Meaning of Recession Image

This is the third in a three-part series that looks back at the Great Recession, its effect on the Wisconsin Retirement System and how the State of Wisconsin Investment Board invests first to help protect the pension system from another major downturn and then to earn reasonable returns.

In June 2009, the National Bureau of Economic Research, which determines start and end dates of U.S. recessions based on a range of economic indicators, declared that the Great Recession had ended. The declaration came despite many feeling the U.S. economy was far from fully recovered. Since then, the economy has, in many ways, pulled out of the economic tailspin. The stock market has seen tremendous growth and record highs, housing prices have bounced back, and June's job numbers show the economy has added jobs every month for almost eight years, the longest streak on record.

The Great Recession was the worst economic downturn since the 1930s. It left investors wondering what, if anything, can be done to help protect against another major economic downturn. SWIB moved to implement a disciplined, prudent and innovative investment strategy to manage the WRS trust funds.

A key to that strategy is diversification. Choosing the right asset allocation is an important factor in providing moderate downside protection. Everyone is familiar with the children's fairytale Goldilocks and the Three Bears. Goldilocks tries to find the porridge, chair and bed that is just right. SWIB is looking for the "Goldilocks zone" with its asset allocation.

Asset allocation – the distribution of investments across stocks, bonds, and other assets to maximize returns and minimize risk – is the primary driver of long-term investment returns and is approved by SWIB's Board of Trustees. SWIB recommends a mix of assets based on expected returns, their contribution to risk, and expected liabilities of the WRS. SWIB works closely with ETF and its actuaries to identify projected liabilities and the appropriate return targets and proper asset allocation. SWIB continues to explore future allocation changes based on shifting market conditions.

"We are trying to find the allocation that is just right and will provide moderate downside protection from another dramatic downturn while still earning reasonable returns in multiple market conditions," David Villa, chief investment officer, said. "Our portfolio of investments is highly diversified, carefully monitored, and designed to strike an appropriate balance between risk and returns."

To provide the best value to all WRS participants in the long run across all market environments, both strong and weak, SWIB's asset allocation has become more diverse.

"Twenty-five years ago, it was possible to earn 7.5% with a portfolio made up of just investments in bonds," Villa said. "That is not the case today. The dramatic swings in the financial markets since the Great Recession have resulted in the need to build a diversified portfolio that includes not only bonds but global stocks, private equity, real estate, hedge funds, and other investments."

SWIB remains focused on the future, the challenges that lie ahead and what's best for the WRS.

"The markets over time are going to continue to present significant challenges," Rochelle Klaskin, interim executive director, said. "But we are expecting that and we are building and preparing to meet those challenges over the long-term by putting in systems and technology, and continuing to hire people with the necessary experience, skills and talent to support our investment strategies and generate the returns that are critical to achieve our long-term goals."

The Great Recession: 10 Years Later Part 1
The Great Recession: 10 Years Later Part 2