Executive Director's Corner

February Update 2019

February 28, 2019 at 8:47 AM

Market Performance Summary
The S&P 500 was down 13.5% in the fourth quarter of 2018, developed international markets were down 12.5% and emerging markets were down 7.5%. A 60/40 mix of global stocks and bonds was down 7% in the fourth quarter.  The PRIT Fund fared better but was down 6%.  For the calendar year 2018, the S&P 500 was down 4.4% and a 60/40 mix of global stocks and bonds was down 5.6%.  The PRIT Fund was down only 1.8% for the calendar year.

In December, the S&P 500 was down 9%, marking the worst month in the markets since the Global Financial Crisis (GFC).  October was almost as weak with the S&P 500 down 6.8%.  The markets experienced similarly large sell-offs most recently in September 2011 and May 2010 when the S&P 500 was down 7% and 8%, respectively. Volatility also increased during the quarter. The volatility index known as the VIX, spiked to more than 36 in December after reaching a low of 11 in August.  This compares to a five-year average of approximately 15.

Quarterly sell-offs of this magnitude are not very unusual. There have been 23 large quarterly losses since the Great Depression, specifically 23 in approximately 90 years.  This equates to a large sell-off occurring approximately once every four years.  Since it has been seven years since the last large quarterly sell-off, perhaps the markets were due for a correction. If there is a silver lining, we have been preparing the PRIT Fund for some market weakness.  As a reminder, we have reduced our global equity position from 50% eight years ago to a target position of 39% today.

We have identified risks in the market during the last several quarters and have compared the current economic picture to that experienced during mid-2014 through early-2016, when there was a global economic slowdown that led to a correction in world financial markets. We explored the past four major market corrections since 2000 and have noted that all corrections occurred with an economic slowdown or even a contraction.  We have highlighted some visible signs that global growth is slowing.  While the U.S. economy is still relatively strong, albeit slowing, Europe, China and Japan are slowing to a point where we’re beginning to worry about contraction. Even in the U.S. economy, manufacturing is weakening, retail sales are weak, housing is weak, consumer confidence has eroded from an 18-year high, industrial material prices are weak and dollar liquidity is tight.  Tariffs and trade tensions could negatively impact global growth as well.  However, there were vulnerabilities in the global economy before there were tariffs.  Earnings growth could also prove to be a formidable headwind for equity markets.  With approximately half of the S&P 500 companies reporting earnings, growth rates are well below the 20%+ growth rates posted in the second and third quarters of 2018 and are expected to slow considerably throughout 2019.

Lastly, political gridlock has become a reality and most think it will last for at least another two years. We have recently endured one of the longest government shutdowns in history as Congress and the President attempted to work out border security and immigration policy differences. The issue will likely be something the courts will decide. President Trump warned of a “war-like” atmosphere in Washington during the midterm elections, and both sides have delivered. 

Although we have reduced our global equity position from 50% eight years ago to a target position of 39% today and have increased our exposure to risk-reducing assets, it is important to emphasize that the PRIT Fund is not completely immune to a downturn in global equities.  To achieve our long-term target rate of return of 7.35%, the Fund must focus on growth and equity.  The PRIT Fund’s strong performance in up markets, such as fiscal year 2018 and calendar year 2017, combined with our strong outperformance in down markets, such as calendar year 2018 and fiscal year 2016, gives us confidence that our investment program is performing as intended. 

PRIT Fund Performance Summary
In this environment, the PRIT Fund has performed well:
As of December 31, 2018, the PRIT Fund net asset value stood at $69.3 billion. For the one-year ended December 31, 2018, the PRIT Fund was down 1.8%, (-2.3% net), outperforming the total core benchmark of -2.3% by 43 basis points (0 bps net).

  • This performance equates to an investment loss of $1.6 billion, net of fees.
  • Net total outflows to pay benefits for the one-year ended December 31, 2018, were approximately $1.0 billion.


Organizational Update

In December we announced six promotions. It is extremely satisfying for me to recognize and reward talented staff members whose work enables us to remain a leader in our industry.

Andre Abouhala was promoted to Investment Officer. Andre joined PRIM in 2014 as an Investment Analyst and has become a valuable resource to the Public Markets team, most recently leading the U.S. micro-cap research and becoming the team’s expert in utilizing the eVestment manager database, FactSet portfolio analysis and the PCS team’s proprietary quantitative tools. Andre also earned an MBA from Boston University this past May. Andre will continue to expand his responsibilities in manager monitoring and investment analytics, reporting to Dave Gurtz. 

Alyssa Fiore, CFA was promoted to Investment Officer. Since joining the Private Equity team in 2016 as an Investment Analyst, Alyssa has made valuable contributions supporting new fund commitments to existing managers, analyzing new investment managers and expanding PRIM’s co-investment program. Alyssa also supported the team’s growth equity research and investment underwriting. Alyssa earned a CFA Charter in November 2017. As an Investment Officer reporting to Mike Bailey, Alyssa will now also have responsibilities for manager monitoring and relationship management. Additionally, she will have a leading role in Private Equity investment research.

Andrew Gromer, CFA was promoted to Investment Officer. Andrew joined the Public Markets team In October 2016 as an Investment Analyst supporting fixed income investments. More recently, he has also supported the Private Equity team. Andrew is responsible for PRIM’s “State of the Industry” research project, which will help guide PRIM’s long-term investment strategy. He has participated in several investment industry conference panels where he has spoken on fixed income topics. Andrew earned a CFA Charter in November 2017 and was recently appointed to Chair the CFA Boston Young Leaders Committee. Andrew will report to Dave Gurtz and will continue to expand his responsibilities in manager monitoring and investment analytics.

Bill Li, CFA, CAIA was promoted to Senior Investment Officer – Director of Portfolio Completion Strategies (PCS). Bill joined the Strategy team in 2016 as an Investment Officer and was promoted to Senior Investment Officer in 2017. Bill has expanded and refined PRIM’s distinctive suite of analytical tools, manager sourcing processes, idea generation and portfolio construction across several asset class teams. He combines impressive thought creativity and ingenuity with strong technical skills and conceptual understanding. Bill spearheaded the creation of PRIM’s hedge fund emerging manager program negotiating new mandates with several hedge fund managers. In addition, he researched and deployed PRIM’s innovative and successful equity hedge program utilizing a put spread collar package of trades. Bill will continue to report to Eric Nierenberg and have responsibility for the oversight of the entire PCS portfolio.

Christina Marcarelli, CAIA was promoted to Senior Investment Officer. Christina joined the Real Estate and Timberland team as an Investment Officer in 2016 with expertise in asset management, acquisitions and development projects. Christina has been extremely productive since joining PRIM and this past year she successfully led the private real estate RFP process, which resulted in awarding $1 billion to three real estate investment managers. She also contributed to the team’s direct investing platform and portfolio management research. Christina’s collaboration with the PRIM Public Markets and Strategy teams has enabled PRIM to expand investments in the Other Credit Opportunities allocation. Additionally, Christina has earned the CAIA charter. Reporting to Tim Schlitzer, Christina will have increased responsibility for manager and property oversight throughout the entire Real Estate and Timberland portfolio.

George Tsipakis was promoted to Director of Investment Operations. George joined the Investment Operations team in 2016 as Manager of Real Estate and Timberland reporting. He has quickly demonstrated the analytical skills necessary to enable the team to innovate, particularly in the real estate direct investing platform. George also restructured PRIM’s investment cash operations and improved the team’s investment support capacity. George will report to Matt Liposky and manage a team of four finance and operations professionals responsible for asset class reporting.

I would like to recognize Morgan Burns, CFA, CPA on the accounting team who appeared on the television show Jeopardy recently. It is a very selective group of participants who make it to the television rounds. Contestants must first take an exam and have an in-person screening which includes playing a test round. His results were impressive, admirably finishing in second place. This is no easy feat.

Investment Performance Reporting Milestone
I am pleased to announce that PRIM has adopted the CFA Institute’s Global Investment Performance Standards of integrity and transparency, effective January 1st. This performance standard is commonly known as GIPS.

GIPS are universal, voluntary standards based on the fundamental principles of full disclosure and fair representation of investment performance. Many asset owners require their investment managers to comply with the GIPS standards, however it is less common for asset owners such as PRIM and other large public pension funds to apply the principles in their own performance reporting to governing bodies and plan beneficiaries. More than 1,700 asset managers worldwide are GIPS compliant, however PRIM is now one of only a handful of large public pension plans to comply with GIPS.

The GIPS standards are an important part of our commitment to maintain the highest level of integrity and transparency possible. We are proud to be part of the CFA Institute’s goal to bring about an ethical, global reporting standard.


Tags: PRIT Updates
Category: Updates