ers market summaries, june 2020 · the market continued to focus on the path to recovery from the...

MARKET SUMMARIES SEPTEMBER 2020

1 | Monthly Market Summary – September 2020

Table of Contents Domestic Equity Market Summary ..................................................................................................................... 2

International Equity Market Summary ................................................................................................................ 3

Public Real Estate Market Summary ................................................................................................................. 4

Private Real Estate Market Summary ................................................................................................................ 7

Private Equity Market Summary ........................................................................................................................ 8

Fixed Income Market Summary ......................................................................................................................... 8

The Bond Markets ............................................................................................................................................. 9

Hedge Fund Market Summary ......................................................................................................................... 10

Private Infrastructure Market Summary ........................................................................................................... 12


DOMESTIC EQUITY MARKET SUMMARY In September, U.S. Equity markets took a break from recent gains, with major indexes posting the first negative month since March 2020. Declines in major benchmarks ranged from 2.3% to 5.2%. The technology-heavy NASDAQ was down the most, while the S&P 500 Value was the best performer. This is a reversal of recent trends, where market gains had been concentrated in large cap, growth and technology. In terms of the S&P 500 sector performance, Materials and Utilities were the only positive sectors, up 1.1% and 0.8%, respectively. Information Technology and Communications Services—which includes large internet companies—were down 5.4% and 6.5%, respectively. One sector occupying a familiar spot was Energy at the bottom of the pack. Energy was down 14.6% in September and is down more than 50% year-to-date. Early in the month, markets shrugged off positive jobs market data, with significant profit-taking concentrated in the technology sector. There was no specific news driving this weakness, but such weak spells can be expected after substantial and prolonged gains. Markets remained fairly flat through mid-month, but then took a leg down when Fed Chairman Jerome Powell highlighted the importance of federal stimulus, which remained at an impasse. Markets recouped some of the month’s losses in the final week of September, as big technology stocks rebounded and investors became more optimistic about a stimulus plan. Labor markets continued to draw the most investor attention on the economic release calendar. Initial jobless claims stayed steady at just under 900,000 throughout the month, which was a positive surprise early in September. On the consumer front, University of Michigan Sentiment and Consumer Confidence surveys beat expectations and showed month-to-month improvement. All of the major housing market indicators continued to be red-hot, especially new and existing home sales. In terms of S&P 500 stocks, Nike Inc., FedEx Corp. and Darden Restaurants Inc. were up after reporting strong off-quarter results. Nine of the 10 top decliners of the month were in the oil & gas sector, as the market continues to evaluate on how the industry will adapt to lower energy prices. Table 1: Benchmark Returns – September 2020

Index Close September 2020 (%) Calendar Year to Date (%)

NASDAQ 11167.5 -5.2 24.5

S&P 500 Growth 2334.5 -4.8 19.6

Dow Jones Industrial Avg. 27781.7 -2.3 -2.7

S&P 500 3363.0 -3.9 4.1

S&P 600 Small Cap 855.3 -4.8 -16.2

S&P 400 Mid Cap 1861.3 -3.4 -9.8

S&P 500 Value 1114.1 -2.6 -13.3


Table 2: S&P 500 Economic Sector Returns

Sector September 2020 (%) Year to Date (%)

Materials 1.1 3.7

Utilities 0.8 -8.1

Industrials -0.8 -5.4

Consumer Staples -1.8 1.9

Health Care -2.3 3.6

Real Estate -2.5 -8.9

Financials -3.7 -21.7

Consumer Discretionary -3.7 22.4

Information Technology -5.4 27.5

Communication Services -6.5 7.6

Energy -14.6 -50.2

INTERNATIONAL EQUITY MARKET SUMMARY International stock markets, as measured by the MSCI ACWI ex U.S. Index, fell (-2.5%) in September, after increasing (4.3%) in August and rising (4.5%) in July. Returns were negative in all but one sector. Information Technology (1.4%) and Discretionary (-0.3%) led the index while Financials (-6.6%) and Energy (-10.6%) were the largest detractors of performance. EUROPE: MSCI EAFE fell in line with the broader international index in September (-2.6%) after leading the group in August (5.2%) and lagging in July (2.4%). Europe and Developed Asia saw returns turn negative in September, after a strong August performance. Returns were negative across all sectors, with Health Care and Information Technology being the best performers. Energy was the worst performer due to falling crude prices. Japan was the only major benchmark country to post a positive return for the month as the new government signaled a continuation of former Prime Minister Shinzo Abe’s structural reform agenda. European returns declined due to an increase in COVID-19 cases, which tempered demand and stoked deflation concerns. EMERGING MARKETS: MSCI Emerging Markets fell less than the broader international index in September (-1.6%) after lagging the group in August (2.2%) and leading in July (9.0%). The pace of the stock rebound in emerging markets continued to slow, and turned negative in September. Information Technology and Discretionary were the only sectors that saw a positive performance, while Health Care and Energy saw the largest declines. From a country standpoint, energy-sensitive countries lagged with the decline in oil prices, surpassed only by Thailand. Thailand was rocked by government protests and Indonesia saw a strong recurrence of COVID-19 cases.


The chart above shows sector returns for the MSCI ACWI ex U.S. index in September, with Information Technology (1.4%) and Discretionary (-0.3%) being the top-performing sectors. Financials (-6.6%) and Energy (-10.6%) were the lowest.

The chart above shows the performance of the MSCI ACWI ex U.S. (1.3%), MSCI EAFE (1.9%) and MSCI Emerging Markets (0.3%) indices for August and September.

PUBLIC REAL ESTATE MARKET SUMMARY The global real estate securities market as measured by the FTSE EPRA / NAREIT Developed Index was down 3.0% on renewed lockdowns and second wave concerns. Listed real estate slightly outperformed the broader equity market MSCI World Index for the month (-3.0% vs. -3.4%), but underperformed on a calendar year-to-date basis (-19.1% vs. +2.1%). The market became more volatile in the second half of the month as the headlines of U.S. elections, Brexit, COVID-19 and the negotiation of economic stimulus measures continued to dominate. Quarter-end portfolio rebalancing also added to the volatility. Global bond yields fell overall in September, with the U.S. 10-year government bond yields falling slightly to 0.68%. Additionally, the German 10-year government bond yields declined further from -0.40% in August to 0.52% in September. The


U.S. dollar strengthened against most major currencies over the month, largely driven by risk-off sentiment and less dovish rhetoric from the Fed. As far as real estate return in USD terms, Continental Europe (USD -1.7%, local +0.6%) was the best performer, followed by Asia (USD -2.3%, local -2.0%) and North America (USD -3.1%, local -3.0%). The U.K. (USD -8.5%, local -5.2%) was the worst performer. Table 3: FTSE EPRA/NAREIT Developed Index Country – Total Return (USD)

Country September 2020 (%) Calendar Year to Date (%)

SWEDEN 16.1% -3.7%

NORWAY 2.1% -13.2%

SWITZERLAND 1.2% -8.6%

BELGIUM 1.2% 9.1%

NEW ZEALAND -0.3% -35.3%

SINGAPORE -1.0% -8.8%

JAPAN -1.0% -16.9%

NETHERLANDS -2.2% -42.6%

GLOBAL -3.0% -19.1%

USA -3.1% -20.0%

CANADA -3.2% -25.7%

HONG KONG -4.3% -20.3%

AUSTRALIA -4.3% -27.3%

GERMANY -4.8% 11.7%

AUSTRIA -5.1% -26.8%

ITALY -5.5% -46.6%

SPAIN -6.8% -37.1%

UNITED KINGDOM -8.4% -27.7%

FINLAND -10.0% 5.8%

IRELAND -11.0% -15.0%

FRANCE -11.7% -54.8%

ISRAEL -15.5% -36.3%

Norway, Italy and Austria each contain only one name in the index.


In the Asia-Pacific market, Australia was down 4.3%, dragged by the Australian dollar weakening against the U.S. dollar, while the local return was -1.2%. COVID-19 new infection cases slowed in Australia. The state of Victoria lifted a curfew sooner than originally expected and relaxed some of the social distance measures. Despite the relatively positive news on the COVID-19 front, Australia Q2 GDP was down 6.3% year-over-year, which was worse than expectations. Despite the sudden resignation of Prime Minister Shinzo Abe, who was replaced by Yoshihide Suga, the news that flowed out of Japan was sanguine. Japan was down 1.0% for the month, as the Hotel and Retail subsectors performed relatively strong, being helped by some encouraging signs of an economic recovery. Under Suga, the market still expects the current major monetary and fiscal policies to continue. Singapore was down 1.0%. As August, retail sales were down 8.5% year-over-year, which was less than expectations of it being down 15.0%. Hong Kong was down 4.3% as the daily number of new COVID-19 cases fell to single digits throughout the month. The Hong Kong government relaxed some of the social distancing measures because of the declining cases. Grade-A office rental levels continued to decline across the board in the third quarter, although the magnitude had narrowed. Multiple European countries have seen a resurgence of new COVID-19 cases. The U.K., France, Germany, Italy and Spain reported record cases since the spring outbreak and as a result, restriction rules were tightened in some major areas. The operating environment continued to be challenging for the Retail sector as a number of retail names raised equity to reduce financial leverage and the sector’s share prices were subsequently hit hard. Lastly, the British pound weakened against the U.S. dollar as risk of the U.K. not being any closer to a Brexit deal became a more likely scenario. U.S. real estate securities, as measured by the FTSE EPRA / NAREIT U.S. Index, were down 3.1% for the month, reversing consecutive months of a strong absolute performance as concerns over the COVID-19 virus returned. COVID-19-related stimulus negotiations remained at an impasse. Despite the negative sentiment shift from the prior months and an inclination for the market to bid the more defensive REIT names, subsector performance was quite mixed. The more cyclical and risk-on REIT subsectors did not all perform similarly. The Self Storage (+3.6%) subsector materially outperformed as operating fundamentals had improved since the peak of the pandemic. The Industrial (-2.0%) subsector reversed the weak relative performance it experienced in August as investors were more inclined to increase their defensive positioning for the month. On the other hand, the Lodging/Resorts (-0.3%) and Health Care (-2.1%) subsectors were strong relative performers in September. Other COVID-19-affected subsectors such as Retail (-4.1%), Residential (-4.4%) and Office (-6.3%) unsurprisingly underperformed. This was predominately due to the coastal Residential and Office names dragging down their respective subsectors. Consistent with the mixed performance seen between the higher and lower beta REIT subsectors, the Diversified subsector (-4.4%), led by the Data Centers, lagged the REIT Index. Table 4: U.S. Sector Total Return

Sector September 2020 (%) Calendar Year to Date (%)

SELF STORAGE 3.6% 5.8%

LODGING/RESORTS -0.3% -41.5%

INDUSTRIAL -2.0% 10.5%

HEALTH CARE -2.1% -22.8%

U.S. ALL SECTORS -3.1% -20.0%

RETAIL -4.1% -40.8%


Sector September 2020 (%) Calendar Year to Date (%)

RESIDENTIAL -4.4% -20.4%

DIVERSIFIED -4.4% -11.6%

OFFICE -6.3% -29.0%

The below chart illustrates the daily price change of FTSE EPRA/NAREIT Index for September. On September 30 the index was at a level of 4728. FTSE EPRA/NAREIT Index Daily Price Change – September 2020

PRIVATE REAL ESTATE MARKET SUMMARY

The net asset value of the Private Real Estate portfolio as of September 30 was approximately $2.4 billion. For the month, approximately $23 million in capital was called for the Private Real Estate program and distributions for the month were $21 million. Since inception of the program, the total capital called is approximately $3.9 billion. From inception through the end of the month, approximately $3.0 billion was returned as income, capital gain or return of capital. The chart below summarizes the various capital calls and distributions for the current month, fiscal year-to-date and since inception.

Table 5: Capital calls and distributions for September 2020

September Fiscal Year to Date Inception

Calls ($23) million ($23) million ($3.9) billion

Distributions $21 million $21million $3.0 billion

Net (Called)/Distributions ($2 million) ($2) million ($0.9) billion


One commitment of $75 million was made in September to DivcoWest Fund VI. DivcoWest Fund VI is a non-core manager focusing on “technology” cities across all property types, but predominately focusing on office. DivcoWest Fund VI will also focus on life sciences. They are targeting a 12%-14% net internal rate of return. The target commitment for Fiscal Year 2021 is $300 million, with an upper range of $600 million. The ERS Private Real Estate portfolio represents 8.2% of the overall System’s assets, which is below the target of 9%. The near-term focus continues to be on renewed commitments to performing fund managers in which ERS has investments, such as commingled “club funds” with the potential to drive terms and conditions, niche property sectors, co-investments and select international investments. Since inception, commitments by ERS’ Private Real Estate program in total is approximately $5.2 billion.

PRIVATE EQUITY MARKET SUMMARY ERS Private Equity team did not close any new investments during September. Private Equity’s target commitment for Fiscal Year 2021 is $800 million with a range of $600 million to $1.0 billion. As of September 30, the Private Equity portfolio’s net asset value was $4.51 billion, or 15.8% of the System’s assets. From program inception through September 30, ERS has closed on 114 funds and 57 co-investments with commitments totaling $10.2 billion (adjusted for currency exchange rates). In addition, ERS holds LP Advisory Committee seats on 69 active funds and six fund LP Advisory Observer seats.

FIXED INCOME MARKET SUMMARY

COVID-19 cases and deaths held fairly steady in September while Europe saw a significant spike post-holiday. While COVID-19 held steady in the U.S., the market was more focused on additional fiscal stimulus to support the economy; recent developments do not look particularly constructive for a deal to be reached before the November elections. While the Federal Reserve will remain accommodative to support the economy, Fed members have become increasingly vocal that only targeted fiscal stimulus can support the hardest hit areas of the economy. The unemployment rate has continued to tick lower, but it remains very high. We saw a large number of layoffs toward the end of the month, which have yet to be captured in the payrolls and unemployment statistics.

Table 6: Index Returns (%)

Total Return September (%)

Total Return Calendar Year 2020 (%)

Barclays Capital Intermediate Credit -0.14 5.45

Barclays Capital Intermediate Treasury 0.07 6.02

U.S. Treasury 0.14 8.90

U.S. Agency 0.20 5.44

Corporate -0.29 6.64

Securitized -0.07 3.86

U.S. Corporate High Yield -1.03 0.57

Emerging Markets -1.26 1.93

• Labor: The economy added 661,000 jobs during the month and the unemployment rate declined from 8.4% to 7.9%. While the economy did add a significant number of jobs, the pace of additions has


declined. Additionally, the unemployment rate remains very high, providing a case for additional monetary and fiscal actions.

• Inflation: The Federal Reserve’s preferred measure of inflation, Core PCE, was at 1.6% year-over-year, well below the Fed’s 2% target. The Fed has signaled that it is willing to let inflation run above 2% in the future to target a longer-run 2% average.

• Housing: The housing market has remained relatively robust. Existing home sales increased 2.4% month-over-month and new home sales increased 4.8% month-over-month.

• Durable Goods: Durable goods orders increased 0.5% month-over-month signaling a slowing pace of growth in the Industrial sector.

THE BOND MARKETS

As shown in the charts below, treasury yields changed only a little for the month of September; the yield spread between the 10-year and 2-year Treasuries decreased from 57 basis points to 56 basis points month-over-month. Risk markets retraced in September. The S&P 500 lost 3.80%, while high-yield bonds and emerging markets bonds returned -1.03% and -1.26%, respectively. Given the yield curve was mostly unchanged, U.S. treasuries returned a modest 0.20%. Year-to-date, U.S. Treasuries and rate-sensitive investment grade corporate bonds have outperformed, returning 8.90% and 6.64%, respectively. High-yield and emerging markets have returned a modest 0.57% and 1.93%, respectively. 2s-10s U.S. Government Yield Spread


U.S. Government Yield Curve

HEDGE FUND MARKET SUMMARY The Absolute Return Portfolio posted an estimated gain of +0.58% in September. The target return of 90-day T-bills plus 350 basis points reached +0.29% over the same period. Fiscal year-to-date, the Absolute Return Portfolio has returned an estimated +0.58% while the target return has reached +0.29% over the same period. In September, most of the global equity markets declined due to a resurgence in European COVID-19 cases, prospects of a volatile and potentially contested U.S. presidential election, and a general stalling of the global economic recovery across a number of regions. Within U.S. markets, intra-month volatility within equities was at its highest for the past three months due to concerns over a potential delay of an additional stimulus package, as well as a sharp correction seen within the technology sector NASDAQ Index. Due to these factors, global equities sold off, while safe-haven assets such as the U.S. dollar rose. U.S. Treasuries were relatively unchanged. Performance during the month varied by sub-strategy. The largest contributors during the month included Magnetar, a relative value manager; Glazer, an event-driven manager; and Complus, a global macro manager. These three managers posted gains of +3.10%, +2.98% and +1.41%, respectively. In turn, there were only two managers that detracted from performance. These two managers were Laurion, a relative value manager, and Southpaw, an event-driven manager. For September, these two managers were down -2.22% and -1.90%, respectively. The graphs below indicate the current and historical strategy positioning of the Absolute Return Portfolio as of August 2020 month-end. At the end of August, the ERS Hedge Fund team completed a partial reduction to an event-driven manager. This reduction won’t have a material effect on the portfolio composition, and an overweight to event-driven and relative value strategies remain.


Current Strategy Exposure

Historical Strategy Exposure


PRIVATE INFRASTRUCTURE MARKET SUMMARY The ERS Private Infrastructure team closed two new transactions in September, each was a $30 million co-investment. ERS Private Infrastructure’s target commitments for Fiscal Year 2021 are $400 million with a range of $280 million to $520 million. Since inception, the Private Infrastructure team has closed on 22 co-investments and 18 funds with commitments totaling $2.13 billion (adjusted for currency exchange rates). ERS holds an LP Advisory Committee seat on 17 funds and an observer seat on one fund. As of September 30, the Infrastructure portfolio net asset value was $1.12 billion, or 3.9% of the System’s assets.

ers market summaries, june 2020 · the market continued to focus on the path to recovery from the...

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