PROVIDENCE – The state’s $8.4 billion pension fund failed to yield positive returns in February, as market volatility helped fuel an overall decrease of $263.4 million.
The fund, comprising the retirement money of current and former state employees, returned a loss of 2.6 percent after accounting for investment-related fees. The state investment team attributed the lackluster return to market performance during the month.
“February 2018 saw a challenging market environment with public equity markets entering a correction early in the month bringing volatility, which would continue to drive uncertainty among investors – even as markets began to rebound,” according to a February investment report.
The stock market in February was the worst month in two years. It entered into correction territory — or 10 percent below its all-time high — and ended an impressive stint of monthly gains. The second month of the year also included two 1,000-point plunges for the Dow Jones Industrial average, an index of large publicly traded U.S. companies.
“February’s equity market correction saw an increase in volatility, which had been noticeably low in prior months,” according to the report.
The volatility also represented one of the first real tests for General Treasurer Seth Magaziner, who has implemented an investment strategy dubbed “Back to Basics.” The treasurer, who heads the investment fund, moved about $500 million out of hedge funds and into alternative asset classes meant to offset market volatility and protect against inflation.
In February, the volatility protection class returned a loss of 0.02 percent while the inflation protection class gained 0.29 percent. Magaziner in prepared remarks said he was pleased with these results.
“Our Back to Basics investment strategy is designed to deliver growth when markets are strong, and stability when they are down,” he said. “While I would prefer to see markets grow every month, Back to Basics did its job and limited the impact of February’s market correction.”
Michael D. Ice, professor of finance at the University of Rhode Island, said alternative asset classes are different than traditional asset classes, like stocks, bonds and fixed income, because returns are not necessarily correlated with macro trends and are designed to smooth volatility over longer periods. The corresponding performance of such assets, he added, should therefore also be measured over longer periods.
“On a month-to-month basis they could be all over the map,” he said. “People are going to look at public funds all the time. But in reality it’s the long-term view that really matters.
The overall fund outperformed a traditional 60-to-40 stock-to-bond portfolio, which returned a loss of 2.9 percent. But it fell short of an internal benchmark plan, which returned a loss of 2.5 percent.
Since the fiscal year that started in July, the fund has performed well thanks largely to a string of strong monthly gains. Fiscal year through February, the portfolio grew $344.5 million after benefits paid.
How the fund will finish out the fiscal year, however, will continue to depend largely on capital markets, which just finished a rocky first quarter. The portfolio – after accounting for pension payments – decreased $35.4 million since the start of the year.
And March – like February – suffered market volatility.
Eli Sherman is a PBN staff writer. Email him at Sherman@PBN.com, or follow him on Twitter @Eli_Sherman.
