In 2019 the U.S. stock market had one of its best performing
years on record. Stocks, as reflected by the S&P 500 Index,
gained 28.9%. To put that in historical perspective, in only four
of the past 50 years have returns been higher. But if a recession
hits and stocks go down, what happens to investments that pay
pensions and other retirement benefits earned by City of Los
Angeles employees and their beneficiaries? Fortunately, the
LACERS portfolio is designed to endure both good and bad economic
times.
The latest bull market is the most enduring on record. It began
after the 2008 recession and has continued for 11 years. An
investment in the S&P 500 Index made in 2009 increased more
than 3.5 times if held through the end of 2019. To put that in
real dollar terms, $1,000 would have grown to more than $3,500
over that period. So how will the stock market perform in the
years to come? No one truly knows. But if history has taught us
anything, it’s that stock markets experience periods of retreat.
To withstand significant market swings, the LACERS portfolio is
invested across multiple asset classes. These include bonds, U.S.
stocks, foreign stocks, real assets, and private equity. Much
like a ballast steadies a ship sailing through rough waters, a
variety of investments helps a portfolio get through volatile
markets. This is possible because asset classes behave
differently from one another. In down markets, some assets
decline less than others; in up markets, some assets increase
more than others.
No one can reliably predict the start and end to bull markets or
bear markets. In the early stages of a market cycle, just when it
begins to trend upward, investors who buy and hold equity
positions are rewarded. For example, going back to the “Tech
Bubble,” which burst in dramatic fashion in 2000, the LACERS
portfolio was valued at $7.1 billion (September 30,
1999). Over the next 20 years, the portfolio more than
doubled in value to $18.1 billion and returned 6.8% (gross of
fees) on an annualized basis.
While the markets have produced attractive returns in the 11
years following the 2008 recession, we recognize that market
conditions will change. So with that in mind, the LACERS Board
takes a long-term, strategic approach by adopting a diversified
asset allocation policy tailored to address current and future
market conditions. Assisting the Board is a highly qualified team
of investment staff and consultants who ensure that all relevant
financial and economic information is considered by the Board
when making key investment decisions. In fact, staff continues to
implement a restructuring of the investment portfolio approved by
the Board in 2018 to ensure the continued delivery of retirement
benefits for many years to come.