity and Alternatives Return Leading Strategies (PEARLS) composite returned 3.4% and 4.3%, respectively, during the third quarter. The Real Return Pool composite decreased 9.8%. We need to keep in mind however that ACERA is a long-term investor with a well-diversified, conservative portfolio and a strong long term track record.
Real Estate and PEARLS composite returns are subject to a quarter lag in reporting results.