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Meriden Retirement Board
Tuesday, June 12, 2007
Overview
The general consensus among Wall Street economists has shifted over the past month, reflecting faster growth and greater inflation risks, thus reducing the expectation of interest rate cuts later this year. Prices for the ten-year US Treasury note slumped to a five-year low, as yields rose to 5.25%. Rather than rate reductions, central banks around the globe have been raising rates to slow growth, especially in countries where agriculture, mining, and natural resources have experienced soaring demand. For investors, this turns attention toward growth stocks and commodities. On CNBC last week, the manager of the world’s largest bond fund, Bill Gross of PIMCO, forecast that overseas investors will begin shifting emphasis from bonds to “growth-like” investments. Rising yields also
suggest mortgage rates moving up, further impacting the housing sector.
Higher-dividend stocks, such as utilities and real estate trusts, suffered most in the retreat from the equity market’s record highs. The prospect of higher yields on fixed income, perhaps even a Fed rate increase, has muted the attraction of value equities.
Meriden Retirement Funds
Despite a pullback in the first week of June, the composite Meriden retirement portfolio, totaling nearly $245 million, reflects strong gains as we approach the close of FY 2007. Returns through the end of May showed the pension funds gaining over 15% since last July. Limited exposure to the bond market has served the fund well this year, as Meriden’s fixed income commitments were concentrated in very short-term instruments. As of May 31st, the combined asset allocation for the funds showed 52.5% in US equities, 15% in foreign stocks, 11.5% in fixed income including cash equivalents, 9.5% in gold, 8.5% in managed futures, and 3% in REITS. The best performing managers for the year are the mid-cap and international equity managers, although the larger cap growth managers recently have
seized the momentum of the markets. The lagging performers are gold (last year’s top sector) and fixed-income. At the end of May, the City Employees Retirement fund totaled $141.3 million, and the Police/Fire Pension funds stood at $107.3 million.
Allocation Update
Following Board approval, positions in high yield fixed income (Mainstay Bond Fund) and First Trust Specialty Finance were added to the portfolios last month. Since adoption of the Board’s new policy statement in December, we have continued the desired rebalancing by reducing gold, adding bonds, replacing real estate, and supplementing international positions.
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