First Quarter 2020 Update

May 27, 2020  

Market Update
The first quarter of 2020 was unlike any we have seen, and it presented challenges in both the economy and our everyday lives. As expected, the markets have reflected some of the economic challenges. For the calendar year through May 19, 2020, the S&P is down 7.3%, developed international markets and emerging markets are down approximately 16%. Diversified bonds are up 5% for the year, while long bonds are up 29% for the calendar year as yields have plummeted. The 10-year Treasury is currently yielding approximately 0.68% – a year ago, it was yielding approximately 2.5%.

The market correction in March 2020 was the fastest on record going back to the Great Depression in the ‘30’s. In just 20 days, equities fell 34%, which may have been the quickest drop in history, but it was not the deepest. That record still belongs to the fall during the Great Depression when stocks fell 86% over 34 months. The recovery is one of the fastest and steepest with the S&P is up 33% since the lows on March 23rd.

Despite the recent rebound, we believe the bear market will continue. We examined 14 major market selloffs since the Great Depression, and on average, significant sell-offs last 20 months, not 20 days, like the March 2020 selloff. The economic damage is severe, and the challenges this economy faces in rebounding from very low levels are enormous and are expected to take some time.

Some believe that the S&P’s 7% decline does not fully capture the economic damage, which may be partially due to the unprecedented size and scope of the federal stimulus package. While the hope is that the stimulus will be enough to help the economy rebound quickly, we do not build a resilient portfolio based on hope. We believe that until the economic outlook comes into focus, we can expect some continued volatility.  The stay-at-home-advisories and the business/workplace shutdowns have caused an abrupt decline in economic activity, and the data may just be beginning to reflect it. Most of the economic data reported in March and April has been very poor.  For example, GDP growth shrank at an annualized rate of 4.8% in the first quarter as the nation’s unemployment rate hit a record 14.7% with more than 36 million people filing for unemployment benefits since the beginning of the shutdowns – that is equivalent to nearly a quarter of the working-age population.  It was recently reported that the unemployment rate in Massachusetts could reach 25%, as nearly one million people have filed jobless claims.

Industrial production in the U.S. fell 11.2% from a month earlier in April, its largest drop in the 101-year history of the index, which represents a 45% drop quarter over quarter, annualized.  Retail sales sank 16.4% in April from a month earlier, its sharpest decline ever, representing a 60% decline quarter over quarter, annualized.  And housing starts plummeted 30% month over month, while building permits declined 20%

PRIT Performance Summary
While the first quarter of 2020 was very challenging from an economic standpoint, we are pleased that under these unprecedented conditions that the Fund performed relatively well. The PRIT Fund, while down almost 10% as of March 31, 2020, fared well compared to its benchmark, the financial markets, and its peers. As a point of comparison, according to the Wall Street Journal, Q1 2020 was the worst quarter on record for public pension plans, which lost a median 13.2% in the first quarter based on analysis from the Wilshire Trust Universe Comparison Service.

While we recognize that we’ll face more challenges in the months and perhaps in the years ahead, our asset allocation decisions are designed to enable the PRIT Fund to perform strongly in both up, and perhaps more importantly, down markets. Over the past several years, we have implemented several timely asset allocation decisions designed to reduce the overall risk of the portfolio and maximize its risk-adjusted return, while still delivering on our long-term return goal. For example, PRIM reduced its Global Equity exposure from a midpoint of 50% five years ago to a midpoint of 39% today, and we also added several risk mitigation strategies over the last few years. The result is a carefully constructed, broadly diversified portfolio that we expect will perform well over the long-term. The entire team is hard at work during this crisis, continuing to identify and vet new investment opportunities every day in order to maintain a strong, resilient portfolio. At the May 21st Board meeting, the Board approved more than $1.3 billion in new opportunities for the Fund – proof that the PRIM staff and our committees are still very productive. Market dislocations happen, and they are painful, but these dislocations also create opportunities. For example, at the May Board meeting, we received approval for an investment opportunity that will enable PRIM to be among the first participants in the newly created Term Asset-Backed Securities Loan Facility (TALF) program, which allows us to utilize favorable government funding vehicles to help ensure credit is flowing to the highest quality AAA-rated companies. Not only is it an excellent opportunity for the PRIT Fund, but it also serves an important purpose for the nation by supporting the flow of credit to consumers and businesses.

We believe we have worked hard to position the PRIT Fund appropriately for what lies ahead, but as we discussed at the recent Board meetings, this is a global crisis, and it has presented a very large economic hole to dig out of. As always, we will continue to adhere to our disciplined, long-term investment focus during this historical time, and also look for opportunities caused by market dislocations.

Organizational Updates
PRIM is fully functional with all employees working remotely, and all functions operating as close to normal as possible.  As you know, Governor Baker recently announced a four-phase reopening plan for the Commonwealth. As part of that plan, office spaces in the City of Boston will be permitted to reopen on June 1st with significant limitations. Based on the Governor’s directives and guidance, as well as guidance from the Treasurer, the Mayor, the CDC, the state Department of Public Health and our building manager, PRIM is working on a plan to gradually bring employees back to the office and ensure that the required and appropriate safety standards and protocols are in place when they return. As we start to transition to slowly reopening our office, we will take into consideration both the business needs of PRIM and the needs of each employee, for example, childcare issues, health issues, commuting issues, and the like.  In April, we were very sad to learn of the passing of Peter Brooke, who served for nearly a decade on the PRIM Investment Committee. Peter is considered a legendary private equity figure both here in Boston and throughout the world, having founded two of the industry’s oldest and largest firms, TA Associates and Advent International. Peter’s service to PRIM was exceptional, and he will be missed.  On a personal note, my time at PRIM did not overlap with Peter, but he took the time to meet with me several times and was always a great help to me. Our thoughts and prayers are with his family.  In PRIM Board news, we are pleased to announce that both Robert Brousseau and Paul Shanley won their respective elections and each has been reelected to start a new 3-year term on the PRIM Board on July 20, 2020. Bob for the Mass Teachers’ Retirement System and Paul for the State Employees’ Retirement System. Both have been outstanding contributors to PRIM for quite some time, and we are delighted to have them serve another term.  I am very excited to welcome four new employees to PRIM, who were all in the pipeline before we started working remotely. The new employees include:

Joy Seth joined PRIM as an Investment Officer on the Portfolio Completion Strategies team in March. Previously Joy worked as Senior Investment Analyst at the Employees Retirement System of Texas, responsible for building machine learning models and developing a back-test engine for option-based strategies. Prior to that, Joy was an engineer at Microsoft Corporation. Joy graduated from the University of Washington with a master’s degree in Computational Finance, and holds a bachelor’s degree in Electrical and Computer Engineering from the University of Texas, Austin.

Silas Owoyemi joined PRIM in March as a Helpdesk and Operational Support Specialist on the IT team. Silas previously worked as a Network Engineer at Ocean Spray and was responsible for planning and maintaining their data network and infrastructure. Prior to that, Silas was a Senior Support Specialist at Alkermes Biopharmaceutical Company.  Silas holds a bachelor’s degree in Mathematics from the University of Ilorin in Nigeria.

Michelle Witkes joined PRIM in March as Director of Human Resources. Michelle brings extensive Human Resources experience. Michelle previously worked at Beacon Health Options (a division of Anthem) as their Vice President, Human Resources, and at Enterprise Associates, LLC, as their Director of Human Resources. During her career, Michelle has been responsible for all HR related functions from strategic HR leadership to tactical employee support. Michelle holds a bachelor’s degree in Human Services and Psychology from the University of Massachusetts, Amherst.

Beth Herlihy joined PRIM as Director of Communications in May.  Beth brings extensive communications experience, having served as Head of Marketing Communications at AEW Capital Management for 12 years. Since leaving AEW in 2016 to attend graduate school full time, Beth has worked as a marketing communications consultant. Her most recent assignment was with Advent International. Beth has more than 20 years of experience in strategic marketing, public relations, branding, investor communications, and business development. Beth holds a bachelor’s degree in Political Science from the University of Vermont and a Master of Fine Arts in Creative Writing from Emerson College.