Annual Reports

2020 Annual Report
Report from the CIO

On behalf of your investment team at the YMCA Retirement Fund, let me convey good wishes to all of our participants and families. Despite some parts of our country attempting to return to something close to normal, many of our lives are still far from what they were just six months ago. And, even under the most optimistic assumptions of beating the coronavirus, we have a long challenging road ahead of us, including for our YMCAs across the country.

As many of you are faced with difficult decisions regarding your family’s health, education, and employment, we hope that all of you can rest just a little easier knowing your lifetime income in retirement is secure and kept under close watch. We at the YMCA Retirement Fund continue to work from home as we strive to ensure the stability of your savings for life.

A Historic, Challenging Year … and the Benefits of a Long Time Horizon

This is an investment report on the Fund’s fiscal year of July 1, 2019 – June 30, 2020. Despite most equity markets and most individual stocks producing negative returns over those 12 months, the Fund held its own with approximately zero growth (after all fees and investment costs). Since the Fund’s audit was completed, we’ve received additional updates on the performance of our investments that added nearly 2% to our results.  

Given the challenging environment for most equities during the period July 1, 2019 – June 30, 2020, it is not surprising that the Fund’s best performing asset class was our Treasury portfolio (+7.0%). Our next highest performing sub-portfolios were all alternative assets, including Private Equity (+5.6%), Directional Hedge Funds (+5.3%), and Real Estate (+4.5%).

Emerging Market (-5.5%) and International Developed Market (-5.1%) stocks were the laggards in Public Equities. Our biotech and software specialists in the Public Equity portfolio produced exceptionally strong returns, continuing their multi-year strong performance. Unsurprisingly, our investments in Natural Resources registered the weakest performance (-34%), resulting from the collapse in commodity prices over the period.

If one had closed one’s eyes on July 1, 2019 and then checked the S&P 500 or Nasdaq one year later, it would be reasonable to assume it had been a great year, with those indexes up 7% and 27%, respectively. But the strength of large-capitalization U.S. growth stocks (propelled by highly stimulative monetary and fiscal policy) overshadows a historic equity bear market in the first quarter of calendar year 2020, due to the ongoing global pandemic and the resulting poor performance of most risky assets – including most U.S. stocks that are not large cap technology. And as a pension fund it would be unwise, if not irresponsible, for the Fund to invest solely in the risky stock market.

Benefits of Long-Term Diversification

In periods like this, diversification does not appear to have aided returns (as compared to a portfolio –unlike the Fund’s – more heavily tilted towards what turned out to be the best performing assets). We are aware however that this has been an exceptional period in history for this select grouping of large cap companies, and it is our belief that with concentrated returns comes concentrated risk, which is unsuited to managing your pension.

We remain confident that diversification will continue to be a benefit over long periods. Time will tell, but we continue to believe thoughtful diversification to be a critical building block of a portfolio meant to provide income to our participants in perpetuity while never having their account balances decline.

Long Time Horizon and Compellingly High Annuity Payout

As the Fund provides lifetime retirement income for our participants, we have an extremely long time horizon over which to earn the returns necessary to do so. Therefore, short periods of low returns are not a significant focus. The Fund’s 10-year trailing return, for example, is a healthy 7.6% per year. As a reminder, these longer-term returns allow us to provide our participants with lifetime income in retirement that has historically been substantially above market rates and payouts.

Interest credits from the Fund provide just a fraction of one’s total retirement benefit from the Fund – and thus are not the most important aspect of the Fund. It is the well-above-market annuitization rate and a promise of lifetime income in retirement that are the key features of the Fund. In addition, even when financial markets and our portfolio have decreased in value, the account balances that are annuitized have never gone down, thereby shielding our participants from investment risk (a feature unique to the Fund in the annuity marketplace).

Market and Macroeconomic Outlook

The Global Pandemic Changed Everything

The markets entered 2020 with some of the highest optimism for the economy in years on the heels of extremely low unemployment, low inflation, and high consumer and business confidence. However, the devastating spread of the coronavirus caught many governments and investors by surprise. Economies around the world went into complete lockdowns, forcing businesses of all sizes to close and their citizens to isolate for weeks and even months.

Fear of a complete stop to the global economy led to panic selling across all asset classes in March, including in some of the lowest risk and most critical ends of the global funding markets. The first quarter of 2020 saw the fastest equity market declines in history, and bond yields fell to their lowest levels on record. The second quarter witnessed the U.S. economy contracting 33% on an annualized basis, representing an abrupt end to the country’s longest economic expansion in history. The International Monetary Fund projects that nearly 90% of countries will exhibit negative growth for calendar year 2020.

Concluding Remarks

The current environment is amongst the most daunting investors have faced in decades, not just because of the troublingly real economic and market uncertainties, but because these are occurring in a liquidity-driven market with high asset valuations and therefore low go-forward expected returns. To that challenge, the Fund applies several investment management tools to achieve our long-term goals on your collective behalves.

In particular, the Fund employs careful diversification across asset classes – should certain asset classes, industries, or size of companies fail to earn our expected returns – and the use of alternative assets that seek to generate higher returns than those achieved by individual investors managing their own retirement savings.

We wish all of our participants a healthy year ahead and we extend our deepest gratitude to those now working at YMCAs as you continue to play an essential role in helping your communities recover. Now more than ever, the YMCA is showing the world the importance of youth development, healthy living, and social responsibility, and we at the Fund have never been prouder to stand by our participants who carry out this inspiring and enduring cause.