First Quarter 2018 Update
May 25, 2018
Markets Performance Summary
U.S. GDP growth slowed to 2.3% annualized in the first quarter of 2018 from 2.9% in the final quarter of 2017, a slight disappointment. Consumption growth was weak in the quarter, despite a surge in real disposable income, causing some economists to question the extent to which the recent tax cuts have stimulated any meaningful boost in business activity, but it may still be early. Recent business surveys and some data, such as a sharply lower March Purchasing Managers Index (PMI), suggest that advanced economies lost momentum at the beginning of 2018, but the US Federal Reserve (Fed) is still confident in the near-term economic outlook and have been more focused on the strong employment numbers (low unemployment), some first signs of wage growth, and a stronger than anticipated pick-up in inflation, the personal consumption expenditures (PCE) having hit 1.9% in March. Consensus is for three Fed Funds rate increases this year and a few economists are projecting four.
Financial markets do not typically respond well to rising interest rates and tighter monetary policy, especially if the data doesn’t consistently confirm an expansion. Add to that the continued geopolitical concerns around a possible trade war with China and other trading partners, reciprocal tariffs, possible renegotiation or termination of the Iran nuclear pact, negotiations to denuclearize North Korea, and other stresses in the middle east, and it is easy to understand why volatility spiked and the markets sold off in Q1. Perhaps this sell off was due, or even past due, after an outstanding year in 2017 and a strong start to the year in January.
In the first quarter, domestic stocks were down, developed international equities were down and bonds were down as yields and interest rates continued to rise modestly. A 60/40 mix of stocks and bonds, a common benchmark for diversified portfolios, was down more than 1% in the quarter. The lone bright spot was in Emerging Markets (EM) equities, which were up 1.3% in the quarter. Our commitment to EM equities served us well, as it was the only equity sleeve that wasn’t cut earlier this year in our asset allocation decisions.
PRIT Fund Performance Summary
In this environment, the PRIT Fund has performed well:
As of March 31, 2018, the PRIT Fund net asset value stood at $71.6 billion. For the one-year ended March 31, 2018, the PRIT Fund rose 12.9% gross (12.5% net), outperforming the total core benchmark of 10.5% by 240 basis points (192 bps net).
- This performance equates to an investment gain of $8.1 billion, net of fees.
- This outperformance equates to $1.2 billion of value above the benchmark return, net of fees.
- All seven major asset classes outperformed their respective benchmarks.
- Net total outflows to pay benefits for the one-year ended March 31, 2018, were approximately $1.5 billion.