Fourth Quarter 2017 Update

March 09, 2018

Markets Performance Summary
The final quarter of 2017 was strong, and it capped an outstanding year in the financial markets. In 2017, domestic equities rose 21.8%, developed international equities rose 25%, and emerging markets equities rose 37.3%. The moderate improvement in global economic indicators during the year failed to produce a corresponding increase in interest rates and inflation, and as such, diversified bonds rose 3.5% and long duration bonds rose 13.7%.

While global economic indicators have improved, we still monitor several risks in the market, many we first identified more than a year ago. The economic cycle is more than 9 years old and there are many uncertainties ahead – the impact of tax reform, the debt ceiling, federal budget appropriations, North Korea, immigration reform, currency manipulation, tariffs and trade agreements, to name a few. We believe that our carefully constructed, diversified portfolio is appropriate for this environment and we are very proud of our strong performance in 2017 even while, for the last five-plus years, we have systematically de-risked our portfolio. The asset allocation recommendations approved by the Investment Committee in January are a modest evolution of the path we have been on for the past several years and our top core beliefs that guide our investment decisions are as follows:

  1. We are guided by our mandated rate of return, the actuarial rate of return, which currently is 7.5%.  That makes it necessary to have a relatively aggressive portfolio with significant equity risk.
  2. We make sure that every active manager we hire has skill, and we have developed tools to identify managers with skill.  We only pay active fees for managers with skill – an attractive manager will produce strong returns that cannot be explained by persistent factor tilts.
  3. We believe that any investment must be evaluated on three equally important parameters: risk, return and cost.  Too often, especially in years like we just had, investors are focused more on return than they are on risk and cost.
  4. We value a basis point of cost reduction more than a basis point of return.  Why?  We can count on cost savings every year, but nobody ever really knows what the markets will deliver.
  5. Nobody can predict the future, so we don’t try.
  6. Nobody can predict the stock market, so we don’t try.
  7. Every strategic decision we make on asset allocation complies with our “do no harm” rule.  We try to find assets or strategies that improve the risk/return profile of the entire fund.

PRIT Fund Performance Summary
In this environment, the PRIT Fund has performed well:

As of December 31, 2017, the PRIT Fund net asset value stood at $71.9 billion. For the one-year ended December 31, 2017, the PRIT Fund rose 17.7% gross (17.2% net), outperforming the total core benchmark of 14.9% by 281 basis points (232 bps net).

  • This performance equates to an investment gain of $10.8 billion, net of fees.
  • This outperformance equates to $1.4 billion of value above the benchmark return, net of fees.
  • Six of the seven major asset classes outperformed their respective benchmarks.
  • Net total outflows to pay benefits for the one-year ended December 31, 2017, were approximately $1.4 billion.

Organizational Update
Bill Li, CFA, CAIA on the Portfolio Completion Strategies team was promoted to Senior Investment Officer. Bill was hired in May of 2016 as an Investment Officer and has been an extremely hard-working and valuable member of the investment team focused primarily on developing innovative initiatives from PCS and Strategy, including Alternative Risk Premia Harvesting strategies, the hedged equity program and asset allocation. With Eric Nierenberg, Ph.D., he is also responsible for ongoing due diligence and manager sourcing in our Hedge Fund portfolio. Bill has a Master’s degree in economics and finance from Brandeis and a Bachelor of Science degree from Dongbei University in China.

Maria Garrahan joined PRIM in January of 2018 as an Investment Officer. She reports to Eric Nierenberg and joins Bill Li on the Portfolio Completion Strategies team. Maria joins PRIM after 2½ years at Columbia Threadneedle Investments as a research analyst focused on global asset allocation. Her prior experience includes working as a research assistant for Professor Ken Froot of the Harvard Business School where she focused on factor-based investment techniques, an element of investing that is becoming increasingly important to us at PRIM.  Maria holds a Master’s degree in applied economics from Northeastern University and a Bachelor of Arts degree in economics, magna cum laude, from Eastern Connecticut State University.

Ed Caron joined PRIM in November of 2017 as an Investment Operations Analyst. He will work on accounting and reporting on PRIM’s private investments. Ed joins PRIM from BNY-Mellon, where he serviced two large public plans; and before that, he worked at State Street Bank. Ed is a graduate of UMass-Amherst, from which he holds a Bachelor of Arts in finance.

Alyssa Fiore, a member of PRIM’s private equity team, and Andrew Gromer, a member of the public markets team, received their CFA Charters in November. This is a major accomplishment that requires passing three difficult exams over three years and working for four years in the investment sector. This brings the number of PRIM investment staff who have earned their CFA Charters to nine. That’s about two-thirds of PRIM’s investment staff.

Christina Marcarelli, Investment Officer – Real Estate and Timberland, has volunteered to lead PRIM’s diversity initiatives. PRIM recognizes the value of diversity of thought in decision-making and of having a diverse staff.  We are excited to have Christina continue a long legacy of recruitment and retention programs aimed at diverse employees. Christina has played an important role in direct real estate investments and in performing in-house analysis of real estate markets and due diligence on PRIM’s real estate holdings.