Third Quarter 2018 Update

January 02, 2019

Market Performance Summary
The September quarter was strong, but market volatility returned in October and November as global equities sold off sharply. The VIX spiked to 21.2 in October after reaching a low of 12.1 in the September quarter. The five-year average for the VIX is 14.8. October 2018 was the third worst month for the S&P 500 since the global financial crisis, with the S&P down 6.8%. It was the worst month since September 2011 when the S&P was down more than 7%. September 2011 was one month before the US debt downgrade and that sell-off occurred amid continuing concerns about the European debt crisis. The only other worse month was in May 2010 when the S&P was down 8% in the aftermath of the “Flash Crash”, which was caused in part by the early stages of the European debt crisis. One of the big challenges which surfaced recently is the stand-off between Brussels (the EU) and Rome concerning Italy’s dire fiscal situation.

This all only adds to the brew of caution that we identified last quarter. At the last meeting of the Board, we discussed the risks in the market and we compared current conditions to those of mid-2014 through early 2016, when there was an unprovoked global economic slowdown that led to a correction in world financial markets. Not much has changed on the economic front in the last few months to change our view. US GDP growth is growing at a 3.5% clip, the employment picture is bright, wages are finally rising, and so too is inflation. With this backdrop, the US Fed seems intent on raising rates one more time this year and three times next year. Meanwhile, the rest of the world, including Europe, China and Japan, is slowing. At our last meeting, we pointed out that we were observing some of the same market characteristics that we observed in the mid 2014 to 2016 downturn – today we still observe many of the same conditions. Namely: 1) narrowing stock markets as the equity rebound since the first quarter left many global markets, and many US sectors; 2) liquidity issues – became difficult to secure US dollars from outside the US in 2015, and note that global funding conditions are still very tight for dollar funding; 3) the economic situation – there were vulnerabilities in the global economy before there were tariffs, and tariffs are an additional negative for global growth, and most believe that a change in control of the U.S. House of Representative as a result of the mid-term elections is NOT likely to impact or restrain the Administration’s protectionist trade policies.

We also note that equity markets generally peak at the peak acceleration of earnings, and not on the earnings peak itself, and S&P earnings were up approximately 20% on an 8% growth in sales for the second quarter and are expected to show similar if not better growth in Q3. Consensus is that it will be hard to maintain that strong level of growth going forward.

And last, in regard to the mid-term elections and the firing of Attorney Jeff Sessions immediately afterwards, it seems increasingly likely that we could have two years of political gridlock before the next general election. President Trump warns of a “war-like” atmosphere in Washington, and pundits generally have reduced the prospects of enacting bipartisan fiscal stimulus (infrastructure spending, for example) and have increased the prospects of having a prolonged government shutdown.

We believe the PRIT Fund is appropriately positioned for weakness in global equity markets. Our main focus during the past several years has been to reduce our global equity exposure while identifying diversifying assets in our Portfolio Completion Strategies allocation. However, it is important to note that the PRIT Fund is not completely immune to a global equities downturn, since in order to achieve our long-term 7.35% target return rate, our Fund is by necessity growth and equity focused.

Organizational Updates
Iris Sosa joined PRIM in August as an executive assistant supporting me. She joined us after nearly 15 years of supporting the CEO of Santander Bank. Prior to that, Iris was executive assistant to the Executive Director at the Boston Housing Authority.

Maureen Aquino also joined PRIM in August as our new receptionist. Maureen has almost 20 years of experience as an Office Manager and Receptionist working for AIG in New York. Maureen earned a bachelor’s degree from William Patterson University.

Grace Gao joined PRIM in October as an Investment Research Analyst in the Strategy group, reporting to Eric Nierenberg. Grace recently received her master’s degree in finance from MIT Sloan. She previously interned at Baidu, Bain & Company, and PwC, and earned her bachelor’s degree in finance from Peking University in China.

Liu Liu joined PRIM in October on a permanent basis as an Investment Analyst after spending 18 months as an intern working in PRIM’s Strategy team, also reporting to Eric Nierenberg. Liu received her master’s degree in finance from the Brandeis International Business School and earned her bachelor’s degree in finance from Shanghai Jiao Tong University in China.

Sara Coelho joined PRIM in November as a Corporate Accountant on the Finance team. Sara spent several years at Bulger Partners as an accounting analyst and accounts payable clerk, and has a bachelor’s degree in finance and accounting management from Northeastern University. She reports to Dan Eckman.

The Strategy group also welcomed two new interns this fall. Anita Huang is currently a graduate student at the Brandeis International School of Business, majoring in economics and finance, and Shijia Chen recently received her master’s degree in International economics and finance from John Hopkins University.

Also, we congratulate Christina Marcarelli, an Investment Officer on the Real Estate team, on receiving the Chartered Alternative Investment Analyst (CAIA) credential. The CAIA curriculum is designed to provide a broad knowledge in alternative investments including Real Assets, Hedge Funds, Private Equity and structured products. The charter is 2 exams, 2 levels, and typically requires 12-18 months and more than 200 hours of study.

And last, Andrew Gromer, an Investment Analyst on the Public Markets team, was appointed Chair of the CFA Boston Society Young Leaders Committee. As Chair, Andrew will organize events for the Society’s new generation of investment professionals focused on engagement, career development, and networking. It is a very vibrant and active community.

PRIT Fund Performance Summary
As of September 30, 2018, the PRIT Fund net asset value stood at $73.8 billion. For the one-year ended September 30, 2018, the PRIT Fund rose 8.7% gross (8.2% net), outperforming the total core benchmark of 6.9% by 182 basis points (136 bps net).

  • This performance equates to an investment gain of $5.7 billion, net of fees.
  • This outperformance equates to $944 million 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 September 30, 2018, were approximately $1.3 billion.