Several MOSERS members have inquired about the stability of our investment portfolio in reaction to the increasing frequency of headline news and television broadcasts reporting on the current turmoil in the financial industry. While it is not my intention to sugarcoat anything, I do think it is noteworthy that we live in a “sound bite” world where the speed with which reporting is done is paramount, where accuracy may be sacrificed for the sake of brevity, and where generalizations are characterized as being descriptive of the common condition. In other words, take what you are hearing with a very large grain of salt.

With that said, let me begin by acknowledging that the U.S. economy is experiencing falling growth rates and that there is, in fact, a national credit crisis. The financial markets are generally struggling. Since the beginning of our current fiscal year (July 1, 2007 – to mid March, 2008) the investment return of the S&P 500 has been negative 13%. The S&P 500 is an index of 500 stocks designed to be a leading indicator of what is happening within the universe of large U.S. public companies. For the same period the total return of the $8 billion MOSERS portfolio has been near zero. While you might not consider that to be something to write home about, we are pleased that we have preserved capital during a period when returns from the market have generally been negative. Our success in this regard is largely attributable to MOSERS investment belief that "diversification is critical because the future is unknowable." For us, diversification goes well beyond holding a variety of stocks and bonds. In order for the portfolio to be truly diversified, it must be composed of a broad array of investments, each with unique characteristics that will likely cause them to perform differently under a variety of economic scenarios.

Another strong investment belief of MOSERS has to do with risk-adjusted returns. While risks come in a variety of forms, our primary focus is on market risk. While keeping pace with the market in "good times" is certainly desirable, it is also extremely important that we structure the portfolio to include the downside protection needed to carry us through the "bad times." This requires us to structure the portfolio in such a way that we may give up a little return during the "good times" in order to minimize the downside during the market's "bad times." Fortunately we have not had to give up much at all on the upside and have consistently been a top quartile performer (or better) during both the good and bad times.

Another important aspect of MOSERS is the structure of the pension plan. MOSERS is a defined benefit plan and, as such, benefit amounts are not directly tied to the investment performance of the fund over the short term and certainly not the performance on any given day. Our goal is to maintain a contribution rate for the state that remains relatively level as a percent of payroll over decades of time. We have been able to accomplish that objective through a series of up and down markets historically and fully anticipate continuing to successfully pursue that objective into the future. The one constant in the investment industry is that things are rarely either as bad as they seem or as good as they seem in the short term. We see nothing to persuade us that the current rocky shoal is any different than those that we have weathered in the past and that we will weather in the future.