Why Do We Do What We Do?
Chris Maxwell, Vice Chair
June 15, 2021
The short answer to the question is: To benefit the missions of the parishes and diocese whose money we invest. And, we are pleased to report some pretty good investment returns over the last several years.
|Annualized Total Return with Dividends reinvested through June 11, 2021|
|1 year||3 years||5 years||10 years|
|Easton Episcopal Fund||31.61%||12.25%||11.86%||9.28%|
|Rank*||21st percentile||22nd percentile||18th percentile||37th percentile|
The Fund was established in 2011. For the first five years the portfolio was managed by outside organizations, for the last five years all major decisions were made by your Board of Managers.
Our name indicates, and we have long articulated, that we are a Balanced Fund with a normal equity range of 50% to 70%, and for the most part, we have kept to this range. The range was established based on historic returns of both stocks and bonds. In 1982, 10-year US Treasuries yielded over 12%, and today the yield is about 1.5%. As yields drop, bond prices rise, and the drop since 1982 created one of the strongest bond markets ever recorded, but that bull market in bonds ended several years ago. When we originally set our range, expectations were that bonds would cushion the blow of a volatile stock market and still provide a decent return of around 6%. As shown by the table below, this assumption never materialized and is unlikely to occur until interest rates rise and stabilize at a higher level.
|Stock and Bond returns since 2011|
|S&P 500||Bloomberg Total Bond Index||Stock returns – Bond Returns|
|Last 3 years||17.31%||5.50%||11.81%|
|Last 5 years||17.41%||3.17%||14.24%|
|Last 10 years||15.15%||3.32%||11.83%|
In this environment we have allowed our equity exposure to grow with market appreciation using fixed income interest to meet shareholder withdrawals. Our current equity exposure is now about 73% and fixed income about 27%. The investment question we deal with every day is, “Where do we best invest shareholders’ money?” Our projection, based on both the market and the Federal Reserve’s guidance, is that bonds will earn the current coupon of about 1.5%, and may even lose money over the next several years, but if we continue to allow our equity exposure to rise, can we still call ourselves a moderate allocation balanced fund? A related question is, how will we handle the inevitable stock market pauses (i.e. declines)?
Currently we are handling the bond issue by diversifying our holdings to include more specific maturity bonds and more high yield bonds. We began the use of these alternative fixed income holdings in May. They account for about 2.5% of total assets and make up about 20% of our total bond holdings.
Our outlook for the economy continues to be bright for the next two years, but we are facing growing uncertainties as the effects of the Covid stimulus begin to wear off and the impetus of the new fiscal policies advocated by President Biden begin to have an impact on economic activity. We will continue to have a high exposure to stocks, but at perhaps a slightly lower level. Changes in policy, as always, will be reported as soon as practical.