Michael Kimmel, Executive Director
I hope that your new year has started out well, and that your High Holy Days were filled with meaning, spirit and purpose.
Over the last few months, the capital markets were more volatile than we have seen in the last several years. We hope that you know that we are carefully monitoring these market movements and the impact on the RPB’s retirement plan. As you will read below, we have made a few adjustments to the plan and are consistently reviewing the asset allocation and expected returns of each of the Funds as expectations for the economy, interest rates and global political and economic forces change. Let me assure you that we remain steadfast in our mission to provide a retirement plan and other products that enable you, our participants and your employers, to pursue a shared goal of financial security.
As we do on a regular basis, we have discussed the recent market volatility with our investment consultant, Summit Strategies Group. In our last letter to you, we described the three basic questions we asked Summit: First, why is this happening? Second, is the RPB’s portfolio properly positioned given recent market events and any changes in overall outlook? And third, what should we tell our participants? Below we reiterate key learnings from these discussions, the adjustments we have made to the Funds, and highlight actions we hope every participant will consider taking as well.
Volatility as we have been experiencing in the global equity markets is a normal part of a market cycle. Stock and bond markets don’t always go up, which has mostly been the case for the past 6+ years. In fact, such volatility was more normative before the market crash of 2008 and can often create opportunities for future long-term asset appreciation. [Note: A market “correction” is a technical term that describes when a particular market or index (e.g., S&P 500, Dow Joes Industrial, etc.) drops by 10 percent or more from its peak.] Yes, China’s growth is slowing, but is still a healthy 7 percent; and yes, the Fed may choose to raise interest rates, but has decided once again to hold off for now, both of which appear to be among the primary catalysts for recent market activity. Importantly, the overall global economy does not appear to be headed into a recession.
Each of the RPB’s funds have been, and will continue to be, structured to mitigate some of the risk of equity or fixed income market declines. This is one of the main points behind diversification and why we maintain a portfolio with different types of investments across the globe. Different sectors of the market move in and out of favor among investors, and it is a noisy and often unpredictable process. The basic premise behind diversification is to invest in different types of assets that tend to not move in the same direction at the same time. It is also why investment decisions should be made based on expected long-term performance that balances return with a certain level of risk, not on short-term market volatility.
Nonetheless, this volatility can sometimes create opportunities, and the RPB determined at the end of September to make one selective adjustment to the portfolio while remaining diversified. This change included making a small allocation change in the Capital Appreciation Fund by increasing our allocation to MLP’s (Master Limited Partnerships) by 2.75% to 8.0% while simultaneously lowering our allocation to REIT’s (Real Estate Investment Trusts) by 2.75% to 2.5%. Other allocation adjustments are under consideration, and will be discussed at our upcoming Investment Committee meeting in November.
So this is not the time to act on emotions. What it may be time for is for you to review your situation. Ask yourself these questions: What are my retirement goals and how am I doing against them? What is my time frame? And what is my appetite for volatility or risk in my portfolio?
Interest Rate Outlook
Many of you who are invested in the Income Focused Fund may have concerns about the challenges facing the fixed income markets. Global interest rates have been at historically low rates for the past several years and have continued to hover around these lows with little movement. This has meant low yields (meaning lower streams of income from fixed income securities) and little, if any price appreciation, since expectations are that interest rates will move higher in the near-term (interest rates and bond prices move in opposite directions). In addition, given the projected rise in rates for the coming year as the Fed begins to normalize rates, we would expect the price of fixed income securities to move down. The entire investment community has lowered its expectations for fixed income markets to generate income. The generally held belief is that long-term ten–year interest rates will hover between 2.5 and 3.0 percent. We are balancing the likelihood that yields will rise yet still remain low, with not wanting to chase returns by investing in asset classes with greater risk. Accordingly, we have taken measures to hopefully help mitigate some of the impact of rising rates by investing in unconstrained bonds in the Income Focused Fund. Our unconstrained bond managers can position their portfolios with more or less sensitivity to interest rates, which can be helpful during periods where interest rates move quickly in either direction.
You may wish to revisit your own expectations for your portfolio’s returns and your appetite for risk or volatility, in particular, those of you approaching retirement or are in retirement and invested mostly or solely in the Income Focused Fund. To everyone, we recommend that you review your asset allocation with a personal financial advisor who can help you to assess your individual circumstances and tolerance for risk.
If you don’t have an advisor, as an RPB plan participant, you and your spouse have access to Ceridian LifeWorks, a service that the RPB engages to provide financial counseling free of charge. While the Ceridian service is not a true substitute for a personal financial advisor, the financial counselors at Ceridian can be very helpful in assessing your situation and leading you to decisions that are right for you and your family. Just call Ceridian LifeWorks and identify yourself as an RPB participant; they will make an appointment for you to speak with a counselor at a mutually convenient time. If you don’t have Ceridian’s toll-free telephone number, please contact the RPB office, as this service is exclusive to RPB participants.
The RPB continues to manage its operation very closely and continually reviews its expenses to be sure value is added at every opportunity. As such, we are pleased to announce that effective October 1, 2015, we have lowered the annual Administrative Fee charge assessed to all participants from 25 basis points to 20 basis points. (Note: One basis point equals one-hundredth of one percent.)
I will be starting my annual travel to Reform Movement conferences, meetings and kallot shortly and look forward to meeting many of you there. And I am pleased also to let you know that Alyce Gunn, the RPB’s new Chief Financial Officer, will be joining me for some of the trips. Alyce brings a wealth of experience to the RPB, having served most recently as the CFO of B’nai Jeshurun in New York City, and also having spent a number of years with Wall Street firms in various capacities. I can speak for her in saying that she also looks forward to getting to know you, learning more about your concerns and also the Reform Movement, as she is new to us.
I would also like to take this opportunity to thank Daryl Messinger for her years of distinguished service to the Reform Pension Board, serving as its Chair for the past five years. As many of you know, she will be elected as the next Chair of the Union for Reform Judaism in just a few short weeks at the upcoming Biennial in Orlando. We are all blessed to have had Daryl at the helm, and she will surely be missed in that capacity. But we are thrilled for both her and the entire Reform Movement as she assumes her new role. And I also would like to thank her personally for helping to make my transition into my role as Executive Director so smooth. She has been a great friend and mentor to me, and while she will remain on the RPB Board, I will miss her as Board Chair as she moves on to do even greater things for all of us.
With Daryl taking over as URJ Chair, I am thrilled to also announce that G. Leonard Teitelbaum has been elected as incoming Chair of the RPB. Len will be assuming that role on January 1, 2016 when Daryl officially steps down. Len has been a long-time member of the Board of Trustees of the RPB, and has served with distinction as a member of the Board of Trustees for eighteen years, with the past eight years serving as Chair of the RPB’s Investment Committee. Len brings over forty years of Wall Street experience to the Board, and with his experience, warmth, focus, and insights, he no doubt will continue the great work of those who came before him. I very much look forward to partnering with him as we bring the Reform Pension Board from strength to strength.
Looking ahead, we will continue to monitor the markets, make adjustments to the portfolio when warranted, and of course keep you abreast of developments within the RPB and beyond. We will also be seeking additional ways to keep you informed and give you additional tools and educational opportunities to help you take a more active role in planning for your retirement and other financial needs. And we truly appreciate your feedback, so please click here to complete a short survey. As always, please don’t hesitate to contact us with questions or concerns at PensionBoard@rpb.org or (212) 681-1818.