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STATE PENSION FUND TUMBLED $4.5 BILLION IN FOURTH QUARTER .: The State House News Service

STATE PENSION FUND TUMBLED $4.5 BILLION IN FOURTH QUARTER

By Michael P. Norton
STATE HOUSE NEWS SERVICE

BOSTON, FEB. 7, 2019.....The turbulent financial markets of 2018 were a bummer for many investors and the state pension fund did not escape the damage, which amounted to $4.5 billion in the fourth quarter.

Meeting in Boston on Thursday, members of the Pension Reserves Investment Management Board's Investment Committee were briefed on the reasons why the pension fund's balance dropped last year to $69.3 billion. State employees, teachers and many municipal employee retirement funds in Massachusetts are invested through PRIM.

The fund, which is supervised by a nine-member board, has 45 employees and works with professional investment firms, was stung by a dismal fourth quarter that rivaled quarterly losses last seen in 2010 and 2011.

Pension fund executive director Michael Trotsky put a positive spin on fund's performance, which shed 1.8 percent in value for the year, noting it's been seven years since a selloff like the fund experienced in the fourth quarter.

"These kinds of selloffs are not too unusual, as I mentioned we had similar quarterly losses in 2010 and '11, and in fact we've had 23 large quarterly losses since the Great Depression back in the '30s," he said. "Twenty-three of them in 90 years, so that means on average we get a selloff of this magnitude once every four years or so. And it's been seven years since the last quarterly selloff so perhaps we were due."

Still, the annual loss sticks out and helped drop the fund's three-year return rate to 7.7 percent, its five-year return to 6.4 percent and its 10-year return to 9.1 percent, according to numbers released Thursday.

Calling 2018 a "challenging, volatile year," Trotsky outlined the fund's performance with gains of 0.6 percent in the first quarter, 1.1 percent in the second quarter, and 2.8 percent in the third quarter.

The fourth quarter was punctuated by a December that Trotsky, who is also the fund's chief investment officer, called "the worst month since the global financial crisis," and the pension fund absorbed a 6 percent loss.

The fund ended the third quarter with a $73.8 billion balance, which fell to $69.3 billion on Dec. 31.

Pension fund officials for weeks have declined to release information about the fund's performance in 2018 but on Thursday were quick to point to overall market performance in January, and contrast it with actual fund results.

Trotsky said the fourth quarter was "dismal" but told the committee that there was "some good news."

"Since the December lows, things have rebounded quite strongly and since the December lows the S&P is up 16.7 percent, developed international markets up 9.6 percent, emerging markets 10.7 percent, bonds are up a point and a half and the 60/40 mix of stocks and bonds is up 10.5 percent," Trotsky said, omitting the fund's own performance since the December lows. "So we pretty much gained all those losses back."

Trotsky said investment committee members have noted that the past four major market corrections since 2000 have all occurred with an economic slowdown or contraction, and gave voice to warning signals ahead.

"While the U.S. is still relatively strong, but slowing, Europe, China and Japan are slowing to a point where we begin to worry about contraction," he said. "But even in the U.S., manufacturing is weakening -- a good economy has more than twice the manufacturing production increases that have been posted recently."

He continued, "Housing is weak, consumer confidence is eroding from an 18-year high, industrial material prices are weak and global dollar liquidity is tight. There were vulnerabilities in the global economy before there were tariffs. Tariffs and trade escalations are an additional negative for global growth."

Constance Everson, the managing director of Capital Markets Outlook Group and a member of the PRIM Investment Committee, offered her outlook on global markets. She said recent data has gone beyond showing a slowdown and "slipped into contraction" among "some key bellwether export economies."

"And if you're, like us, trying to export to these economies, contraction is way different than just slowdown," she said. "That can take a slow-moving slowdown and make it more severe faster."

Everson said that German factory orders are showing a year-over-year decline of 7 percent, but that the turning point came in the fourth quarter of 2017, before the first new tariffs were imposed. She said the tariffs were an additional drag on economies that had already begun to decelerate.

"To the question of whether the U.S.A. can avoid a slowdown that has taken hold among trading partners, it would be a first," Everson said. "One-third of American industrial orders are for export ... but that portion so far has not been enough to keep the U.S.A. growth rate unimpeded if trading partners are slowing down."

Trotsky acknowledged that the outlook for global markets "may sound very dire," but he said that he believes the pension fund is "appropriately positioned" for a weakening global equity environment.

"Our main focus, as you remember, during the past several years has been to reduce our global equity exposure," he said. "Remember: we've reduced our global equity position from 50 percent eight years ago to a target of 39 percent today."

He later added, "Please take comfort in the fact that we have been preparing for it as much as possible."

Later during Thursday's meeting, a team from PRIM presented a proposal to de-risk the fund by reducing the fund's reliance on global equity by 3 percent and value-added fixed income by 2 percent, all while increasing exposure to core fixed income by 3 percent, and private equity and portfolio completion strategies by 1 percent each.

The investment committee also recently took a dim view of the state of politics in Washington D.C. Trotsky said political gridlock "has become a reality and most think that it will last for at least another two years."

"We've recently endured one of the longest government shutdowns in history as Congress and the president tried to work out border security and immigration policy differences. And who knows if that issue is really behind us," Trotsky said. "President Trump warned of a 'warlike atmosphere' in Washington during the midterm elections and really both sides have delivered."

[Colin A. Young contributed to this report]

END
02/07/2019


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