LAGERS’ Investment Team describes the portfolio allocation process as being similar to building a house. We want to build a house that will withstand all types of weather, one that will protect our loved ones against anything that the current or future environment could throw our way. We seek to accomplish this same goal in portfolio construction, using diversification of assets, liquidity, and careful monitoring of exposures to ensure we’re not dependent on any one market environment to succeed. The last six months of 2018 saw the “weather” in the global market change drastically from the last nine years since the crisis. Due to the portfolio adjustments of the last few years, resulting in the current allocation, the house was only minimally impacted by this current storm.When times are good and stocks are flying high it can be difficult to keep your expectations grounded and remember what history has taught us. Planning for the future, taking a long term view on your holdings, and diversifying your investments across assets and liquidity will pay off in the long run. We believe that’s the case here at LAGERS, and we are building a portfolio that’s steady and robust enough to provide the returns to secure our members’ retirements in all environments for many years to come.
For the 2018 calendar year LAGERS’ portfolio returned +2.0% while the US equity market, represented by the S&P 500, was down -4.4%. A more drastic difference in performance can be seen during the fourth quarter of 2018 when the S&P 500 fell over -13.0%, with similar negative returns across all equity indices. In this same period LAGERS total portfolio fell only -2.8%, this large difference was the result of decreased equity exposure in LAGERS’ overall allocation. Over the last few years LAGERS has moved the allocation away from growth focused exposure in equities, towards inflationary exposure in real assets.
The equity bull market that began on March 9, 2009, and that may be ending as we speak, is over 3,400 days long. During that time it became increasingly difficult for portfolio managers to justify to investors why someone shouldn’t simply buy and hold an S&P 500 index fund. Why dabble in bonds at low rates, or real assets when commodities are falling, and hedge fund managers whose returns don’t reach the double-digit a year returns of the equity indexes? We’re seeing why today. That period was a great period to be in stocks, but like all things, it was going to come to an end. And when it did, diversification protected the portfolio from large negative returns and helped ensure that our house remained standing strong. During the September to December time frame when equities fell drastically, Fixed Income returned +0.4% and Real Assets returned +1.2%. Thus the positive returns in these asset classes, which together make up over 60% of the portfolio, dampened the negative effect of the pullback in the equity market.
As time passes we will continue to adjust our allocation in tune with opportunities in the market, but will never deviate from our fundamental view of being long term investors seeking to hold a pool of diversified assets. Through these fundamental principles we will seek to provide our members with the secure retirement they deserve.
For more information on our performance, take a look at our most recent financial reports.