Executive Director's Corner

August 2016 Update

August 10, 2016 at 2:08 PM

Market Analysis and PRIT Fund Performance
Markets were shaken following the June 23 referendum requiring the United Kingdom’s government to implement an “exit” the European Union trading block.  In the two days following the BREXIT vote, U.K. equities plunged 16%, European equities fell 10% and U.S. Equities fell 5%.  Safe haven assets, including long-duration U.S. Treasuries, rallied.

We learned two important lessons from Brexit.  First, don’t believe the London bookmakers — they were completely wrong. Entering June 23, the odds for a “remain” outcome were over 90%, despite close polling.  Why were the world financial markets paying such close attention to book makers and not the polling?  Lesson learned.

Second lesson: Remain calm and don’t overreact to any single event, however ominous it might seem. Believe in good portfolio construction to weather storms.  Following the sharp reaction to the vote, and after the shakeup of leadership in the U.K. government, cooler heads prevailed and markets rebounded strongly.  From June 28 to the end of July, U.K. equities rose 14%, European equities rose 11% and U.S. Equities rose 9%. Perhaps investors soon realized economic damage might be contained, it will take years for BREXIT to play out and other countries are unlikely to immediately follow suit.

Also, headlines continued to point to slow, steady, but unremarkable economic growth. Unemployment remained flat in July, U.S. manufacturing expanded for the fifth consecutive month, retail sales remained strong, housing starts rose sharply — and most important, the Federal Reserve left rates unchanged at its June and July meetings.  Additionally, markets anticipate a very low probability of a hike in September.  GDP growth was the most significant headline disappointment as the Commerce Department reported Q2 2016 GDP growth of only 1.1% compared to an estimate of 2.6%.  Perhaps the swift market rebound reflected the fact that slow, steady economic growth combined with low interest rates is really nothing new.

Despite the drama, market returns for the calendar second quarter were mostly positive and the PRIT Fund, which has been carefully designed to better withstand volatility in equity markets, performed well.  For the calendar second quarter, U.S. equities rose 2.5%, developed markets equities (Europe, Japan) fell 1.5%, emerging markets equities rose 0.7% and diversified bonds rose 2.2%.   A 60%/40% mix of global equities and bonds, a measure commonly used to compare pension fund performance, was up 1.5%, while the PRIT fund was up 1.9%.  Core fixed income, including our allocation to long-duration Treasury securities, was the strongest performing asset class for the quarter and performed in-line with expectations, consistent with the designed purpose of providing “portfolio insurance” in turbulent equity markets.

For the fiscal year ended June 30, 2016 the PRIT Fund net asset value stood at $60.6 billion.  The allocation to long duration Treasury STRIPS was the top contributor to absolute performance, up 30.1% for the year.  Private equity and real estate also were strong contributors, both up 12.2%.  Non-U.S equities and hedge funds were detractors. The PRIT Fund’s fiscal year performance was as follows:

  • For the one-year ended June 30, 2016 the PRIT Fund was up 2.3%, outperforming the total core benchmark of 1.5% by 84 basis points.
  • This return equates to an investment gain of $1.4 billion.
  • This outperformance equates to $514 million of value above the benchmark return.
  • Net outflows to pay benefits for the one-year ended June 30, 2016 were approximately $1.6 billion.
  • Five of the seven major asset classes outperformed their respective benchmarks.

Organizational Update
I am pleased to report the national recognition for PRIM and our talented staff continues.  On June 23, 2016 at a ceremony in New York City, Eric Nierenberg, Ph.D., Senior Investment Officer and Director of Hedge Funds and Low Volatility Strategies, was awarded Institutional Investor Magazine’s Hedge Fund Public Plan of the Year.  The award recognizes innovation, achievements and contributions to the industry over the past year.  Eric’s work on managed accounts, replication and alternative risk premia harvesting was cited.

Also, at a ceremony in Boston on July 20, Sarah Samuels, CFA, Deputy Chief Investment Officer, received Banker and Tradesman’s “Women of Fire” award.  The award recognizes the most talented, ambitious and innovate women in key sectors of the economy.

Last, Michael Bailey was recently nominated for the Investor Intelligence Award for excellence in Private Equity.  The award recognizes the most outstanding and innovative public plan strategies in North America.

We would also like to welcome the newest member to join the PRIM Staff.  George Tsipakis joined PRIM on July 11, 2016 as Manager of Real Estate and Timberland Accounting, replacing Cathy Hodges, who was promoted to Senior Financial Manager.  George joins us from Liberty Mutual Investments where he served as an Operations Manager.  Prior to that, George was a Trust Officer for BNY Mellon, where he was a member of the team that serviced the PRIM account.

Please join me in congratulating these outstanding individuals. 


Tags: PRIT Updates
Category: Updates