Diversification
We live in a complex, fast-paced world with
rapidly changing economic, social, political,
and technological environments. The only thing
we know, for sure, is that the future is unknowable.
Changes in the economy and financial markets
are inevitable. In order to maintain the financial
stability of the pension plan for the long-term,
the MOSERS’ investment portfolio must
be structured to deal with changes. Boiled down
to its bare basics, investing concerns returns
and risks. Diversification is an investor’s
best defense against the risks associated with
any one investment type.
Diversification controls risks by allocating
assets across a broad array of investments.
Each have unique characteristics that will likely
cause them to perform differently in a variety
of economic scenarios. For example: in times
of rising inflation, one would expect real estate,
commodities and stocks in emerging markets to
perform well. In times of falling inflation,
one would expect equities, corporate bonds and
securities issued by the U.S. Treasury to generally
perform well.
A carefully planned and broadly diversified
asset allocation allows for risk protection.
As reflected in the pie chart above, MOSERS’
investment program is well diversified among
a myriad of investments, positioning the total
fund to weather a variety of economic conditions.
Asset Allocation
The MOSERS asset allocation focuses as much on
risk as on return. Investing with an eye toward
risk is about diversification, valuation, and
recognizing that the economy and investing opportunities
are cyclical. The stock market can have periods
of very high returns like it did in the 1990’s
or it can produce very unspectacular returns and
even big losses. The “bear” market
of 2000- 2003 was the longest and deepest stock
market decline since the Great Depression. The
simple fact is that things change - the pendulum
swings.
The economy, corporate profits, stock prices,
interest rates and foreign exchange rates, are
in constant flux, sometimes swinging from one
end of the spectrum to the other. While the
temptation to go after higher investment returns
may be enticing, the possible risks and uncertainties
associated with various investments must be
considered.
MOSERS Stabilizes
As you can see in the chart below, the stock
market, represented here by the S&P 500
index (the green line), started to decline in
2000 with stocks posting significant losses
in 2001 through 2003. During the market upside,
MOSERS’ total fund generated significant
positive returns, however did not peak at the
same height as the S&P 500. During the downside
swing in the market, MOSERS’ total fund
returns, while in decline, experienced the downside
with much less negativity than the S&P 500.
Our diverse asset allocation alleviates the
extreme ups and downs of the stock market roller
coaster.
MOSERS’ investment goal, to maximize return
while minimizing risk, has served the fund well.
Investment performance, for the sixth straight
year, has generated returns in excess of our benchmark
(the return target goal set for each year) and
has done so at a lower relative level of risk.
Building our portfolio with an eye toward risk
has allowed us to produce strong results over
long periods of time. For the 5- and 10-year periods
ended June 30, 2006, MOSERS returns (net of expenses),
were among the top 15% of all public pension funds.
