Secure Your Future
Stock market review - The year that was: Not great but not bad
Feb 16, 2006 2:27 PM
2005 was a positive but lackluster year for the U.S. stock market. For the third year in a row all types of stocks — domestic, international, large capitalization (cap), mid cap, small cap, growth, value and technology — closed higher than they did in the previous year. But some sectors did not do as well as others.
The results for the year again showed the importance of having a well-diversified portfolio of stocks. With the Teachers’ Retirement system investing a large part of its portfolio in the Russell 3000 index of stocks, not only did we benefit from the positive growth of large-cap stocks, but we benefited from the inclusion of mid and small caps, which had better returns than large company stocks in 2005.
Another factor that helped the investment returns at TRS was that part of our portfolio was invested in international stocks. The stock markets in the developed countries of the world outside of the United States had higher returns than the U.S. stock market.
Stocks did better as a group, compared to a broad spectrum of investment-grade bonds and cash. Cash, as represented by the return of 91-day Treasury bills, earned just over 3 percent, which was a better return than the return on a broad spectrum of investment-grade bonds, which earned 2.43 percent for the year. The Russell 3000 index of U.S. stocks grew by 6.12 percent and international stocks, represented by the EAFE index, grew by 14.02 percent.
The Variable A program is more than 90 percent invested in a broadly diversified portfolio of the different classes of stock mentioned above and the pension fund is 65 percent invested in a similarly well-diversified portfolio.
We cannot predict what will happen in 2006 — the first weeks showed a sharp increase in stock values and then a drop — but no matter what happens, we know that all the funds invested by the TRS are carefully managed. The three portfolios are widely diversified and the investment managers and advisors to the funds are carefully selected. Investment fees are kept to the minimum, which yields higher returns.
The TRS currently has three different programs in which members may invest. The three choices are the Fixed-Income Fund, Variable Annuity A and Variable Annuity B.
Tier I/II members may invest their Annuity Savings Fund and Increased Take-Home Pay accounts in these three funds, and members in all tiers who participate in the TDA program may invest in any of the three investment choices. The TRS is preparing to add other investment choices in 2007.
The total value of the TRS’ assets in all three programs as of Dec. 31 was about $45.6 billion. This makes the TRS one of the top 30 largest pension funds in the U.S. The fund is invested under the direction of the Teachers’ Retirement Board, which, with the guidance of its investment consultants, retains a group of money managers who are associated with banks, insurance companies, mutual funds and other institutional money management firms. If you would like a list of these firms write to us at the UFT.
Fixed-Income Fund
This fund is invested commingled with the pension fund, which is financed by New York City and member contributions to provide our defined benefit pension — the Qualified Pension Plan (QPP). The fund has assets worth about $32.2 billion as of Dec. 31.
The assets are allocated into several different asset classes (see box).
The fund earned 7.48 percent in 2005 and an annualized rate of 8.31 percent over the last 10 years. Members who invested in the Fixed Fund trade off the volatility of this investment for a guaranteed crediting rate of 8.25 percent annually.
Because of the poor investment returns in 2000, 2001 and 2002, the city has raised its contributions to the pension fund in order to keep our benefits soundly funded. The UFT carefully monitors the funding needed to make sure funds are available to pay all of your benefits. You can be very confident that the money needed to pay for your hard-earned, well-deserved pensions will be there at retirement.
As you are aware by reading the papers, there is a call by some to create a new pension Tier V with reduced benefits for new members. There is even a call by fiscal conservatives in right-wing think tanks to close the defined-benefit (DB) plan for new members and create a defined-contribution (DC) savings plan in its place. The UFT will monitor this carefully and mount a most vigorous campaign to prevent it. The UFT helped our brothers and sisters in California through our membership in the AFT and the AFL-CIO and our close relationship with the National Conference on Public Employee Retirement Systems to successfully fight off Governor Schwarzenegger’s attempts to impose a DC plan on future California public employees.
This move to DC plans is a nationwide threat already enacted in Alaska and under consideration in California (again), Michigan and Montana. There is a significant threat of undermining retirement benefits in Colorado, Illinois, Indiana, Mississippi, New Jersey (and that’s close), New Mexico, Oregon, and Rhode Island. In many other states there is a potential threat caused by legislative uncertainty or funding shortfalls. We will keep watch on these.
Some members of the UFT — paraprofessionals and part-time employees — are not automatically mandated into retirement system membership. They may join a retirement system voluntarily and we urge them to do so ASAP. Part-time employees should join the Board of Education Retirement System (BERS) and paras should join the TRS.
In 1968, the UFT obtained for TRS members the right to capture the entire return after expenses on their TRS investments. Thus, the variable annuity was born. This, along with the TDA, which began in February 1970, gave TRS retirees an opportunity to enjoy an even more financially secure retirement than was provided by the QPP alone.
In order to get the right to earn the entire return on their investments, members had to give up the guarantee that their principal would never fall and that there would always be growth. Those who select a variable program must accept the volatility of the investment markets.
Currently, the TRS offers two variable programs. Work is being done at TRS that will lead to additional variable programs in the future.
Variable A
This fund has evolved into a broadly diversified equity fund designed to capture the return of the broad equity market over the long term. The fund emphasizes the ownership of stock in large-, mid- and small-cap companies as well as the stock of non-U.S. companies. A portion of the fund is allocated to make tactical shifts among stocks, bonds and cash in order to control the short-term volatility of equities.
While the primary goal is growth of principal, a secondary goal is preservation of capital through careful attention to risk, wide diversification and the tactical allocation segment described above.
On Dec. 31, the market value was about $13.9 billion, about 80 percent in domestic stocks, 17 percent in international stocks, and about 3 percent in fixed-income securities including cash.
Variable A had a 7.64 percent return for 2005. This was higher than the Russell 3000 index return of 6.12 percent.
Consistent with its long-held position that it is very difficult to out-perform the entire stock market, the TRS has invested most of Variable A in index funds designed to match the returns of the entire stock market. Most of the funds are passively invested in either pure or enhanced index funds. The rest are actively managed in an effort to get higher returns than the market.
Variable B
This program was started in 1983 as a vehicle for members who preferred to
Annualized Investment ReturnAll figures annualized through Dec. 31, 2005
Pension FundAllocation as of Dec. 31, 2005
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