In the latest edition of the SWIB Market Update, we sat down with Derek Drummond, Head of Funds Alpha at SWIB, to unpack some of the economic challenges and opportunities investors are facing this year.
Interest rates remain a dominant market theme in 2025. With political pressure pushing for lower rates and the Federal Reserve taking a cautious, data-driven approach, the tension has led to significant market volatility.
Drummond noted that this uncertainty has created a difficult environment for “beta” investors—those seeking returns from general market movement—but a favorable one for SWIB’s alpha-generating strategies that focus on selecting investments that will outperform the market.
“People tend to gravitate towards high-quality companies in uncertain times, which plays to our strength in security selection and generating alpha,” Drummond said.
Diversification has been a cornerstone of SWIB’s success this year. Drummond highlighted three key areas of diversification that benefited SWIB’s portfolio:
- Regional: European and Japanese markets provided a counterbalance to the more volatile U.S. market.
- Asset Class: Exposure across stocks, bonds, commodities, interest rates, and currencies helped stabilize returns.
- Style: Mixing value, growth, and quality investing approaches allowed for strategic flexibility.
While volatility often causes investor anxiety, Drummond sees it differently. “Volatility provides the fuel for opportunity—if you understand what’s causing it.”
SWIB focuses on market dislocations where pricing diverges from fundamentals, allowing skilled managers to capitalize on inefficiencies.
Drummond said the resilience of the U.S. consumer remains a key market narrative. SWIB previously bet successfully on strong consumer balance sheets. Early signs suggest a shift, with slowing wage growth, rising inflation, and growing caution in household spending.
“We’re beginning to see cracks—credit card balances, loan repayments, big-ticket purchases,” Drummond noted.
“While we haven’t sounded the alarm yet, we’re closely watching the data and have strategies in place for both a continued expansion or a more defensive environment.”
As SWIB continues to navigate a complex global economy, its data-driven, diversified approach remains central to protecting and growing the WRS’s Trust Funds. For SWIB, volatility isn’t just a challenge—it’s also an opportunity.
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