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P-Solve Monthly Retirement Update

May 2018

Key Takeaways:

✔ Discount rates increased in April; the US 10 year Treasury yield touched the symbolic level of 3% for the first time in 4 years!

Market volatility continued through April with geopolitical factors like the prospect of a trade war between the US and China, tensions between the US and Russia over Syria, and the uncertainty of the Iran nuclear deal. These tensions were somewhat offset by a positive earnings season and strong fundamentals.

✔ Funded status should have increased in April due to the positive equity returns and higher rates.

April 2018 Summary

The rise in discount rates during the month will decrease liabilities for most plans.  This, combined with a flat US equity market across the month, will have the majority of plans seeing an improved funded percentage.

Discount Rates & Asset Returns

Discount rates bounced back from a small dip last month by rising 0.12% in April, putting rates in-line with rates at this time last year and up nearly 0.50% since the end of 2017.

US equities eked out a modest return of 0.4% while developed markets increased 2.3%. A perception of inflationary risks started to build and interest rates increased, causing US aggregate bonds to decrease 0.7%. Commodities were the strongest performers as oil prices increased 7% during the month.

What’s New at P-Solve?

P-Solve Speaks at the UCS Mid-Sized Retirement & Healthcare Plan Management Conference in New Orleans

P-Solve director, Michael Clark, spoke at the most recent UCS Mid-Sized Retirement conference in New Orleans on pension plan management and what P-Solve believes to be the three pillars of successful plan management; Investment Strategy, Liability Management, and Plan Administration and Governance.

If you are interested in learning more about his presentation or attending any of the upcoming UCS Mid-Sized Retirement conferences please email michael.clark@psolve.com for more information and to receive a UCS Mid-Sized Retirement & Healthcare Plan Management Conference discount code.

Ask P-Solve!

Q:

Should I be concerned by the recent volatility in equity markets and what can I do to reduce my exposure to equity markets falling further?

A:

Equity market volatility has picked up significantly since the end of January. Equity markets had been on one of the longest winning streaks, in terms of months of positive returns, in recent history. We regard this situation as a return to a more normal level of equity market volatility, which had been artificially low over 2017, rather than a sign of an imminent recession. That said, we remain cautious regarding the level of equity market volatility and further turmoil is certainly possible.

Sponsors who wish to reduce the impact of equity market falls on their pension plans essentially have three options:
– Sell equities and hold more cash or bonds
– Diversify away from equities into other return seeking asset classes
– Use equity derivatives to protect their portfolio from market falls.

Each solution has pros and cons. The right solution will be plan specific and will depend on things like the funded status, importance of maintaining expected return and how long the plan is expected to be around before termination.

Have a question for P-Solve? Please submit it to usa@psolve.com and look for a possible answer in next month’s update!

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.