The board of the Marin County Employees’ Retirement Association received sobering news this week about the performance of the association’s investment portfolio in the first quarter of 2020.
The value of the portfolio dropped 14.2% to $2.3 billion after increasing by 17.5% during 2019. The value of MCERA’s assets has dropped 9.5% during the first nine months of the association’s current fiscal year.
The association’s board held its April meeting online Wednesday to comply with social distancing guidelines aimed at reducing the spread of the coronavirus. Investment consultant Jim Callahan, executive vice president of Callan LLC, presented the portfolio update to the board.
Callahan said the market began reacting to the coronavirus pandemic on Feb. 19 and over the next 23 trading days fell 34% to its lowest point since the crisis began.
“This is really unprecedented,” Callahan said. “We’ve seen declines that have been worse than this for sure, but what has been most unique about this decline is just how quickly it happened.”
Since then the market has bounced back a bit. Callahan said that as of Tuesday the S&P 500 Index was down 17.2% year-to-date.
MCERA pays out pensions to 3,300 retirees and beneficiaries each month. Last year, it paid $149 million. Of that amount, $109 million came from Marin County and other employers in the system and their employees. The remaining $40 million came from earnings on the association’s investments.
Jeff Wickman, MCERA’s administrator, told board members that in March, with the stock market in free fall, he cashed in some of the association’s investments to make sure it had sufficient liquidity to get pensions to retirees over the next several months and cover margin calls on some of the association’s very short-term investments.
“We did some work to ensure that we had at least 90 days of cash for the next three months,” Wickman told the board. “That is all now in place.”
Wickman said of the $38 million raised in March, $20 million has been earmarked for margin calls while the remaining $18 million is available for use as pension payouts beginning this month.
Even before the arrival of the bear market, fiscal hawks were warning that public pension funds were underfunded and counting on overly optimistic investment returns to bail them out.
As of June 30, 2019, MCERA had an unfunded pension liability of $399.4 million. The funded ratio for the plan as of June 30, 2019, is 86.6%. The unfunded liability attributable to the county of Marin is $237.5 million; the funded ratio for the county of Marin as of the same date is 89%.
Richard Tait of Mill Valley, a founding member of Citizens for Sustainable Pension Plans, wrote in an email, “If the fiscal year to date loss of 9.5% prevails for the rest of the fiscal year, it will offset the positive impact on the unfunded actuarial liability resulting from the last fiscal year’s gain in assets.”
The investment fund’s assumed annual rate of return is set currently at 7%. The rate was last cut in 2017 from 7.25%, resulting in member agencies and employees having to pay more to finance the program.
The rate of return is re-evaluated by MCERA’s board every three years based on a review of economic and demographic assumptions used to fund the plan. The next review will take place later this year.
Callahan said the stocks of companies with relatively small market capitalization have performed the worst during the crisis, tumbling more than 35%. The worst performing sectors have been energy, which plummeted more than 50%, and financials, which lost nearly 32% of their value.
Not surprisingly, the best performing sectors have been information technology, which fell just under 12%, and consumer staples, which lost over 12%.
Callahan said the emerging markets index dropped 23.6%. He said that China, where the pandemic began, was ironically the country with the highest performing market in the first quarter of 2020; it fell only 10%.
Callahan said economic uncertainty surrounding the coronavirus and the oil price war between Russia and Saudi Arabia also affected fixed-income markets, pushing yields lower. The 10-year U.S. Treasury fell to its lowest point in history on March 9.
Long government bonds were the top performing area of the market, rising more than 20% in value.
Callahan said it is impossible to discern at the moment how big a hit real estate values will take due to the crisis because new appraisals can’t be made because of a lack of transactions. He said the retail and office sectors are the ones most likely to see drops in value.
“I find it hard to believe we aren’t going to see a decline in the value of commercial real estate portfolios,” Callahan said.
Following Callahan’s update on the market, there was a brief discussion regarding UBS Trumbull Property Fund, a real estate fund that MCERA has been trying to withdraw its money from since January. During the most recent valuation of the fund’s assets, MCERA’s investment in the company was worth more than $121 million.
Wickman said the fund was underperforming because it was overinvested in retail malls. In 2019, during the halcyon days of the bull market, the fund’s value dropped nearly 3%.
In a memo to the board, Callahan wrote, “UBS is not paying out any redemptions at the end of the first quarter and payments will likely be very small for the second quarter. It should be noted that AEW and many other core funds are suspending redemptions in the first quarter as well while they wait to gain further clarity into the market conditions come April and May.”
MCERA has an investment in the AEW Core Property Trust recently valued at $105 million.
Regarding UBS Trumbull Property Fund, Callahan told the board on Wednesday, “This has gotten to be an ugly situation. You’re going to see a lot of problems in other funds too.”
