The 2019 Investment Review
The Board of Pensions Balanced Investment Portfolio returned 17.8%
The Cockeyed Optimist Slays Debbie Downer
U.S. Bulls Flatten Global Bears
At the start of 2019, many global investors were wearing Debbie Downer caps, with modest if not
low investment expectations for the year. Always the pessimist, Debbie sees the glass half empty
and usually at about 10% full. The theme for the 2018 Investment Review was “Yard By Yard”,
meaning that we must be long-term investors and not day traders. We were long-term positive on
the U.S. but a Debbie Downer for the rest of the planet, for as challenging as conditions might be
in the U.S., markets and denizens of the rest of the globe faced more serious challenges with
fewer resources and less favorable outcomes than the U.S.
What is your weltanschauung, or worldview? Are you a cockeyed optimist or Debbie Downer?
It is more prudent to be a pessimist. It is an insurance against disappointment and no one can say “I told you
so”, which is how the prudent (pessimist) condemns the optimist.
Dietrich Bonhoeffer, Letters and Papers from Prison, 1945
Fortunately we were so wrong to be a Debbie Downer pessimist on the global economy. We
should have been humming the tune sung by that famous Cockeyed Optimist, Ensign Nelly
Forbush, in the musical “South Pacific”:
When the skies are brighter canary yellow But I’m stuck like a dope
I forget ev'ry cloud I've ever seen, With a thing called hope
So they called me a cockeyed optimist And I can’t get it out of this heart!
Immature and incurably green. Not this heart…
I have heard people rant and rave and bellow
That we're done and we might as well be dead,
But I'm only a cockeyed optimist
And I can't get it into my head.
Music by Richard Rodgers, lyrics by Oscar Hammerstein II
Should we be Debbie Downer or a Cockeyed Optimist in 2020 and beyond? As we review the
global economy and markets of 2019, and analyze the performance of the Board of Pensions
Balanced Investment Portfolio, we explore events that surprised on the upside as well as
disappointed on the downside.
As we entered 2019, only a Cockeyed Optimist would have predicted the events of 2019. Wall
Street investment bankers are rarely immature and incurably green, but are always optimistic that
markets will turn in their favor, and there were many such turning points in 2019, including:
As we rant and rave and bellow: The U.S. political gridlock on virtually all issues. Wars and
human rights violations in Syria, Iraq, Afghanistan, India, Myanmar and China.
Might as well be dead: Getting trade agreements with Canada, Mexico and China completed in
With a thing called hope: Democratic contenders to the 2020 Presidential Election
Stuck like a dope with a thing called hope: Global stock markets rallied on every glimmer of
2019 Investment Outlook versus 2019 Actual Results
Good investment performance is as simple as getting more things right than wrong in asset
allocation and manager selection. 2019 was a year when we were right, partly right and wrong in
our major asset allocation decisions. While some managers outperformed in major asset classes,
we were wrong in our asset allocation decisions that reduced U.S. equity, the best performing asset
class in 2019.
We will compare our January 2019 outlook with actual results. Our 2019 Outlook comments are
from the 2018 Investment Review.
Our 2019 Outlook: Following the downturn of U.S. and international stocks in the fourth quarter
of 2018, we believe stocks are likely to outperform bonds in 2019, yet it is unclear which regions,
sectors and strategies are most likely to outperform
2019 Actual: Right. U.S., international developed markets and emerging market stocks all
Our 2019 Outlook: Emerging market stocks, after a negative 2018, could provide superior
performance in 2019.
2019 Actual: Partly Right. Emerging markets provided a return of 18.4% but lagged the
performance of developed market and U.S. stocks.
Our 2019 Outlook: U.S. large company value stocks underperformed growth/momentum stocks for
the ten years ended December 31, 2018. Is 2019 a time for value stocks to outperform?
2019 Actual: Wrong. While it was a question and not a forecast, value stocks underperformed
growth stocks by a wide margin in large capitalization growth stocks as well as small company
Our 2019 Outlook: After a weak 2018, active international developed market managers will have
the opportunity to reposition portfolios to recognize outsized gains in technology stocks in 2018.
2019 Actual: Right. Managers increased technology holdings and the sector returned 40.7% in
Our 2019 Outlook: The U.K will wrestle with the impact of Brexit, the decision to leave the EU.
We believe our managers will select the best companies, but at this time do not plan to increase the
allocation to international developed markets.
2019 Actual: Right. Despite a year of political uncertainty and no final Brexit decisions,
companies in the U.K. carried on and returned 21.1%. We repositioned the international equity
portfolio in 2019 but did not increase the allocation.
Our 2019 Outlook: We continue to expect (since 2014) that long duration fixed income assets will
be less attractive in 2019 as the Federal Reserve continues to increase rates.
2019 Actual: Wrong. The Federal Reserve reduced interest rates and long U.S. Treasury bonds
Our 2019 Outlook: We do not expect inflation will be a problem in 2019
2019 Actual: Right. We took the opportunity to trim our allocation to inflation mitigating
Our 2019 Outlook: Opportunities in private limited partnerships will be evaluated
throughout 2019. The red flags waving for both private equity and real estate partnerships
reflect the concern that fund sizes have increased and now exceed pre-2007 levels. Our
initial focus will be on real estate opportunity funds and venture capital.
2019 Actual: Right. We made selective commitments to private partnerships in 2019, including
to venture capital and real estate partnerships.
The Board of Pensions Balanced Investment Portfolio returns net of fees and the asset
allocation on December 31, 2019 were as follows:
2019 Asset Allocation
U.S. Equity 29.6% $3,439 33.8%
International Equity 23.1 2,200 21.6
Fixed Income 8.9 3,073 30.2
Private Partnerships 1.6 856 8.4
Marketable Diversifying Strategies 10.6 484 4.7
Real Estate 12.6 134 1.3
Total 17.8% $10,186 100.0%
To maintain the asset allocation ranges approved by the Board of Directors, in the asset
allocation table shown above, the 1.6% allocation to Global Equity is included in U.S. and
International Equity. The return for Global Equity was 28.6% in 2019. The 1.3% allocation to
Real Estate is in Private Partnerships and a public market REIT in Market Diversifying
Assets in separately managed and commingled accounts are valued on a daily basis and reflect
the actual market value on December 31, 2019. The assets in illiquid private partnerships are
valued and reporterd on a one quarter lag. The Balanced Investment Portfolio data for private
partnerships relects valuations on September 30, 2019 so do not include the significant global
market actions in the fourth quarter of 2019.
The Board of Pensions Balanced Investment Portfolio began 2019 with total assets of $9.616
billion. With an investment return of 17.8% in 2019, the market value of the Portfolio increased
$10.186 billion by December 31, 2019, after paying out $407 million in net benefits payments to
Plan members and their surviving spouses.
Performance of the Board of Pensions Balanced Investment Portfolio is compared to the
absolute return benchmark of the 6.0% long-term investment return assumption for the Pension
The return of each component of the Balanced Investment Portfolio is compared to the relevant
asset class benchmark.
The Absolute Return Benchmark: The Long-Term Investment Return
In October 2016, a comprehensive review of future long-term capital market assumptions and their
impact on the Balanced Investment Portfolio was presented in a joint meeting of the Investment
and Pension Committees. As global economic and market conditions and historically low global
interest rates have dampened expectations for long-term investment returns for almost all asset
classes, the Investment Committee recommended, and the Board of Directors approved, a
reduction in the expected long-term investment return assumption for the portfolio, from 7 percent
to 6 percent.
By moving to a more conservative assumption for financial planning, the Board took a step to
ensure the long-term solvency of the Pension Plan, whose assets make up 89 percent of the
portfolio. The Board believed that it would not be acting in the best interest of Plan members if it
continued to rely on a long-term investment assumption of 7 percent when market expectations
indicated that the Balanced Investment Portfolio could not achieve that return without restructuring
the portfolio into asset classes that have higher risk and less liquidity than the current long-term
Balanced Investment Portfolio Market Value and Cash Payments: 1988-
The Balanced Investment Portfolio had $2.1 billion in assets in 1988, paid out $6.4 billion in
benefits to Plan members and survi