HomeMy WebLinkAbout05. HighMark Capital 4th Quarter ReportH IGHIV ARKS
CAPITAL MANAGEMENT
February 2, 2015
Thea Vassallo
Finance Manager
Central Contra Costa Sanitary District
5019 Imhoff Place
Martinez, CA 94553 -4392
RE: 4Q 2014
Dear Thea,
U.S. Economic and Market Overview
The U.S. economy continued to represent perhaps the brightest opportunity across
global markets in the fourth quarter of 2014 and for the full year. The continuing strength
of the U.S. economy, as represented by two consecutive quarters of 4% or higher
annualized GDP growth, provided investors around the world with sufficient reasons to
add to their holdings of U.S. stocks, bonds, and dollars. As 2014 came to a close, a
series of positive economic indicators, some at their highest levels in a decade,
highlighted the domestic economy's slow but steady recovery from the Great Recession.
These included:
• Consumer Sentiment — Final December 2014 figure of 93.6 is highest since
January 2007.
• Consumer Spending Growth — Continued improvement with 0.6% growth in
November.
• Rising Average Earnings — Up 1.7% in 2014 and annualized wage growth of 5%
predicted for 2015.
• Non -Farm Payroll Growth — Averaged 206,000 jobs per month since the
beginning of 2012 with total growth exceeding 7 million jobs.
• Unemployment — 5.6% at year -end and lowest since June 2008.
• Corporate Merger and Acquisition activity — 2014 had highest value of deals in 7
years.
• U.S. Doliar — Continued strength in 2014 against the world's major currencies.
Given the welcome news from the U.S., one might think that domestic Treasury rates
would be higher, but economic issues around the world continued 2014's flight to quality
U.S. debt, pushing rates even lower during the 0 quarter. These issues include
potential deflation in Europe, China's transition from a country of manufacturers to one of
consumers, and Japan's seemingly endless effort to restore economic growth. By year-
end, the gap between domestic and international developed economies was perhaps
best expressed by the spread between 10 -year U.S. Treasuries and the equivalent
German government bond of 1.6 %, a difference which stood at its highest level in the
last 25 years and spotlights investors' global growth concerns about global growth.
The latter half of 2014 saw two significant transitions in the U.S. economy. The first
transition involved the price of oil, which peaked in June and declined about 50% from
there, finishing the year at a level below $551barrel. There is some debate in the
investment community as to whether the price declines are related to increased supply,
namely through North American shale production, or decreased demand principally due
to international slowdowns primarily in Europe and China. While some sectors of the
economy may struggle with a lower price of oil, historically, a decline in oil prices has
been regarded as a positive. Consumer spending is a significant component of growth,
especially in the U.S., and lower -to- middle income consumers can be expected to
benefit as they will have more disposable income to support spending patterns. One
caveat, however, is a slide in oil prices could prove to be indicative of a larger global
slowdown could act as a headwind for future equity returns.
The second transition involved the U.S. Dollar which began a strong rise that coincided
with the decline in oil prices. The combination of strong GDP growth in the second and
third quarters, and the growing consensus that the Fed will not engage in additional
quantitative easing measures, supported the rise in the dollar, Additionally, the dollar
has strengthened due to many other regions showing weakness: the Eurozone is likely
to initiate their own quantitative easing program to assist in their recovery, Russia is in a
recession, Brazil is potentially headed to a recession, China's growth rate is likely
slowing, and Japan's quantitative easing measures have weakened the Yen.
Performance Review
The Central Contra Costa Sanitary District PRHCP Plan returned 1.61%, gross of
investment management fees for the quarter. The Plan's fixed income investments
posted a 0.911'% return, which lagged the Barclays Aggregate return of 1.79 %. The
longer end of the yield curve saw yields tighten in the quarter, while high yield credit
spreads widened. The sell -off in the high yield market was strongly influenced by the
decline in oil prices, as roughly 20% of the high yield index is related to oil related
companies. The Plan's fixed income allocation had an overweight to shorter duration
investments throughout the quarter. This tilt was established to mitigate the impact of
rising interest rates. Rates however did not increase, and this was a primary detractor to
performance. Additionally, both of the managers in the intermediate -term bond space
also had a duration positioning that was less than the primary benchmark — which
detracted from performance.
The equity segment of the portfolio returned 2.36% in the fourth quarter. International
equity investments detracted from performance during the quarter, with emerging
markets returning -4.5% (MSCl -EM Index) and developed markets also declining -3.57%
(MSCI -SAFE Index) in the quarter. The combination of the steep decline in commodity
prices and weakening foreign currencies exacerbated the difficulty that faced most
emerging markets. Developed international markets were also negatively impacted by
currency trends as well as the uncertainties surrounding the European and Japanese
recoveries. Mid -cap equities slightly outperformed their benchmark in the quarter, while
small cap and large cap stocks fell short of benchmark targets.
Active managers continued to struggle during the 4`" quarter, which contributed to large -
cap mutual fund managers posting their worst relative performance in several decades.
This was seen across a wide spectrum of styles and sizes due to several reasons. First,
r
the dispersion of returns has been lacking: when stocks' returns don't vary by much, it is
very difficult to add much value by choosing the best ones. Higher dispersion typically
goes hand -in -hand with higher volatility which is something that, despite the many macro
events that dominated headlines this year, did not really surface for equities. Secondly,
there was a fairly unusual negative effect exhibited in the size premium: smaller
companies significantly underperformed larger companies by the most in 15 years and
small companies tend to be areas of the market where active managers can gain an
advantage. A third factor consisted of large cap domestic managers holding foreign
equities in their portfolios. Foreign markets trailed by over 18 %, vs. the S &P500 in
calendar year 2014. Finally, active equity managers entered 2014, and the 4°i quarter,
bracing for interest rates to increase: instead rates have decreased and have made
expensive areas of the market, namely utilities and REITs, even more expensive, and
therefore risky. We suspect that this painful run of active manager underperformance
may be nearing the end, as volatility has recently begun to increase due to oil price
effects on earnings, which should add to stock dispersion, small caps relatively
outperforming in the 4it' quarter resulting in a shrinking of the relative return gap, and
interest rates are unlikely to go much lower from here with the consensus view that the
Fed is poised to increase rates.
Strategy Positioning
The Plan's allocation to equities is currently "neutral" with a targeted 50% allocation.
Within this allocation the portfolio continues to have an overweight to international
equities given the relatively more attractive valuations compared to domestic equities.
During the quarter, the underweight allocation to small caps was eliminated and small
caps now have a neutral allocation. This transition was made based on valuations
becoming slightly more attractive relative to where they were at the beginning of the year
and the significant performance gap compared to large caps. The Plan remains slightly
underweight in fixed income, maintaining a target allocation of 47.5% of assets. The
cash allocation currently is targeted at 2.5 %.
Best regards,
Rndrew Brown
Central Contra Costa sanitary District
Fourth Quarter 2014
Presented by
Andrew Brown, CFA
�HIGHMARKO
CAPITAL MANAGEMENT
CCCSD
Asset Allocation
Total Assets: $37,467,222
Period Ending 12 -31 -14
4Q14 Return: 1.61%
1 Year Return: 4.70%
Inception -to -Date Return: 11.95%
Inception Date. 4 -1 -2009
Fixed Income
817,739,069
47.3%
'investment Summary
Since Inception
Beginning Value
$ 566,683.26
Contributions
27,073,510.86
Withdrawals
-250,020.07
Gain (Loss)
4,889,234.83
Interest and Dividends
5,187,835.31
Net Accrued Income
44,484.87
Ending Market Value
$ 37,511,729.06
Cash
$921,022
? 9%
Equity
$18,807,131
50.2%
'Ending Market Value differs from total market value on the previous page due to differences in reporting methodology. The above ending market value is
reported as of trade date and includes accruals. The Asset Allocation total market value is reported as of settlement date.
H IGHMARKO
CAPITAL MANAGEMENT
PARS: Central Contra Costa Sanitary District
- J
Selected Period Performance
PARS /CENTRAL CONTRA COSTA SANT PRHCP
Account 6746030600
Period Ending: 12/31/2014
Account Inception: 4/1/2009
Returns are gross -of -fees unless otherwise noted. Returns for periods over one year are annualized. The information presented has been obtained from
sources believed to be accurate and reliable. Past performance is not indicative of future returns. Securities are not FDIC insured, have no bank guarantee,
and may lose value.
HIGHMARK® PARS: Central Contra Costa Sanitary District
CAPITAL MANAGEMENT
Year
Inception
to Date
to Date
Sector
3 Months
(1 Year)
2 Years
3 Years
5 Years
(69 Months)
Cash Equivalents
.00
.02
.02
.02
.04
.11
iMoneyNet, Inc. Taxable
00
.01
.02
.02
02
.03
Total Fixed Income
.91
4.04
1.62
3.62
4.60
5.86
BC US Aggregate Bd Index
1.79
5.97
1.89
2.66
4.45
4.88
Total Equities
2.36
5.65
17.81
17.53
12.53
18.30
Large Cap Funds
4.03
10.13
22.02
20.43
13.75
18.91
S &P 500 Composite Index
4.93
13.69
22.68
20.41
15.45
20.45
Mid Cap Funds
6.16
7.99
19.02
17.23
Russell Midcap Index
5.94
13.22
23.52
21.40
17.19
23.79
Small Cap Funds
6.85
5.79
23.39
20.58
17.85
23.78
Russell 2000 Index
9.73
4.89
20.67
19.21
15.55
21.61
International Equities
-3.68
-3.29
3.04
7.83
3.77
12.12
MSCI SAFE Index
-3.57
-4.90
8.05
11.06
5.33
12.67
MSCI EM Free Index
-4.50
-2.19
-2.39
4.04
1.78
1213
Total Managed Portfolio
1.61
4.70
9.12
10.26
8.55
11.95
Account Inception: 4/1/2009
Returns are gross -of -fees unless otherwise noted. Returns for periods over one year are annualized. The information presented has been obtained from
sources believed to be accurate and reliable. Past performance is not indicative of future returns. Securities are not FDIC insured, have no bank guarantee,
and may lose value.
HIGHMARK® PARS: Central Contra Costa Sanitary District
CAPITAL MANAGEMENT
ASSET ALLOCATION
As of December 31, 2014
Equity
50.20%
Range: 40 %n 60%
18,807,131
Large Cap Core
5.75%
SMGIX
Columbia Contrarian Core CI Z
2,153,746
4.74%
SICWX
Sentinel Common Stock 1
1,777,635
Large Cap Value
2.90%
DODGX
Dodge & Cox Stock Fund
1,087,762
4.84%
LSGIX
Loomis Sayles Value Fund
1,813,997
Large Cap Growth
3.60%
HACAX
Harbor Capital Appreciation Instl
1,349,135
3.62%
PRGFX
T. Rowe Price Growth Stock Fund
1,354,681
Mid Cap Value
2.10%
TIMVX
TIAA -CREF Mid -Cap Value Instl
786,051
Mid Cap Growth
2.09%
IYMIX
Ivy Mid Cap Growth Fund 1
782,129
Small Cap Value
3.83%
NSVAX
Columbia Small Cap Value Fund II
1,434,568
Small Cap Growth
3.78%
PRNHX
T. Rowe Price New Horizons Fund
1,417,586
International Core
3.27%
NWHNX
Nationwide Bailard Intl Equities Fund
1,223,776
International Value
2.02%
DODFX
Dodge & Cox International Stock Fund
757,204
International Growth
1.98%
MQGIX
MFS International Growth Fund
743,590
Tactical - Europe
2.15%
FEZ
SPDR EURO STOXX 50 ETF
806,423
Emerging Markets
3.52%
SEMNX
Schroder Emerging Market Equity
1,318,847
Fixed Income
47.35%
Range: 40 9lo-60%
17,739,069
Short -Term
11.87%
VFSUX
Vanguard Short-Term Corp Adm Fund
4,445,508
Intermediate -Term
16.55%
NWJJX
Nationwide HighMark Bond Fund
6,201,132
16.53%
PTTRX
PIMCO Total Return Instl Fund
6,193,641
High Yield
2.40%
PHIYX
PIMCO High Yield Instl
898,788
Cash
2.46%
Range: 0 %20%
921,022
2.46%
FPZXX
Money Market
921,022
JHIGHMARKV
CAPITAL MANAGEMENT
TOTAL 100.00% $37,467,222
PARS: Central Contra Costa Sanitary District
* f
a
CENTRAL CONTRA COSTA SANITARY DISTRICT
For Period Ending December 31, 2014
Data Source: Morningstar, SD Investments
Returns less than one year are not annualized. Past performance is not indicative of future returns. The information presented has been obtained from sources
believed accurate and reliable. Securities are not FDIC insured, have no bank guarantee and may lose value.
HIGHMI RK®
CAPITAL MANAGEMENT
PARS: Central Contra Costa Sanitary District
3 -Month
YTD
1 -Year
3 -Year
5 -Year
Fund Name
Inception
Return
Rank
Return
Rank
Return
Rank
Return
Rank
Return
Rank
Sentinel Common Stock I
(7/13)
4.09
58
10.62
63
10.62
63
18.54
63
14.27
45
Columbia Contrarian Core Z
(7113)
4.69
44
12.92
31
12.92
31
22.07
10
15.93
10
Dodge & Cox Stock
(8114)
2.21
78
10.40
54
10.40
54
23.71
1
15.56
9
Harbor Capital Appreciation Instl
3.26
77
9.93
53
9.93
53
20.52
31
14.48
42
Loomis Sayles Value Fund
(7/11)
3.82
55
10.76
48
10.76
48
21.58
8
14.35
28
T. Rowe Price Growth Stock
4.30
56
8.83
65
8.83
65
21.68
15
15.84
17
Idx: Russell 1000
4.88
--
13.24
--
13.24
-
20.62
--
15.64
EQUITY
FUNDS
TIAA -CREF Mid -Cap Value Instl
5.96
33
12.85
19
12.85
19
20.37
46
15.64
39
idx: Russell Mid Cap Value
6.05
--
14.75
--
14.75
--
21.98
--
17.43
-
Ivy Mid Cap Growth 1
(5114)
6.36
29
8.20
38
8.20
38
16.89
67
15.73
33
Idx: Russell Mid Cap Growth
5.84
--
11.90
-
11.90
-
20.71
--
16.94
EQUITY
FUNDS
Columbia Small Cap Value 11
6.76
54
4.61
42
4.61
42
18.87
35
15.55
20
Idx: Russell 2000 Value
9.40
-
4.22
-
4.22
--
18.29
--
14.26
-
T. Rowe Price New Horizons
6.98
69
6.10
19
6.10
19
22.50
6
21.43
1
Idx: Russell 2000 Growth
10.06
-
5.60
--
5.60
--
20.14
--
16.80
-
INTERNATIONAL
P
Dodge & Cox Intemational Stock
-4.66
86
0.08
9
0.08
9
15.23
4
7.89
7
Nationwide Bailard Inti Eqs InSvc
-1.10
16
-1.94
15
-1.94
15
12.98
12
6.37
18
MFS International Growth 1
-2.17
69
-5.10
58
-5.10
58
8.95
77
5.90
53
Idx: MSCI SAFE
-3.57
-
-4.90
--
-4.90
--
11.06
--
5.33
Schroder Emerging Market Equity
(11112)
-4.54
50
-4.61
70
-4.61
70
4.30
50
1.41
56
Idx: MSCI Emerging Markets
-4.50
--
-2.19
-
-2.19
--
4.04
-
1.78
SPDR EURO STOXX50 ETF
(6114)
-2.06
88
0.77
73
0.77
73
6.57
56
7.76
100
Pimco Total Return Insrl
1.32
45
4.69
71
4.69
71
4.26
22
5.14
37
Vanguard Short-Term Investment -Grade Adm
0.22
23
1.86
15
1.86
15
2.51
18
2.97
23
Nationwide HighMark Bond InSvc
1.16
57
5.00
64
5.00
64
3.48
44
4.93
45
BarCap US Aggregate Bond
1.79
--
5.97
--
5.97
--
2.66
--
4.45
-
PIMCO High Yield Instl
(11/14)
0.42
10
3.31
13
3.31
13
7.77
41
8.26
35
Credit Suisse HY
-1.59
1.86
--
1.86
--
7.91
--
8.68
-
Data Source: Morningstar, SD Investments
Returns less than one year are not annualized. Past performance is not indicative of future returns. The information presented has been obtained from sources
believed accurate and reliable. Securities are not FDIC insured, have no bank guarantee and may lose value.
HIGHMI RK®
CAPITAL MANAGEMENT
PARS: Central Contra Costa Sanitary District