Fourth Quarter Update

February 16, 2023

Markets and PRIT Fund Performance

We are pleased that the PRIT Fund was up 4% for the December quarter, following three straight quarters of market declines, and the gains have continued into the first quarter of 2023. Returns were negative during the 12-month period ending December 2022 as equity and bond indices were down globally: domestic equities were down 18%, developed international equities were down 14.5%, and emerging equities were down 20%. Normally, we would expect bonds to offer protection from a selloff in equities, but bonds were also down substantially in calendar 2022, down approximately 13%. A 60/40 mix of stocks and bonds was down 16.2%, but the PRIT Fund fared better, down 11.2% net of fees. The loss in calendar year 2022 followed a very strong calendar year 2021. Calendar year 2021 returns were the fourth largest returns ever, and the outperformance of 8% net of fees relative to our benchmark in 2021 was the strongest outperformance in PRIM’s entire history.

The PRIT Fund has performed well over the last several years while the financial markets and global economies responded to several disruptive situations. PRIM does not control geopolitical events, slowing economic growth worldwide, monetary policy responses, wars, viruses, supply chain shortages, or the behavior of other investors. We are market takers, and the only thing we can control is the design and composition of the PRIT Fund. We have carefully engineered a diversified portfolio with components that will perform well in a variety of market environments, and we are also very focused on controlling our costs. Our history of strong performance in both strong and weak markets is an indication that our portfolio is well constructed in terms of risk, return, and cost – PRIM’s philosophical three pillars of investment. Our alternatives, specifically Hedge Funds, Private Equity, Timberland, and Real Estate helped anchor the PRIT Fund in this very stormy environment, an investment period when both public equities and bonds were down significantly in all markets around the globe.

The silver lining in turbulent markets is that selloffs create attractive buying opportunities. The PRIM team was busy during the year evaluating opportunities and deploying approximately $5.7 billion in new investments. Another silver lining is that some of the uncertainties are beginning to resolve. Namely, inflation appears to have peaked, the Fed is beginning to taper interest rate increases, and the economy is still growing. For the quarter so far, which includes all of January and half of February, equity markets are up between 6 and 10% globally, with Europe and China leading the way, and bonds are up approximately 2%. We hope the positive trends continue.

The main risks going forward are familiar: that inflation spikes again or remains too high, business spending or corporate earnings could weaken more than anticipated, and unemployment or wages could spike. Any of those conditions could result in an economic slowdown that turns into a severe recession, one that is worse than the current consensus expectations. That scenario would be a headwind for financial markets. There are many moving pieces in the global economy and in the world’s geopolitical situation, we can’t control any of that, but we do believe the PRIT Fund is well constructed to perform relatively well in any environment.

Customary for this Board cycle, asset allocation recommendations are approved, and annual plans are discussed. The annual plans are consistent with prior years, but this year each functional area includes plans to support the newly formed ESG committee. We believe the ESG Committee will build on the important work we have been doing internally and with our partners in the MIT Sloan School’s Aggregate Confusion Project. We are excited to get started with the new committee and have reached out to the new Committee members to schedule our customary on-boarding briefings. We expect The ESG Committee’s first meeting will occur at the next Board cycle.

On asset allocation, the Investment Committee approved the recommendation to continue our multi-year effort to gradually increase the PRIT Fund’s allocation to Private Equity. Maintaining a consistent pace of Private Equity commitments has been a key contributor to our long-term success. We have observed throughout our history that some of our highest performing Private Equity vintage years originate during volatile times like this, when other investors may be cutting their commitments for a variety of reasons. Our Private Equity partners have the proven ability to wait for valuations to become attractive to deploy capital, and investors who provide capital in difficult environments benefit when valuations are cheapest. We have learned that 80% of our peers are currently 4-6% above their ranges for Private Equity, but at 17.7% of PRIT Fund assets, Private Equity is within the current range, and we have room to continue our commitment pace. PRIM’s Private Equity team carefully models commitment pacing each year, and the fact that we are still within our range when most others are not, is testimony to the robustness of PRIM’s very disciplined process. The recommended increase of 1% to Private Equity continues a multi-year trend consistent with PRIM’s asset allocation research findings and will provide extra headroom to maintain an adequate commitment pace.

PRIT Fund Performance

For the one-year ended December 31, 2022, the PRIT Fund was down -10.8%, (-11.2% net), underperforming the total core benchmark of -7.0% by 382 basis points (422 bps net).

Organizational Updates

Pengtuan Wu joined the Research team in January as an Investment Officer reporting to Maria Garrahan. Pengtuan holds a Master of Science degree in Mathematical Finance from Rutgers University, and before coming to PRIM was a principal quantitative developer at Fidelity Investments. At Fidelity he led the development of the centralized factor engine in addition to many other quantitative research initiatives.

Tianyi Shi joined the Research team in February as an Investment Analyst reporting to Maria Garrahan. Tianyi joined PRIM as a Research intern in May 2022 and has worked within multiple areas of Research, all while finishing her degree at Boston University. Tianyi graduated from Boston University in December 2022 with a Master of Science degree in Mathematical Finance & Financial Technology. She also has a bachelor’s degree in Financial Engineering. We are delighted that she chose PRIM to start her very promising career.

PRIM deployed more than $2.8 billion to diverse managers in 2022 as part of the FUTURE Initiative, bringing the total to more than $9 billion. In December 2022, PRIM received the Commonwealth’s “Equity in Governance Award” for its efforts in this area. PRIM also designated more than $340 million to 15 emerging-diverse managers as part of a $1 billion program specifically designed to reduce barriers between the PRIT Fund and emerging-diverse managers. This progress was reported to the state legislature as a requirement of the Investment Equity legislation, the legislation championed by the Treasurer more than two years ago. As reported by Pensions and Investments, this puts PRIM at the very top of the heap compared to other pension funds, 7th in the nation in capital deployed with diverse managers, far above our rank in size.