2010 INVESTMENT REVIEW
(Excerpts from the 4th Quarter 2010 Final  Performance Report by Frank Armstrong of Investor Solutions, Inc.., MISSA’s Investment Advisor)

After a slow start and a tough second quarter, most markets in the world ended the year with positive results. The US market indices accounted for most of the top performance, with the Russell 2000 Growth Index delivering 29.09% return for the year. US small cap and small value also were among the top performers.

Most developed markets around the world logged positive returns, with thirty-seven of the forty-five countries that MSCI tracks gaining ground in both local currency and US dollar terms. Scandinavia and Asia had particularly high returns. Overall, the MSCI World ex USA index gained 9%, and the MSCI Emerging Markets Index gained 19% for the year.

In the last few months of the year, the highest returns were generally experienced by countries whose economies are dominated by oil and commodity exports-for example, Canada, Norway, Russia, and South Africa. Other emerging markets such as Thailand, Philippines, Chile and Peru had strong returns. China, despite its continued high profile and news of economic growth, was one of the lowest-performing emerging markets. Read More

The US dollar lost ground against the Canadian dollar and most Pacific Rim currencies, which helped dollar-denominated equity returns from those countries. The US dollar gained against the Euro and British pound.

Along the market capitalization dimension, small caps outperformed large caps by substantial margins in the US, developed and emerging markets. Value stocks underperformed growth stocks across all market capitalization segments in the US and had more mixed results in international developed and emerging markets.
Fixed income performed generally well, especially for investors who took term and credit risk, with long-term, high-yield bonds returning more than 20%. Real estate securities had returns, performing comparably to the equity asset classes.
First quarter
Following a slow start in the year, equity markets around the world began to climb in mid-February and ended the first quarter in the black. The broad US market gained about 6% in the quarter, with all asset classes delivering solid gains. The developed markets benchmark MSCI World ex US Index was up 6.4% in March and finished the quarter with a return of 1.3%. Emerging markets outperformed the developed markets, up 8.1% in March and 2.4% for the quarter. Some of the large markets, such as Brazil, China and Taiwan, had negative returns. As in the case of developed markets, there was much dispersion in the performance of different emerging markets and asset classes. However, both developed and emerging markets, underperformed the US, partially due to the stronger US dollar, which was up 6% against the pound and the euro, hurting the dollar denominated returns of developed market equities. Fixed income securities had positive returns. Longer-term securities tended to have better performance than short-term ones.
Major news in the developed markets was related to the fiscal crisis in Greece and the resulting worry about the mechanics of a bailout and its impact on the euro. As a result, the worst equity market returns were in Europe, where stocks slipped in Greece, Portugal and Spain - the countries most at risk of sovereign default.
Second quarter
After four consecutive quarters of strong performance, the US equity market saw a sharp reversal in May and June, ending the second quarter with large negative returns. The broad US market lost over 11%, with most asset classes delivering double-digit negative returns. Both developed and emerging markets performed poorly. The MSCI World ex US Index was down 13.6% for the quarter, with most of the damage coming in May, when the index fell 11%. Emerging markets outperformed developed markets for the second quarter in a row, down 8.4%. The US dollar gained ground against most major currencies, especially the euro and Australian dollar, and against major emerging market currencies. This strong performance hurt dollar-denominated returns of developed and emerging market equities. Fixed income securities had good returns due to a flight to safety triggered by the sovereign debt problems in Europe and weak economic data around the globe. Intermediate government securities and inflation-protected securities did particularly well.

The sovereign debt crisis in Greece, Spain, Portugal and Ireland, continued to affect European bank. Officials in Hungary hinted at a default, and Spain’s credit was downgraded. Widespread announcements of austerity measures and budgets cuts across Europe caused some observers to lower growth expectations. Other major events were the April explosion of the Deepwater Horizon in the Gulf of Mexico, which cast a negative spotlight on BP and raised concerns of a major environmental calamity, and the bewildering “flash crash’ in May, which saw the Dow plummet over 1,000 points in the course of a few frantic minutes.
Third quarter
The US equity market rallied strongly in the third quarter, with the broad US market gaining over 11% and most asset classes delivering double-digit returns. With the exception of Q2 and Q3 of 2009, non-US markets had their best quarter since 2003. Although both developed and emerging markets did well, emerging markets once again had the strongest performance. Looking at benchmark returns, strong performance in July and September led the MSCI Emerging Markets benchmark to a quarterly return of 18%. By comparison, the benchmark MSCI World ex US index was up 16%.
The US dollar lost ground against major currencies in developed and emerging market countries, which greatly helped the dollar-denominated equity returns. Fixed income securities had good returns. Declining long-term rates rewarded investors who were exposed term risk. Intermediate government securities and inflation-protected securities did particularly well.
International news focused on central banks around the world intervening to curtail rising currencies, with the focus on Japan and China.
Fourth quarter
The equity markets had a strong finish for the year, with the broad US market gaining over 11%. US asset classes again delivered double-digit returns. Most of the world’s stock markets continued with the gains experienced in the third quarter, albeit at more moderate pace. The MSCI World ex US Index and the MSCI  Emerging Markets Index both had returns of over 7%. Returns were especially good in Canada and Japan, which returned over 12%. Emerging markets had slightly higher performance than developed markets. The US dollar lost ground against the Canadian dollar and most Pacific Rim currency, which greatly helped the dollar-denominated returns from those countries. However, the US dollar gained against the euro and British pound.
Value stocks underperformed growth stocks across all market capitalization segments in the US and in other developed markets. In emerging markets, value stocks outperformed growth stocks for the quarter. Small cap value stocks outperformed small cap growth stocks, while large cap value stocks outperformed large cap growth stocks. Along the market capitalization dimension, small caps outperformed large caps in the US and developed markets by substantial margins. In emerging markets, small caps narrowly beat large caps.
Fixed income securities had generally poor returns in the fourth quarter. Rising long-term rates hurt investors who were exposed to term risk. However, high-yield bonds did particularly well, rewarding investors who took extensive credit risk. Notwithstanding the continued weakness in the commercial and residential real estate markets, real estate securities had excellent returns, performing comparably to the equity asset classes.
Notable events included the mid-term election results in the US, which resulted in an anticipated shift in the political landscape. There was additional anxiety over sovereign debt, with the Irish system accepting an Eu85 billion bailout from the Euro zone. Finally, the implementation of quantitative easing (QE2) by the US central bank contributed to a weakening dollar across most major world currencies, with the exception of the euro, which continued to struggle.

 

 

 

 

 

MISSA bids farewell to Sheryl

The Administration bids farewell to Mary Sheryl Jane Profeta, MISSA’s Deputy Administrator (for Corporate Services) and Chief Financial Officer, who just recently left, together with her husband, to seek for other opportunities in Canada.

Sheryl joined MISSA in December 2006 and consistently maintained MISSA’s strong internal controls over financial recording and reporting. The no finding audits and unqualified opinions earned by MISSA from its external auditors for FYs 2007, 2008, 2009 and 2010 were made possible because of her exemplary handling of Corporate Services Division, more particularly accounting and treasury, the departments that are normally prone to non-compliance to policies and procedures.

Recently, one of the most notable act of excellence attributable to Sheryl was MISSA’s being recognized as the first government agency, not only in RMI, but among the twelve (12) Association of Pacific Island Public Auditors (APIPA) member parties, to be issued an audit report for FY 2010. She did the same feat in FY 2009.

Sheryl is a Certified Public Accountant (CPA) and held various supervisory and managerial posts in finance, accounting and audit for about fifteen years in the Philippines. She has a bachelor’s degree in Accounting (Cum Laude) and earned several MBA units from one of the universities in the Philippines.

Sheryl is also an active officer and member of the Filipino Association of the Marshall Islands (FAMI) and is married to Bong Profeta, Asst. EDP Manager of RRE.

 

 

MISSA’s Audited Financial Performance for FY 2010

Fiscal year 2010 has been a challenging year for MISSA with collections flattening, benefit payments continuing to increase and $1 million being liquidated from MISSA’s Time Certificate of Deposit at BOMI. The Administration had expected and prepared for this cash shortage in early 2006. The recent liquidation of $1 million is the first of its kind in the last decade as MISSA has not tapped into its Trust Fund in a span of ten years. Investments faired well this fiscal year with net investment income at $5,490,636, which is an increase of 64.03% when compared to the net investment income $3,347,438 in the previous fiscal year.

As of September 30, 2010, MISSA’s total net assets held in reserve for future benefits have increased to $68,543,988.

MISSA has no debt and did not have material activity in its capital assets. Read More

 

 

 

Future Economic Outlook

Fiscal Year 2010 ended with MISSA facing one of the most challenging years in the past decade. Carrying forward from last fiscal year, the Administration faces an even more difficult FY 2011, when it expects a more substantial cash flow crisis than that experienced in FY 2010. Before the end of FY 2011, another $2.7 million is projected to be withdrawn from MISSA’s cash reserves. These cash shortfalls are evident in the Administration’s latest actuarial report which gave the Administration’s life expectancy of just a little more than 10 years if no reforms are enforced in the present social security system in the country.

MISSA’s approved budgeted revenues for FY 2011 stand at $12.05 million while projected benefit payments amount to $15.8 million. Another $937 thousand was earmarked for administrative expenses. This simple equation translates to a deficit of more than $4 million. The only way to reverse this gloomy scenario is if MISSA’s investments perform extremely well in FY 2011 or the RMI Government injects enough cash to help MISSA sustain its benefit programs without dipping into its trust funds. Although MISSA’s local investments have continually performed above par in past years, investments outside the country remains volatile and uncertain. Read More

 

Cabinet approves establishment of Social Security Reform Commission

During its September 13, 2010 meeting, the Cabinet approved the establishment of theSocial Security Reform Commission (SSRC).

The main task of the commission is to conduct a comprehensive review of the present social security system and to provide Cabinet with recommended amendments to the Social Security Act of 1990, as amended, which will ensure the viability of the Retirement Fund in the immediate and long term.

The seven-member commission is comprised of:

1. Public Works Minister Maynad Alfred (Chairman),
2. Senator Donald Capelle,
3. MISSA Administrator Saane K. Aho
4. Deputy Chief Secretary Jorelik Tibon,
5. Carlos Domnick, CEO of Anil Development Corporation
6. Ben Chutaro, Consultant
7. Sultan Korean, BOMI Chief Compliance Officer

Read More