February-March 2021
The Profit Engine That Could: 2020 Offered Mounting Challenges for Earnings
The silver lining of quarantine has been time spent with my young daughter. Every night we go upstairs to her room, sit in a large arm chair, and read a selection of books. One of her favorites is "The Little Engine That Could." In this story, a tiny steam engine pulls a broken-down train up and over a mountain. As the tiny engine climbs the mountain, it repeats the mantra “I think I can, I think I can,” and eventually succeeds in getting up and over the hill. On the way down, the engine repeats to itself “I thought I could, I thought I could,” as it descends toward the town below.

Expect Economic Recovery in 2021 to be Robust
While reviewing the prior year and forming an outlook for the market, it is impossible not to take greater stock of the world events and think more broadly about lessons learned during this time, which has been unlike any other we have experienced in our lifetimes.

As we consider these lessons, it is informative to draw comparisons to what we believe are critical factors for companies and their stocks, and our own experience as investors and businesspeople.

Road to Stock Market Rebound Was Rocky
Global stocks rebounded sharply from the coronavirus market crash in 2020, but the ride was rocky. Even in a rising market, volatility is a clear and present danger. With so many risks clouding the outlook, we believe that investors should focus on generating a smoother pattern of returns through the recovery from COVID-19.

When equity markets tumbled in early 2020, controlling volatility was a high priority for many investors. But as markets recovered through the last nine months of the year, volatility might have seemed less pressing.

Opportune Time for Longer-term Investors
Investors are faced with the increasingly critical task of finding alternative sources of resilient income to satisfy distribution needs today amidst lacking bond yields globally. With roughly 80% of the asset class’s total returns derived from income, core real estate can serve as a higher-yielding alternative to fixed-income allocations; given the current funding shift towards riskier strategies, now may be an opportune time for longer-term investors to play the market contrarian and consider revisiting the case for U.S. core real estate in 2021.

Could Your Fund Benefit From Pet Spending?
Recent evidence suggests that there has been a broad and sustainable increase in pet ownership, due to changing attitudes toward pets, referred to as “humanization." People increasingly allow pets to sleep in bed with them, buy presents for them on special occasions and take other steps to personify their animal companions. Based on a survey by GfK, 57% of consumers in 22 countries owned a pet. Specifically, in the U.S., an estimated 67%, or approximately 85 million homes, owned a pet. Dogs are the most prevalent species of pets with over 60 million households owning a dog, followed by cats at just over 43 million households. This change in societal attitudes toward domesticated animals began some time ago and has grown as younger generations are having fewer children and later in life. This trend has also accelerated globally in recent months as pandemic-related stay-at-home orders have increased the desire for companionship as social interactions had been put on pause for much of 2020. Overall, pets are largely treated as members of the family, which generally reflects a greater sensitivity to and recognition of domesticated animals’ complexity and needs.

Risky Business Update: Investors Face Additional Challenges Amid Increased Uncertainty
Five years ago, Callan published “Risky Business,” a paper that focused on the challenges faced by institutional investors in the low return environment they found themselves in. The paper received a lot of attention, including from The Wall Street Journal, largely due to the graphic illustrating what was required in terms of asset allocation to earn a 7.5% expected return over various time periods. Our analysis found that investors in 2015 needed to take on three times as much risk as they did 20 years before to earn the same return.

Investing in Aviation: How the Industry Reset Will Create a Generational Opportunity for Investors
I have been investing in the commercial aviation industry for nearly 20 years. My career started in March of 2001, so my early investing experience occurred during the period of aviation industry dislocation triggered by 9/11, which, while significant, pales in comparison to the impact COVID-19 is having on the travel industry. The pandemic has had an acute impact on the major incumbent capital providers in the aviation sector, leading to significant capital moving to the sidelines at a time when the industry desperately needs $150-$200 billion of capital.

How Recordkeeper Acquisitions Trend Impacts Retirement Plan Sponsors
Recordkeepers continue to make news with acquisitions involving some of the industry's largest and most recognized names, a consolidation trend that impacts tens of thousands of employers and millions of participant accounts each year. A carefully considered selection of a provider can be wholly displaced by this now common occurrence when two merge or one acquires another. It is important for plan sponsors to consider how the change will affect the plan and participants, starting with plan governance, timing, service, and technology.

Tomorrow's Real Estate Strategy Today
Representing 17% of the U.S. investment marketplace, real estate is the third largest asset class behind bonds and equities. It has been a staple of pension plan portfolios for decades, providing diversification, reduced volatility, higher returns, income and inflation protection.

But the real estate investment market has changed over the decades. A marketplace that was once built primarily on assets in four sectors – retail, office, residential and industrial – has expanded in scope. Beyond the four basic “food groups,” the new real estate investment marketplace includes fast-growing, 21st Century property sectors, such as cell phone towers and other infrastructure, data centers and e-commerce logistics facilities. It also includes health care and self-storage facilities, as well as single-family rental and manufactured homes.

To Issue or Not to Issue, is That a Question?
Over the longer term, (i.e., 20 or 30 years), stocks have almost always outperformed bonds, meaning sought-for arbitrage has a high probability of materializing. However, a benefit plan sponsor should understand that, especially in the near term, issuing a benefit bond could result in a negative outcome from a budgetary perspective.

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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.