NOVEMBER 18, 2008: With most of our state’s municipal and county retirement systems having a stake in the Commonwealth’s Pension Reserves Investment Trust (PRIT) Fund, which has seen its market value drop by at least $15 billion this year, there has been some concern among the board trustees (board members) of these local systems.

In a November 14 letter from Paul Todisco, senior client services officer of the Pension Reserves Investment Management (PRIM) Board, which oversees the PRIT Fund, Todisco explains the policy that the Board has followed during this extreme market decline. Regardless of whether you are a member of the State and Teachers’ Retirement Systems, or one of our 104 local retirement systems, we feel that you will find this letter most interesting and reassuring in light of the current recession.

To: All PRIM Investing Retirement Systems>
From: Paul Todisco, Senior Client Service Officer>
Date: November 14, 2008
Subject: How PRIM is responding to the current state of the financial markets

In light of the recent turmoil in the global financial markets, I wanted to explain whatPRIM is and is not doing during these uncertain and volatile times. As we are all toopainfully aware, the current crisis has affected both the U.S and foreign economies andhas placed them on the precipice of a global recession. Because the market declines haveaffected everyone from Wall Street to Main Street, and extreme market movements haveoccupied the headlines on an almost a daily basis over the past 10 weeks or so, webelieve it’s important to remind our investing systems about PRIM’s investment policiesand procedures in an effort to respond to, or in some instances, anticipate questions from your beneficiaries or local officials.

First, PRIM continues to do what it has always done during difficult markets – remain adisciplined investor by adhering to the tenets of its written Investment Policy Statementand not try to time the market. During periods like this, it is imperative to keep thediscipline of an established investment program. While this has become increasinglydifficult with the magnitude of market losses, we believe that staying with our long termstrategy is the most prudent and practical way to increase the probability of meetingPRIM’s, and your, long term investment objectives. It would be a complete abrogationof PRIM’s fiduciary duty to abandon its focus and sell out of poorly performinginvestments at any cost, and flee to asset classes perceived as relatively safe in this kindof environment. But that does not mean PRIM is playing a passive role as events unfold.PRIM staff closely monitors daily movements in the global markets, analyzes thestrategies employed within each asset class, and conducts aggressive due diligence on itsmanagers, ensuring that they are in compliance with their portfolio mandates and guidelines.

What PRIM is also doing during this turbulent period is rebalancing the PRIT Fund backto its target allocations by taking money from the better performing asset classes andputting it right back into the under-performing portfolios. This is in keeping withPRIM’s written policies and it has worked to PRIM’s benefit over its 24-year history.For example, in the months following the tech stock crash in the early part of this decade,PRIM took assets from its core fixed income portfolio, which was over-allocated due tosteep declines in the equity markets, and funded its domestic, international equity, andemerging markets equity managers. This decision was not made to time the market, infact there were further declines before things turned around, but when the global equitymarkets did rebound in late 2002 and through 2003, PRIM was rewarded accordingly.Over the five-year period ending December 31, 2007, PRIT’s domestic equity,international equity, and emerging markets portfolios saw gains of 13.83%, 21.67%, and 36.99%, respectively.

Let us not forget that most Massachusetts Retirement Systems have significant unfundedpension liabilities and we must allocate and diversify our assets in a way that canrealistically achieve the rate of return assumptions contained in our funding schedules. Inorder to achieve the 8.25% return mandated by statute in the Commonwealth’s pensionfunding schedule, PRIM must have some exposure to higher performing asset classes,such as publicly traded equities and private equity (buyouts and venture capital);however, we mitigate risk by diversifying into fixed income and other alternativeinvestments such as real estate and hedge funds. This diversification has been the key to PRIM’s success over its 24-year history.

Simply put, diversification has not worked this year and the asset classes that helpedboost the PRIT Fund to an 80% cumulative return from 2003 to 2007 are mostlyresponsible for the Fund’s current decline, but such is the cyclical nature of the market.Although the PRIT Fund has had an average annual return of more than 10% sinceinception, there have been years when PRIM has fallen short of that objective. And this year, PRIM will likely experience its worst ever annual return.

We also realize that retirement systems that joined PRIM either voluntarily or weremandated to under the provisions of Chapter 68 of the Acts of 2007 have not had apositive experience thus far in terms of investment performance. There are some systemsthat may have performed better than PRIM this year because of higher allocations tofixed income and underweighting to global equities. There are also those that wouldhave been worse off. To those new systems, we remind you that the benefits andadvantages of participating in the PRIT Fund will be realized in the long term, and weask for your patience. We also stand ready to assist you in any way if you are being questioned by your mayors, selectmen, county advisory boards, finance committees, etc., and will attend any meetings with these officials upon your request.

In conclusion, PRIM believes it is well-positioned to withstand the volatility of thiscurrent market environment because of its disciplined investment approach and its broadly diversified portfolio. Through our ongoing client meetings, monthly performance letters, and our quick response to client and consultant inquiries, we areworking as diligently as we can to keep your Retirement Board apprised of market eventsand assist you in focusing on long-term goals. While it is difficult and frustrating toabsorb the market losses that are occurring, and while no one knows how long thisvolatility will last, we continue to believe that long term investors are rewarded for notreacting to shorter term dislocations, no matter how severe.