Dec. 18, 2024
To all LAGERS members:
Over the fiscal year ended June 30, 2024, the capital markets continued to climb the wall of worry as the global macroeconomic outlook balanced between slowing inflation and sustaining economic growth. While inflation began to show signs of moderation, many global central banks maintained a tight monetary policy keeping interest rates elevated relative to the past several years. On the other side of the economic scale, economic growth remained positive, driven by continued strong labor markets and consumer spending. As was the case in fiscal year 2023 (FY23), FY24 markets returns were led by big tech equities (Magnificent 7), followed by U.S. High Yield and sector specific commodities/real assets.
For FY 24, LAGERS’ investment portfolio produced a positive absolute return of 5.7% but struggled against the investment policy benchmark return of 9.4%, resulting in an underperformance of 3.7%. As a result of the negative excess returns over the past two fiscal years (FY23 and FY24), the 1- and 3-year excess returns are both negative. However, the 5- and 10-year excess returns both remain positive. Primary contributors and detractors to FY24 returns were as follows:
- With the largest composite allocation within the LAGERS’ investment portfolio, the equity portfolio was one of the main contributors to both the absolute return and negative excess return. While the equity portfolio produced an impressive 9.9% total return for the fiscal year, it fell short of the benchmark return of 15.6%.
- Real Assets is the second largest composite allocation, producing a -0.3% total return, underperforming the benchmark return of 6.3%.
- While the Alpha portfolio produced an impressive 16.3% relative to a benchmark return of 6.1%, the 10.3% excess return provided only a partial offset to the negative relative returns in the Equity and Real Asset portfolios due to the smaller allocation to the Alpha portfolio.
- The Strategic portfolio was able to slightly outperform the benchmark by producing an 8.8% total return versus 8.2% for the benchmark.
In May 2024, I was honored to assume the CIO role for the LAGERS’ investment portfolio. While we stand on the shoulders of those who’ve come before us, we are evolving the investment process centered around the principle; it is possible to manage risk, but nearly impossible to manage returns. The enhanced investment process will both help reduce the volatility of excess returns relative to the long-term policy benchmark and provide greater clarity in communication about the drivers of the excess returns. I’m excited about our future and providing a secure retirement for our members.
Respectfully submitted,
Scott A. Day, CFA
Chief Investment Officer
For more information, the full investment section of the 2024 Annual Comprehensive Financial Report is available online.
