Article December 4, 2020

Retirement update – December 2020


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Key takeaways

  • Global equities experienced their strongest performance month of 2020, up over 10% with small cap and international developed markets leading the way.
  • Pension discount rates took one of their bigger monthly dives for the year, down 0.20%-0.30%, bringing the total discount rate decline relative to year-end 2019 to approximately 0.70%.
  • Despite the drop in discount rates, most pension plans will see an increase in funded status for the month, as equity gains more than offset liability increases. Year-to-date, pension plan funded status may actually be recovering to beginning of year levels.


November 2020 summary

Optimism abounds in the global financial markets as investors welcomed an end to uncertainty surrounding the US presidential election and favorable news from multiple COVID-19 vaccine developers. In addition, there is hope that fiscal stimulus negotiations in the US Congress are finally gaining momentum. The world appears hopeful for an economic recovery in 2021 which led to extremely strong equity performance in November, both in the US and internationally. Global equities outperformed the US, returning over 15% and the Russell 2000, an index of small cap stocks, had a record setting month returning over 18%.  Fixed income investments also had positive returns for the month.

For pension plans, the positive asset returns in November will be partially offset by liability increases resulting from a 0.20%-0.30% decrease in discount rates.  Although mid-to-long duration US Treasury yields were only down slightly for the month, credit spreads narrowed almost to pre-coronavirus levels, driving the decline in discount rates. The typical pension plan will see liability increases of 2% - 5% for the month.


Discount rates & asset returns

FTSE Pension Discount Rate Index - November 2020

Discount rates decreased by 0.28% in November, as the volatility in rates continues. Current rates are now down 0.72% since year end 2019 and are 2.0% lower than where they were at 2 years ago. The FTSE pension discount index finished November at 2.50%.


November returns (%)

Global equities rallied strongly after the US election, despite the absence of fiscal stimulus, and were further fueled by news of 3 efficacy trials suggesting coronavirus vaccine success. Within equities, this year’s biggest losers gained the most in November, European and value stocks. Fixed income also posted gains with longer-term treasury yields declining slightly and credit spreads continuing to narrow causing higher risk sectors like high yield and emerging market bonds to outperform.


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It seems apt that as post-Brexit trade talks between the UK and EU supposedly hang in the balance over the niche but highly emotive topic of fishing rights, I should explain how we seek to fish for our investments in less crowded waters to generate long-term value for clients.

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SECURITY INDICES: This presentation includes data related to the performance of various securities indices.  The performance of securities indices is not subject to fees and expenses associated.  Investments cannot be made directly in the indices.   The information provided herein has been obtained from sources which River and Mercantile LLC believes to be reasonably reliable but cannot guarantee its accuracy or completeness.
CONFIDENTIAL:  For addressee use only, not to be disclosed to any other person without express consent from River and Mercantile LLC.  Past performance cannot be relied upon to predict future results.  River and Mercantile LLC is an investment advisor registered with the US Securities and Exchange Commission.

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