August-September 2020
Sportswear: Sweet Success Amid COVID-19?
As a discretionary good, sportswear may seem an unlikely winner in the wake of COVID-19. But the category—which includes athletic apparel and footwear—has some unique characteristics that make us think it will emerge just fine. In fact, for stronger companies, we believe COVID-19 will be an accelerant as the companies leverage their connections with consumers and drive business through more profitable channels.

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Capturing the Ups and Downs in
Coronavirus Equity Markets
Several equity factors diverged significantly from their typical performance patterns during the COVID-19 crisis. By understanding how factor returns behaved in this market correction relative to their historic norms, investors can not only prepare for future volatility but also take advantage of short-term market dislocations.

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U.S. Public Pension Underfunding:
Don't Make the Same Mistake Thrice
We are in unprecedented times. Coronavirus. Life and death health threats. Market upheaval. Economic shutdown. And now: talk of states potentially filing for bankruptcy. But whatever happens with bankruptcy proposals, public pensions will still have to be paid, and state and municipal governments should continue making their pension contributions.

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Recessions and Factor Performance:
What History Tells Us
It’s official. On June 8, 2020, the National Bureau of Economic Research (NBER) declared that the United States entered a recession in February of this year. Somewhat anomalously, after falling roughly 33% from its high to usher in a bear market, the S&P 500 Index had rallied nearly 45% from its lows on March 23 through the date of NBER’s recession announcement. 

So while it is bad times for the economy, the stock market has regained some of its former euphoria. Investors may be wondering what this means for stocks going forward, and for the investment factors that shape stock returns.

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Pandemic Reshapes the Outlook for
Farmland Investments
There may never be another global event akin to the COVID-19 pandemic in our lifetimes that more clearly tests the investment thesis for farmland as a component of a diversified institutional investment portfolio. Investors make strategic allocations to farmland for its diversification potential, low correlation to more traditional asset classes, and inflation-hedging properties. These benefits derive from the unique drivers of farmland: the need for food security, global population growth, and an emerging middle class with an increasing demand for animal protein, to name a few.

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Themes for the Second Half of 2020
After its longest-ever period of growth, U.S. economic activity and markets collapsed during the first quarter in response to the initial pandemic shock and stay-at-home mandates. However, as shown in Figure One, major asset classes posted significant gains fueled by historic levels of policy support and reopening optimism during the second quarter. 

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On the Horizon:
Preparing for a Weaker Dollar Era
Profound shifts in the macro economic, competitive and political environment are converging to create a potentially long-lasting period of weakness for the world’s reserve currency. While many analysts and investors have been debating the potential for a short-term crash of the U.S. dollar (USD), in our view investors should be considering how to prepare for the possibility of a long-term period of dollar weakness.

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Defined Contribution Retirement Plan Fees: Lawsuits, Leveling and Lessons Learned
In a time filled with COVID-19 crisis uncertainty and increasing debt, setting money aside for retirement can be challenging. Fiduciaries need to do their best to ensure that the money saved by plan participants for retirement is being maximized toward their investments and not paying fees and other expenses.

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The Mega-Cap Conundrum
2019 was an unusually challenging year for quantitative equity strategies with a large proportion of quantitative strategies underperforming their stated benchmark on a rolling one year basis. There has, therefore, been a great deal of interest in understanding the shortcomings of quantitative portfolios over the same calendar year.

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Has COVID-19 made sustainable investing
more – or less – important?
Environmental, social, and governance (ESG) investing has drawn considerable investor attention in recent years. Morningstar[1] reported that 2019 represented a record year of flows into ESG-related funds in both Europe and the United States. Along with this increased interest, Macquarie Investment Management has continued its commitment to sustainability such as through new ESG analytical and performance measurement tools for investment teams to integrate into their process. Yet, as the world continues to seek effective ways to deal with the COVID-19 pandemic, investors have questioned if there has been a shift in the relative importance of ESG issues when assessing investments. In other words, has ESG lost some of its relevance during the pandemic – or does the crisis make it even more important.

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Factors First: A Risk-based Approach to Harnessing Alternative Sources of Income
The income-generating potential of alternatives seems to be largely underappreciated, despite the trend toward larger allocations to alternative asset classes in institutional portfolios and the quest for yield in a low-rate environment. When we ask institutional investors what roles they look for alternatives to play in a multi-asset portfolio, diversification is the top priority, followed closely by total return. Income generation usually is a distant third.

Institutional investors can enhance their ability to capitalize on the yield and diversification benefits of alternatives by focusing on the risks that drive returns in each specific segment of the alternatives universe. This approach allows investors to stitch together multi-asset portfolios in a more efficient, coherent way.

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Risk Mitigation Opportunities:
Taking Time to Re-evaluate Portfolio
Strategies and Board Governance
The traditional 60% S&P 500 - 40% Aggregate Bond index investment portfolio has been the benchmark for portfolio construction for decades due to the inverse return relationship between equities and fixed income and higher historical bond yields. This simplistic mix had provided returns for pensions that allowed them to meet their actuary assumed returns. The S&P 500 index posted an approximate annualized average return of 11.3% for the past 10 years (ending 2019), while the current yield on the Aggregate Bond Index less than 1.5% (coupon rate of hovering around 3%). The correlation between the two indexes has been slightly negative for the past ten years, and bonds have not provided a consistent offset for drawdowns within the S&P 500 index. Over the next five years, earning a 5% annualized return will be tough. Based on recent comments from the Federal Reserve (the Fed), the expectation for higher interest rates in the intermediate term is minimal. While investors cannot control what the Fed is doing, we can recalibrate current positioning and take a serious look at the risk within the portfolio and its governance.

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Steady Growth in Suburban Vintage Multifamily
In the current economic climate, stability and performance are paramount in the selection of an asset class. Vintage garden-style multifamily fits the needs of risk-averse, and return-driven institutional investors. Because of an uptick in demand due to the pandemic, along with population shifts away from gateway coastal cities and the urban core, performance is key.

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The Case for a Permanent Allocation to an Equity Stabilization Strategy
Institutional investors face the pernicious dilemma of having mutually conflicting needs. When building a portfolio, investors start with the understanding that, over the long term, expected return and volatility are strongly positively correlated. Unfortunately, most investors need both significant levels of return to meet their long-term goals and a stable stream of returns to ensure financial viability. A defined benefit pension plan, for example, needs solid returns to meet its actuarial funding goals and pay pensions, while it needs stability to avoid erosion of its funded status.

For institutional investors seeking stable funding, the same risk assets that provide essential upside potential also represent significant exposure to downside risk and unstable results. Although investors’ need for risk mitigation is high, most investors have not implemented such strategies to date, for reasons we discuss.

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It is not too late to de-FAAMG your portfolio
If the only alternative to forecasting ability is accessing the risk premium in its purest form, some investors in their search for the beta believe that passive management, defined as the investment vehicles tracking market-capitalization weighted indices, offers access to this beta. There is a myth or misunderstanding that “passive = neutral”.

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Dollar Weakness Helps Gold To All-Time Highs
The gold bull market passed two important sign-posts in July. The strength of the market is impressive as it blew through $1,800 and the all-time high of $1,921. These prices had been major technical resistance points set a decade ago.

The second significant signpost in July was the new U.S. dollar weakness. U.S. dollar weakness is a hallmark of most gold bull markets, but in this cycle gold had so far been rising in a flat dollar environment. The chart below shows the U.S. dollar index (DXY) has been in a bull market since 2011. However, the dollar declined through July, then fell precipitously at the end of the month, appearing to have broken its long-term trend. We may be seeing the beginnings of a bear market for the dollar. This enabled gold to test the $2,000 per ounce milestone as it reached an intraday high of $1,983 on July 31. Gold closed out July at $1,975.86 per ounce for a $194.90 (10.9%) monthly gain.

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About Us 
The Texas Association of Public Employee Retirement Systems (TEXPERS) is a statewide voluntary nonprofit association that provides education and legislative advisory services to the trustees, administrators, professional service providers and employee groups that manage the retirement money of police, firefighters, municipal and district employees in cities across Texas.