Retirement insights from a Colorado PERA perspective

A distant view shows a mountainous landscape with sloping peaks, green trees in the foreground, and a cloudy sky above.

After benefiting from <a href="https://content.copera.org/2018-markets-year-in-review/">strong returns during 2017</a>, 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 <a rel="noreferrer noopener" label="multiple asset classes (opens in a new tab)" href="https://www.copera.org/2018-markets-year-in-review" target="_blank" class="broken_link">multiple asset classes</a>, including <a href="https://www.copera.org/pera-board-meeting-notes-setting-peras-portfolio-mix" class="broken_link">public equities</a>, <a rel="noreferrer noopener" label="bonds (opens in a new tab)" href="https://content.copera.org/asset-class-in-depth-real-estate/" target="_blank">bonds</a>, <a rel="noreferrer noopener" label="private equity (opens in a new tab)" href="https://content.copera.org/pera-board-meeting-notes-setting-peras-portfolio-mix/" target="_blank">private equity</a>, <a rel="noreferrer noopener" label="real estate (opens in a new tab)" href="https://content.copera.org/real-return-investments-for-inflation-protection/" target="_blank">real estate</a>, and <a href="https://www.copera.org/2018-markets-year-in-review" target="_blank" rel="noreferrer noopener" label="opportunistic assets (opens in a new tab)" class="broken_link">opportunistic assets</a>. 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 <a href="https://www.msci.com/acwi" target="_blank" rel="noreferrer noopener" aria-label="MSCI All Country World IMI Index (opens in a new tab)">MSCI All Country World IMI Index</a>, 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 <a rel="noreferrer noopener" label="S&amp;P 500 Index (opens in a new tab)" href="https://www.copera.org/2018-markets-year-in-review" target="_blank" class="broken_link">S&amp;P 500 Index</a> 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 <a href="https://www.msci.com/documents/10199/99459e68-5e21-4888-ace6-72a3ffe9b1ab" target="_blank" rel="noreferrer noopener" aria-label="MSCI World ex U.S. Index (opens in a new tab)">MSCI World ex U.S. Index</a> 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 <a rel="noreferrer noopener" aria-label="U.S. 10-Year Treasury Note (opens in a new tab)" href="https://www.investopedia.com/terms/1/10-yeartreasury.asp" target="_blank">U.S. 10-Year Treasury Note</a> 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 <a href="https://www.investing.com/rates-bonds/u.s.-2-year-bond-yield" target="_blank" rel="noreferrer noopener" aria-label="2-Year Note (opens in a new tab)">2-Year Note</a> 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 <a href="https://www.copera.org/pera-staff-keep-legislators-prepared-for-2019-legislative-session" target="_blank" rel="noreferrer noopener" label="automatic adjustment (opens in a new tab)" class="broken_link">automatic adjustment</a> provision designed to keep the system on track to full funding.

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2018 Markets Year In Review

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