Posted: October 15, 2008
Since it's inception in 1972, the MEBT Trust has weathered periods of high inflation and significant market downturns. But these market conditions pale in comparison to the events that have unfolded over the past several months.
Because the market crisis developed in the credit markets, investor confidence was undermined not only in the stock markets, but also in the bond markets. As a result, investments were negatively impacted across the board.
Some participants have asked why the MEBT Trust Committee did not anticipate or react to the rapid market decline. First, MEBT, like most retirement plans in the US, does not believe that that the magnitude and breadth of this unusual market could have been anticipated. As to reacting to declining markets it is important to understand that MEBT is made up of many different investments and that MEBT's investment actions are guided by an Investment Policy Statement (IPS).
The IPS is in place to help the MEBT Trust manage through all kinds of market conditions. It is very well documented that attempting to time the market is most often a losing proposition. For example, if MEBT had tried to move out of the equity market last week to avoid losses, the Trust would have ended up selling "low" and then having to buy "high" after the markets rebounded on Monday.
Key principles of the MEBT IPS include:
- Manage with a long-term investment horizon
- Diversify to attempt to control the volatility
- Capture up-side and try to minimize down-side
- Use a balanced portfolio 40% fixed income (bonds) & 60% equities (US/international stocks)
The mix of MEBT investments is carefully selected in an attempt to meet these goals. To that end, MEBT did not have any direct exposure to mortgage backed securities. Unfortunately the market downturn was not limited to this narrow sector. Ultimately the crisis in the credit markets led to the recent, unprecedented market downturn.
MEBT is a prudently managed long-term investment. The MEBT Committee will continue to monitor performance and communicate with participants. Trust Committee Chair John Backman reached out to participants on October 6 with a letter explaining MEBT's approach to turbulent markets along with an FAQ.