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How One Public Pension Fund Thinks Coronavirus Will Hit Its Portfolio

“Conferences are being canceled, restaurants and stores are being closed, and cruise ships are being quarantined,” the Alabama system’s equity analyst notes.

The Retirement System of Alabama’s investment team is evaluating how the outbreak of coronavirus may affect its portfolio, a quarterly investment update shows. 

“The negatives of the virus outbreak including sickness and loss of life are pretty obvious,” Kevin Gamble, equity analyst at the Retirement System of Alabama, wrote. “Conferences are being canceled, restaurants and stores are being closed, cruise ships are being quarantined, technology supply chains are being disrupted, etc. … and the global economy is likely to generally slow at least temporarily due to these disruptions.” 

Gamble predicted that the Federal Reserve would come under pressure from President Donald Trump to be more aggressive, which indeed happened. On Tuesday, the Federal Reserve cut interest rates by half a percentage point due to the pandemic.   

“The economic fallout from the coronavirus is anyone’s guess but appears to be substantial for China at the moment,” wrote Lance Lachney, a fixed income analyst at the pension fund. The fund recently purchased names like IBM, CVS Health, and the Campbell Soup Company for its fixed-income portfolio, he noted.

Alabama is overweight U.S. equity assets versus international stocks, according to the strategy update, and overweight large-cap U.S. equities compared to small caps, which has paid off as large-cap stocks have been leading the market since 2015.  

The investment team is also using options like put spread collars to protect strong gains early in the fiscal year.  

“The earnings yield and dividend yield on the S&P 500 continues to be attractive relative to the very low yields which are available to investors in the fixed income market,” Gamble wrote.  

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The equities team is considering launching an equal-weighted S&P 500 index, which uses the same stocks as the S&P 500, but weights them equally rather than by market-cap, the report showed. Although the market-cap weighted S&P 500 index has outperformed an equal-weighted index over the past three years, but over a longer period of time, the two tend to produce similar results, according to the report.  

“If we can arguably get similar return levels over time and reduce our year-to-year volatility in returns, then perhaps it makes some sense from a portfolio perspective,” Gamble wrote. “We could tactically be at a very good point to execute this launch given that the market-cap-weighted performance has exceeded the equal weight performance by over 400 basis points this fiscal year alone.” 

The retirement system has not bought “much of anything” for its international equity portfolio since its last update, its investment team said.  

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