Investment Philosophy

LACERS Investment Philosophy

Built for the Long Haul - February 2020

Overview

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.

Post

Stay the Course!

January 2019

You are probably aware that the stock market has recently experienced strong volatility.  A long-overdue correction was anticipated by most investors; the U.S. equity markets as reflected by the S&P 500 are down 10% for the month of December alone. To better understand the current markets and what LACERS does to withstand volatility, it’s helpful to examine past market cycles and what was learned.

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