First Quarter 2019 Update
May 17, 2019
Market Performance Summary
Worldwide markets rebounded strongly in the March 2019 quarter from the weak December 2018 quarter. The PRIT Fund was up 6.4% gross of fees in the March 2019 quarter (6.3%, net), a strong reversal from the 6% loss in the December 2018 quarter. Volatility, as measured by the VIX, spiked to 36 in December 2018 after bottoming at 11 in August 2018, and is now at approximately 12.7, below the 5-year average of 14.9 and the 10-year average of 18.5. The reversal was in part due to optimism on normalizing trade relations with China and news that the U.S. Federal Reserve will curtail interest rate hikes. Additionally, a stream of more positive economic news propelled the markets higher from the doom and gloom that prevailed at the end of last year.
However, we believe some of the headline figures belie some still cautious signals. For example, the GDP report of 3.2% growth in the first quarter was well above the consensus expectations of 2.0%, and a positive headline surprise of this magnitude is always well-received, but the three largest drivers of the strength are expected to reverse in coming months. Net exports, the largest positive surprise in the report, added 1% to GDP growth in Q1 as exports exceeded imports, but with the backdrop of a still slowing global economy, this is not likely to continue. Also, some think last year’s imposition and threats of new tariffs on imports caused an acceleration of import activity in the preceding quarters. In other words, weaker imports in the quarter may have been a reversal of the unusually high import activity in the preceding quarters. GDP growth was also enhanced by inventory building and by an increase in government spending, which are unlikely to be sustained. Stripping out these positive yet transitory contributors and underlying GDP growth was approximately 1.4%.
Additionally, first-quarter corporate earnings have been strong with more than 80% of companies exceeding estimates. However, 80% of the companies are also forecasting a slowdown in future quarters. Last, the bond markets, which are a strong indicator of investors’ long-term economic expectations are far less sanguine. Bond yields are lower, which means that investors are becoming more pessimistic about long-run economic prospects. For example, the bellwether 10-year Treasury yield of 2.5% compares to 3% one year ago, down 50 basis points. This is not what we would expect to see in a strengthening economy. In fact, more telling is that some forecasters think the next move of the U.S. Federal Reserve will be to lower, not raise interest rates.
While we are generally pleased with some of the bright spots in economic news, we continue to remain cautious about the strength of the global economy and we believe the PRIT Fund is appropriately positioned for the uncertainty ahead.
PRIT Fund Performance Summary
As of March 31, 2019, the PRIT Fund net asset value stood at $73.1 billion. For the one-year ended March 31, 2019, the PRIT Fund was up 3.8% (3.4% net), underperforming the total core benchmark of 4.3% by 49 basis points (93 bps net).
- This performance equates to an investment gain of $2.4 billion, net of fees.
- Net total outflows to pay benefits for the one-year ended March 31, 2019, were approximately $956 million.
For an unprecedented fourth year in a row, PRIM has been nominated for “Public Plan of the Year” at the Institutional Investor Hedge Fund Industry Awards, to be held in New York on June 27, 2019. PRIM won this award in 2016. The other nominees this year are Ontario Municipal, New Mexico, Wisconsin, Texas Teachers, and Illinois Teachers.
PRIM continues to receive recognition for its innovative hedge fund program that produces very high risk-adjusted returns while saving approximately $100 million annually on hedge funds fees. PRIM led the industry with the use of direct hedge fund investments replacing fund-of-funds. We also lead in our pursuit of separately managed accounts (SMA’s), which give us complete transparency, more control, and lower fees than commingled funds that are the norm for most investors. SMAs now comprise more than 75% of the PRIT Fund’s hedge fund assets. PRIM’s SMA program and more recently, our Emerging Manager Program are being emulated by peers across the globe.
Last month, PRIM’s PCS Director Bill Li was inducted into the EQDerivatives Investing Hall of Fame, which “recognizes those individuals that have led the line in volatility and alternative risk premia thought leadership.”
We announced his promotion last cycle, but this cycle we announced that Andrew Gromer, Investment Officer on the Public Markets team, was recently accepted into the Yale School of Management and will be leaving PRIM this summer to begin the MBA program. We are happy for Andrew and support his pursuit of higher education, but at the same time, we are sorry to see him go. He has been a valuable employee on the Public Markets team and more recently he has been a valuable contributor to the Private Equity team.
We also announced that in March, Alyssa Fiore, Investment Officer on the Private Equity team, resigned to accept a position at JP Morgan. Alyssa joined the Private Equity team in 2016 as an Investment Analyst and was promoted last year. Alyssa was a valuable contributor to our fund underwriting effort and she helped manage the co-investment program. Alyssa’s potential was well-recognized in the industry. We wish her well in her new endeavors. The Private Equity team is currently interviewing strong candidates for two open positions.
PRIM currently has four active investment staff job openings: Senior Investment Officer on the Public Markets team, an Investment Analyst on the Real Estate team, and two Investment Analysts on the Private Equity team. We have received more than 1,000 applications for those four slots. It is a compliment to all of us that so many highly qualified candidates want to work for PRIM.
And last, I’d like to highlight that we have added a third women-focused summer internship partner, the CFA Society Boston, to supplement our current efforts with Girls Who Invest and the Treasurer’s Women in Finance Fellowship. We are excited to welcome three new summer internships at PRIM this summer.