Interest rates and inflation are among the factors clouding the lending outlook for 2022.
The state pension fund has begun to divest itself of Russian assets, but market conditions have whittled down the fund’s holdings subject to the divestment mandate the Legislature included in a recent midyear spending bill to the point of being nearly “a complete write-off,” the fund’s chief investment officer said Tuesday.
A midyear spending bill signed by Gov. Charlie Baker on April 1 requires that the state pension fund divest itself of Russian interests, a response to Russia’s invasion of and war in Ukraine. At least half of the relevant holdings must be sold within six months of April 1 with the remainder totally liquidated within one year.
Pension Reserves Investment Management Board officials initially estimated that they were overseeing a fund with a $140 million “exposure” to Russia, but Executive Director Michael Trotsky said Tuesday that figure has changed amid a turbulent time for global markets. He said getting accurate pricing information has been difficult when Russian markets have been closed to outside investors.
“We estimate that our position size at the start of this year, the start of the calendar year, was about $250 million. On the day after the invasion, on February 25, the positions were valued at approximately $140 million. And today, as best as our pricing vendors can tell, the positions are worth approximately $9.6 million. Nine point six,” Trotsky told the PRIM Investment Committee on Tuesday morning. “So this is near a complete write-off.”
The great majority of the drop in value has come as a result of market conditions while the fund has so far sold off about $14 million worth of Russia-tied assets, according to an official.
As Russian forces moved into Ukraine, lawmakers began clamoring for divestment from Russian interests, but Treasurer Deborah Goldberg and PRIM officials said legislation was necessary to divest funds from the roughly $104 billion PRIT Fund. Trotsky said Tuesday that he and his team spent about six weeks “providing technical assistance to the Legislature, to the governor and to the treasurer’s team in support of the newly-passed Russian divestment law” and is now “busy implementing the divestment requirements and its associated reporting requirements.” He pledged to provide regular updates as the divestment takes place.
Trotsky told the Investment Committee on Tuesday morning that the PRIT Fund was down 2.1 percent in the first quarter of 2022 though the fund is up 12.6 percent for the trailing 12 months, outperforming its benchmark by 5.5 percent. The CEO and chief investment officer said it was “a good outcome for such a turbulent quarter.”
Slowing economic growth worldwide, rising interest rates and high inflation have pushed PRIM into an “all hands on deck situation” to closely monitor the portfolio, he said.
“The war, combined with new COVID flare-ups, rising inflation and interest rates, and continued supply chain disruptions, are expected to cause global economic growth to slow significantly,” Trotsky said, citing the International Monetary Fund’s world economic growth forecast for 2022 dropping from 6.1 percent to 3.6 percent and the group’s projection of a 2.3 percent growth rate for 2023.
He added, “And the situation is expected to last for years, not weeks or months.”
While the report he presented at Tuesday’s meeting covered the first quarter of 2022, running through March, Trotsky told committee members that “things have deteriorated even since the end of March in terms of market performance.”
