After benefiting from strong returns during 2017, investors found 2018 far more challenging. A generally positive start to the year, for stocks in particular, gave way to concerns over rising interest rates, a continuing trade dispute between the U.S. and China, weakening corporate profit growth, and concerns about China’s slowing economic growth rate. As a result, asset price volatility returned to markets in 2018 after a long period of relative calm, and the year ended on a negative note.
As a reminder, Colorado PERA invests in multiple asset classes, including public equities, bonds, private equity, real estate, and opportunistic assets. PERA achieves a return in each of these areas through public and private market investments. The diversification of PERA’s $46 billion portfolio helps to maintain a more stable return stream, even during volatile times, such as 2018.
Looking at specific areas of investment, global stock markets faced significant headwinds last year, which only worsened in the final three months of 2018. The MSCI All Country World IMI Index, which is PERA’s Equities asset class benchmark, and which measures the performance of stocks of all sizes in both developed and emerging market countries, fell 10.1 percent (in U.S. dollar terms and net of taxes) during 2018. This index was actually up 3.7 percent during the first nine months of the year, only to fall 13.3 percent in the final quarter, as the aforementioned economic worries emerged.
Regionally, stocks saw divergent results for the first three quarters, while falling across the globe in the fourth quarter. In the U.S., the total return for the flagship S&P 500 Index was a positive 10.6 percent through the end of September. The final three months of the year saw a sharp reversal, as the index dropped 13.5 percent, creating a yearly total return loss of 4.4 percent. The rest of the developed world did not benefit from the same good start as the U.S., as the MSCI World ex U.S. Index fell 1.5 percent in the first nine months, before dropping 12.8 percent during the final three months and losing 14.1 percent for the full year. Emerging market shares fared even worse than those in developed nations, shedding 7.7 percent through the end of September, losing 7.5 percent in the final quarter, and costing investors 14.6 percent for the full year.
Fixed income securities also exhibited significant volatility last year. The U.S. 10-Year Treasury Note saw its yield move from 2.40 percent at the beginning of the year to a peak of 3.26 percent in early October, before ending the year at 2.68 percent. The 2-Year Note had even more extreme yield moves, starting at 1.88 percent, peaking at 2.97 percent, and ending at 2.49 percent. Treasuries appeared to benefit from a “flight to safety” in the final quarter of 2018, as investors sold falling stocks and bought bonds, causing bonds prices to rise and bond yields to fall.
While 2018 was
disappointing with regard to investment market returns, PERA continues to focus
on a multi-decade investment horizon, consistent with the long-term needs of
our members. Because approximately one-fifth of the portfolio is not publicly
traded and publicly valued (real estate and private equity investments), PERA’s
official 2018 investment results have yet to be finalized.
The final investment return results for 2018 will be known once the financial audit overseen by the Office of the State Auditor is completed and the financial statements have been reviewed by the PERA Board of Trustees in late June. These results will be used as part of the calculations that determine PERA’s progress toward the funded goals laid out in last year’s SB 18-200 legislation, which included an automatic adjustment provision designed to keep the system on track to full funding.
VolatilityVolatility of returns is the measurement used to define risk. It describes the variation of price of a financial instrument over time. The greater the volatility, the higher the risk.DiversificationA strategy of reducing exposure to risk by combining a wide variety of investments within a portfolio.BenchmarkThe performance objective or standard used to define the return against which another portfolio is to be evaluated.