WASHINGTON, D.C. (December 26, 2018)– The Trust Fund Committee of the Trust Fund for the People of the Republic of the Federated States of Micronesia (the Fund) conducted its fiscal year 2019 (FY19) first quarter meetings on December 12th, 2018.
The meeting covered the Fund’s investment performance for the July-September quarter as well as the October-November period, a review of the fiscal year’s performance, investment fees and glide path asset allocation, initiation of the FY18 audit process, and a discussion of distribution policy options for the post FY23 period.
For the July-September quarter, the Fund gained 2.8%, net of fees, and had an ending net asset value of $634,963,753. For FY18, the Fund had a rate of return 6.6%. The annual gain follows the weighted annual rate of return of 13.8% for FY17 and 9.71% for FY16.
For November, the Fund gained 1.0%, net of fees, and had an ending net asset value of $642,183,870. The November gain was preceded by a loss of 4.8%, net of fees, in October. Also during October, the FY19 US government contribution, per the Compact of Free Association, as Amended, contribution schedule, was received in the amount of $32,242,320. The contribution was invested per the Investment Policy Statement. The net loss for FY19 for the October-November period was 3.8% or approximately $24.5 million.
Global investment markets experienced significant volatility through October and November, driven by factors such as global trade concerns and rising interest rates in the US. US stocks, as measured by the Russell 3000 Index, returned -7.4% in October. Non-US developed markets stocks returned -8.0% in October, and Emerging Markets stocks returned -8.7% in the month. Bonds were also negative, with US investment grade bonds returning -0.8% in October. After spending much of the month in negative territory, US stock markets (+2.0%), Emerging Markets (+4.1%), and US bonds (+0.6%) rebounded in November, while Non-US Developed Markets (-0.1%) finished relatively flat.
As a long-term portfolio, the Trust Fund Committee expects to experience bouts of short-term volatility while pursuing long-term growth. The recent volatility is well within expectations built into the design of the portfolio and the long-term glide path toward FY23. As the Trust Fund is still several years from making distributions, the allocation remains tilted toward higher-expected return assets like US and non-US stocks. Strategies such as private equity, hedge funds and real estate provided diversification to the portfolio during the equity and bond market volatility.
The Committee discussed the Investment Adviser and Money Manager fee schedules and reviewed a range of options to adjust the asset allocation per the Investment Policy Statement. The Fund is invested in a mix of U.S. public equity funds (25,5% of the portfolio as of 9/30/18), non-U.S. public equity funds (21.9%), global equity funds (10.8%), fixed income funds (19.5%), hedge fund (5.0%), real estate fund (9.6%) and private equity funds (7.6%). There were no changes made to the asset allocation. The Fund is following an investment glide path to help minimize risks and maximize growth to FY23. The Fund’s investment objective is to maximize investment returns and assets in the Fund through the period ending FY23, subject to the total portfolio risk parameters. Over shorter periods, outperformance will be sought relative to the notional return on a benchmark portfolio designed to reflect the risk profile according to which the assets are invested at the time.
The Committee discussed a set of distribution policy options. Per the Amended Compact’s Trust Fund Agreement, distributions from the Fund are to begin annually in FY23 for FY24 and beyond. The distribution policy will establish the parameters for the amount to be distributed annually. The Committee discussed options to balance stable and consistent distributions, maintain the stability of the Fund in the post FY23 era, and maintain a level of risk that does not imperil distributions or Fund sustainability.
As provided for under the Compact of Free Association agreements, as amended (U.S. Public Law 108-188), the Fund was established to contribute to the economic advancement and long-term budgetary self-reliance of the people of the Federated States of Micronesia when annual grant assistance under the Compact expires after fiscal year 2023.
 All figures contained in this release are preliminary and unaudited except for the FY16 and FY17 weighted annual rates of return.