WRS News Online

Does SWIB's Investment Strategy Work?

by Michael Williamson, State of Wisconsin Investment Board Executive Director

Michael Williamson
Michael Williamson

After a rough end to 2015 for the financial markets, 2016 started off no better. Through the first quarter of the year, the markets continued to show extreme volatility. The rollercoaster ride early in 2016 reinforced the idea that we are indeed in a low-return environment in which there will be significant challenges to earning positive returns.

The first two months of 2016 also reinforced the importance of the investment strategy we have put in place. That strategy includes elements designed to help protect the trust funds from dramatic swings in the markets. The strategy is also designed to help stabilize annuity adjustments for retirees, and for active employees and employers, the effective rates and contribution rates. But is it working?

At the end of January, the Core Fund had a return of -2.7% and at the end of February the return was -2.5%. During those same months, many of the major indexes struggled far more than the Core Fund. For example, the S&P 500 had a return of -5.0% at the end of January and -5.1% at the end of February. The Russell 3000, an index that represents about 98% of the U.S. public stocks, was at -5.6% in January and -5.7% in February. The MCSI World ex U.S. Equities, a global stock index that excludes the U.S., finished January at -5.5% and February at -8.6%.

Trust fund returns will rarely match market returns. With the investment strategy we have in place, which focuses on risk and diversification, there will be a slight reduction in performance during strong stock markets. However, there is better protection for the funds when the markets are struggling. Sometimes our returns will trail when stocks are performing well and at other times they will finish ahead of falling stocks. That is what we saw in the first part of 2016. Obviously, there is a long way to go in 2016.

We expect the markets to remain extremely volatile. That is why we are constantly working to develop an asset allocation strategy that matches the changing investment environment. This is not the first time we have had to deal with stresses in the markets. But, just as we did through the previous changes to the markets, we will continue to adapt and do our best for the trust funds for you.