Executive Director's Corner
April 2016 Update
April 06, 2016 at 9:42 AM
Market Analysis and PRIT Fund Performance
Recent troubling events globally have highlighted the inability of investors to control factors that can affect markets significantly. At PRIM, we remain comfortable with the “all-weather” portfolio construction of the PRIT Fund – a portfolio we have designed to be resilient in times of stress, but also high-performing in good times.
As you know, market returns in calendar year 2015 were generally weak as concerns mounted for decelerating global economic growth. For several years prior to the correction, we systematically adjusted the PRIT Fund’s asset allocation to reduce the Fund’s volatility.
Changes to strategic asset allocation included reducing the Global Equity target allocation from 49% to 40%; adding long-duration Treasury STRIPS (our #1 performing public markets asset class in FY 2015 and again in Q1 of CY 2016); and adding low-volatility, diversifying Portfolio Completion Strategies. Additionally, our continued exposure to alternative investments such as Private Equity, Real Estate and Timberland provided significant performance stability.
The results have validated those decisions.
At our last Board meeting on February 2, 2016, markets were in the midst of a significant correction as fears of economic and geopolitical risk mounted. At the time, there was plenty of economic data to support those fears. Since mid-February, however, data on the margin has improved and the markets have responded. In the words of PRIM Investment Committee member and resident economics expert Connie Everson: “People’s worst fears for economic slowdown have not been confirmed.” We believe that is indeed the case but we also acknowledge that we are not completely out of the woods. We therefore remain comfortable with the current posture of the PRIT Fund.
Getting into a little more detail about the environment in which we find ourselves, crosscurrents in economic data are still plentiful.
On the positive side, the seasonally adjusted U.S. GDP growth rate for CY Q4 2015 has twice been revised upward from an initial rate of 0.7% to a growth rate of 1.4%. Labor markets have improved, wages are stabilizing or even accelerating, the manufacturing sector is improving (albeit from a low level), oil and other commodities are rebounding, construction spending was up in February and G-20 countries around the globe are launching new stimulus programs. Our own Federal Reserve Bank has dialed back its projections of rate hikes.
On the more-cautious side, calendar year first-quarter corporate profits are expected to come in 7% below last year’s levels; retail sales have been weak; mortgage applications are down; and uncertainty is mounting in the Eurozone as a number of countries have entered the uncharted territory of negative interest rates. The potential the U.K. will exit the European Union through a June referendum is troubling.
As of February 29, 2016, the PRIT Fund net asset value stood at $57.9 billion.
For the one-year ended February 29, 2016, the PRIT Fund was down 3.6%, outperforming the total core benchmark of -5.6% by 198 basis points.
- This performance equates to an investment loss of $2.2 billion and equates to $1.2 billion of value above the benchmark return.
- Four of the seven major asset classes outperformed their respective benchmarks.
- Net total outflows to pay benefits for the one-year ended February 29, 2016, were approximately $1.6 billion.
For the calendar year through February 29, 2016, the PRIT Fund was down 2.5%, outperforming the total core benchmark of -2.6% by 19 basis points.
- This performance equates to an investment loss of $1.5 billion.
- This outperformance equates to $113 million of value above the benchmark return.
- Five of the seven major asset classes outperformed their respective benchmarks.
- Net total outflows to pay benefits for the CYTD ending February 29, 2016 were approximately $273 million.
I am very pleased to announce that Deborah Coulter has returned to PRIM. Many of you will recall that Deb was our Director of Finance and Administration before leaving a few years ago to join the The Baupost Group as assistant controller. She also spent over 15 years as controller, compliance manager and manager of human resources at Essex Investment Management earlier in her career. In what I see as another validation of the work we are doing at PRIM, we were able to convince Deb to re-join us -- this time as Director of Strategic Initiatives on the Finance and Operations team. Deb will report to David Gurtz and help us with compliance, processing of public records requests, proxy voting, human resources and additional initiatives you will hear about soon.
Also, I am very pleased to announce PRIM’s executive assistant, Amaran Soja, has passed the CFA Institute’s Claritas exam. The CFA Claritas program provides a comprehensive understanding of finance, ethics and the investment industry. Amaran joins more than 20 PRIM colleagues who have similarly studied for and passed the Claritas exam. Please join me in congratulating Amaran.