How The Fund Works

Investments & Performance
Investment Review
For the Quarter Ended December 31, 2017


In our most recent letter, we spoke about being at an inflection point where the post-2008 Great Financial Crisis (GFC) trend of low economic growth, low inflation, and low interest rates seemed to be changing. At the close of 2017 and into 2018, we seem to have passed this inflection point. Equity markets globally reflected the increase in economic growth, inflation expectations, and interest rates with a strong 2017 rally in which many major equity market indices notched double-digit returns (in USD). 

Against this backdrop, the Fund enjoyed a strong quarter, growing 4.1%, and registered investment returns for Calendar Year 2017 of 15.2% (after all management fees and investment costs, as are all return figures herein shown). As a long-term investor, we pay more attention to longer periods. Over the last five and seven years, for instance, the Fund generated annualized returns of 8.1% and 7.5%, respectively. These results are encouraging, as they exceed the threshold required to match the growth of our liabilities. We recognize, however, that these periods do not include a period of significant market downturn. The 10-year returns of 4.8% reflect and capture the market downturn during the GFC of 2008. While we primarily focus on absolute returns, relative returns (versus a benchmark of similar investments) can be helpful data points as well. During the quarter, the Fund outperformed its Composite Benchmark by +38 bps. Over longer periods of five and seven years, we outperformed this benchmark by +28 bps and +40 bps, respectively.

Even with the generally positive economic outlook, when we factor in the now-higher equity prices and higher discount rates on future earnings and cash flows, it still appears to be difficult for many retirement plans (such as ours) to find attractive generic opportunities to earn long-term returns approximating the rate at which their liabilities grow. In light of this, we at the Fund are continuing to work to structure a distinctive portfolio that we believe gives us the best chance of meeting our investment objectives.

Some Perspective: Our Goals and Core Strategy

The Fund's mission is to empower YMCA employees to achieve economic security, resulting in loyalty to the YMCA Movement. To help achieve this mission, the Fund seeks to build a portfolio that generates attractive long-term returns (over many years, cycles, and even decades) while maintaining defensive characteristics to safeguard pension promises.

The core elements of our investment philosophy for achieving our mission include the following:

  • Building a diversified portfolio in which the several asset classes behave in different and not highly correlated fashions under different economic conditions

  • Seeking to complement our predominantly equity market–influenced sources of return with other return drivers, thereby diversifying the Fund’s sources of return and positioning the Fund to fall less than stocks when equity markets decline

  • Allocating capital to exceptional investment managers who we believe can produce superior returns through full market cycles

  • Capitalizing on the Fund’s long-term horizons to accept some illiquidity by investing in private investments in several asset classes in exchange for higher expected returns

Macroeconomic and Market Environment

Calendar Year 2017 has been one of global synchronized growth accompanied by historically low market volatility. Global economic data broadly remain robust, and due to quantitative easing (QE), rates have remained low. Risk assets have rallied, and many market indices have hit all-time highs. However, after a year of such strong market performance, 2018 will have a difficult time keeping pace. In the following sections, we discuss the major global economies and their key metrics and comment on earnings growth and inflation.


In the December quarter, tax reform, to the surprise of many, was passed in the US. The Tax Cuts and Jobs Act (TCJA) of 2017 reduced the US federal corporate tax rate from 35% to 21%, moving the US from the country with the highest statutory tax rate among the 35 OECD countries to the thirteenth-highest. The tax bill, coupled with strong economic data and solid earnings growth, resulted in the continued rally of the S&P 500, which achieved twelve months of consecutive positive performance. Unemployment continued to fall in December and hit a seventeen-year low of 4.1%, while the December figures for US manufacturing and non-manufacturing continue to indicate a robust economy. Real US GDP growth for 2017 came in at 2.6%, ahead of the 1.6% of 2016 but still below the US government’s 3% target. However, tax reform, a weaker US Dollar, higher oil prices, and a strengthening global economy should help boost the US to its target in 2018.


Like those in the US, European markets rallied in the fourth quarter and in 2017 as a whole on the back of continued economic expansion, market-friendly political developments, and continued European Central Bank (ECB) stimulus. Recent ECB rhetoric, however, suggests that it would prefer to reduce and even reverse this stimulus but is concerned about the knock-on effect that rising rates could have on the Euro and hence competitiveness in trade. Within the Euro Area, unemployment has hit its lowest rate since January 2009, while its Economic Sentiment Indicator hit a seventeen-year high in December. The UK continues to fare worse than the European continent, with inflation exceeding 3%, its highest in six years, resulting in the Bank of England’s first rate hike in over a decade. 

Emerging Markets

The standout this quarter and year has been the aggregation of twenty-three countries’ markets, known collectively as emerging market (EM) equities, which performed well ahead of US and European equities. In the fourth quarter, the MSCI EM index returned 7.3% (in USD), while the S&P 500 returned 6.6%, and the STOXX Europe 600 returned 2.5% (in USD). Calendar Year 2017 returns were particularly strong, as the MSCI EM index returned 37.5% (in USD), while the S&P 500 and Stoxx Europe 600 returned 21.8% (in USD) and 26.8% (in USD), respectively. EM equity performance has been supported by earnings strength, US dollar weakness, and improving global trade. However, the index’s performance was not evenly distributed. Performance overall in 2017 was heavily influenced by the technology sector. Technology stocks represented only 23% of the index at the start of 2017 yet accounted for 38% of the MSCI EM index’s gains, with particularly strong performance coming from Chinese tech stocks. 

Global Economy

Accompanying 2017’s robust and strongly positive economic data, corporate earnings growth has kept pace and increased significantly year over year. Year-over-year earnings in 2017 for the S&P 500, Stoxx 600, Nikkei 225, and MSCI EM Index grew by 11%, 25%, 40%, and 20%, respectively. 

As unemployment ticks down and the economy continues to expand, inflation has begun to rear its head and rise from its low levels. In December, year-over-year CPI for the world in aggregate reached 3.1%, up from 2.8% one year ago. CPI within the US was 2.1% (vs. 1.6% in 2016), 1.7% (vs. 0.3% in 2016) in the European Union, and 0.5% (vs. –0.1% in 2016) in Japan. Recent employment trends suggest wage growth will begin to accelerate soon. Strong economic growth and accelerating inflation suggest interest rates will likely need to rise, and they have begun to do so globally. More can be expected. The era of QE may be giving way to an era of quantitative tightening (QT). This would have major impacts over time on many financial markets. In such an environment, the challenges of managing a retirement portfolio to fulfill the promises of plans like ours become greater. 

Overall, on a global level, positive sentiment continues to strengthen. In 2017, the global economy grew at its fastest pace since 2010, with all 45 economies tracked by the OECD growing in sync for the first time since the GFC. Risk asset prices have been supported by a combination of continued monetary stimulus, shrinking unemployment, a pickup in investment, and growing world trade, all while global inflation has remained tame. As mentioned, this wonderful cocktail of forces may be changing as inflation grows, monetary stimulus fades, and some fiscal stimulus in the US is added.  


As has been the case for a few years now, Management views few asset classes and investment strategies as attractively priced for buyers. This makes for challenging times, as we seek to protect and grow the $7 billion of pension assets with which we are entrusted.

Many institutions that we respect share this view, including Cambridge Associates, our investment consultant, which evaluates most asset classes as being either overvalued or fairly valued. The result: few compelling options for investors and hence the potential for—and even likelihood of—lackluster returns going forward, as discussed previously.

During the Fund's ninety-six years, broad and index-like exposure to stocks and bonds has been sufficient to fulfill the Fund's mission. We do not believe that it will remain so over the next decade. As a result, Management is working diligently to add exposure to other sources of returns while also enhancing the Fund's ability to perform relatively well if market conditions deteriorate. We remain focused on maintaining and refining a well-diversified portfolio that is built for the long term and that tilts, when appropriate, to sectors with more attractive risk-adjusted returns.

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