The meeting of the Board of Trustees of the Anne Arundel County Retirement and Pension System (Board) was called to order at 12:20 p.m. by John Hammond, Chair. Minutes Mr. Brown moved to approve the minutes for the June 14th, 2007, Board of Trustees meeting. The motion was seconded by Mr. Cuccia and approved unanimously. Investment Committee Southeastern Asset Management Southeastern has been working for Anne Arundel County for 17 years. The firm focuses on finding good companies run by ethical leaders who know how to run businesses. Southeastern aligns employees’ and clients’ interests by requiring all employees to limit their investment in publicly traded equity securities to Southeastern’s funds. The firm invests in the most qualified 20 to 25 businesses and follows those companies and their managements closely. Holding a limited number of financially strong, competitively entrenched businesses at a discount has lower risk than owning a larger number of inferior businesses at higher prices. Southeastern has added Scott Cobb and Josh Shores to its research team since its last presentation to the county. Its large cap separate accounts, Longleaf Partners Fund and Longleaf Partners Small-Cap Fund are closed to new business. Presenter Frank Stanley reported that Anne Arundel County has earned a return of 9.69 percent for the quarter. A real return of 10 percent is adequate. The annual return (from June 30th, 2006, to June 30th, 2007) is 24.57 percent. The county has had an annualized return of 16.12 percent since July 1990. The firm prefers value to growth stocks. The county’s portfolio includes these companies: - Chesapeake Energy Corp
- Liberty Media Corp
- Walt Disney
- Royal Phillips Electronics
- DIRECTV Group
Mr. Stanley noted that FedEx Corporation’s value continues to grow and has a target value of about $130. Dell is having some problems but should be able to solve them. Comcast was getting close to its full value, so Southeastern sold its holdings. GM is doing well; however, Southeastern hopes to sell it when the price reaches a target price of $45 per share. Mr. Stanley said the Southeastern is fully invested in the market and has no cash to purchase equity in any new companies. However, domestically the firm doesn’t wish to purchase anything now because the market is high and everything is overpriced. At times, Mr. Stanley said, Southeastern has had a significant amount of cash when it met with the board, but that’s because the firm couldn’t find stocks to purchase that meet its criteria. Mr. Callahan asked if Southeastern’s position that there’s nothing of value to buy right now is based on the fact that the firm has no cash to purchase anything. Mr. Stanley responded that in order to make a new purchase, the firm would have to decide if it were willing to sell a current holding to make the purchase and if the purchase would be a great value. Mr. Brown asked for Southeastern’s five-year forecast. Mr. Stanley said Southeastern doesn’t make forecasts. Instead, it focuses on what a company is worth. Mr. Howell said Southeastern has been a good example of a long-term investment strategy. Westwood Westwood is a value/income shop that seeks companies that are misperceived in the marketplace and are mispriced at the current time. Westwood sees value in those stocks that the market is missing. The firm looks for companies with free cash flow, stable to improving return on equity and improving balance sheets. Westwood’s employees also invest in the firm’s funds. Westwood has been with Anne Arundel County 17 months. The county has earned an annual return of 22.4 percent growth versus the Russell 1000 benchmark returns of 21.9 percent. The following industries in the county’s portfolio have performed well: - Materials and processing - Companies such as Freeport-McmoRan Copper & Gold have had good results because the demand for copper is high in resource-poor countries such as China.
- Financial services - Mastercard continues to beat earnings estimates because it is leveraged for transaction volume. Westwood has also done a good job of identifying strong asset-management companies.
- Technology - Westwood is overweight in technology but it doesn’t buy what other value firms buy. Oracle has had several good quarters of earnings. Because corporate technology spending is growing as companies look to enhance productivity, Westwood has purchased Cisco Systems and Electronic Data Systems Corp.
Mr. Spika also noted that energy is a good sector partly due to limited refinery capacity. Mr. Willis asked if companies stopped building refineries in order to drive up costs. Mr. Spika said the lack of refineries has more to do with government regulations and the difficulty in getting approval to build new refineries. Today, however, refinery capacity is an issue around the world. Westwood sold Starwood Hotels and Resorts because the company reached Westwood’s target price. Westwood purchased Nike because it has strong international growth. Westwood owns no Real Estate Investment Trusts (REITs) because it’s concerned about the value being overpriced. New England Pension Consultants Rhett Humphreys, a partner of New England Pension Consultants (NEPC), discussed the investment performance of the county’s pension and retirement system. The meeting materials included a preliminary report for the fund period ending June 30th and a mid-year 2007 balancing plan. For the month of June the county is down 50 basis points net of fees. The current market value is $1,314,033,211. The prior market value was $1,322,015,493. The S&P 500 was down as well, and the bond index was down 30 basis points. Further, three equity managers were behind in their benchmarks. On the bonds side, Western Asset Management underperformed in June, as did Bridgewater, a global asset allocation. However, the global asset allocation also includes Wellington, which performed well. Humphreys reported that the county saw a return of 5.2 percent for the quarter. In his mid-year balancing plan, he recommended that the county take profits out of funds that include overvalued stocks and move those profits into more defensive funds. Humphreys suggested taking $5 million each out of Buckhead and Chartwell, two U.S. small cap equity firms. Further, $20 million would come out of GMO, an international small cap equity firm, and $15 million would come from Marvin and Palmer, which focuses on emerging market equity. Those funds would be moved to Western, an active bond portfolio; Bridgewater, a more defensive global asset allocation; and Mariner, which uses a more fixed-income strategy. Given the strength of Westwood and Southeastern’s value strategies, Mr. Hammond suggested that the board should shift $10 million each in profits from those two firms to ING and Sands, which focus on growth equities. Mr. Humphreys said that the county now has about 12 percent in large-cap growth equities between ING and Sands, and 16 percent in large-cap value equities. A $20 million rebalancing would bring those percentages to 13.5 percent and 14.5 percent, respectively. | 
