Members Present: John Hammond, Howard Brown, William Brown, Dennis Callahan, Hunter Calloway, Jay Cuccia, Andrea Fulton, Frank Marzucco, Jay Middleton, M. Kathleen Sulick, LeRoy Wilkison, Douglas Willis Members Absent: Jennifer Gilbert-Duran Staff Present: Judi Lohn Guests: Antonio Casal, Rhett Humphreys, Timothy Maul, Robert Rodriguez Recorder: Laura C. Jackson, Audio Associates 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. Willis moved to approve the minutes for the July 12, 2007, Board of Trustees meeting. A chorus of seconds followed, and the members approved the minutes unanimously. Investment Committee Wellington Management The Board of Trustees retained Wellington Management Company in January 2007. The company focuses on international fixed income with an emphasis on equity. The firm offers no other products other than investment management. Wellington’s partners own the firm, and many of Wellington’s professionals have spent about half of their careers with the company. As part of its investment strategy, Wellington relies on the expertise of career analysts, conducts extensive research of stocks and bonds and uses a team approach to share information and ideas. The Board retained Wellington to manage a $52 million investment in the WTC-CIF Opportunistic Investment Portfolio. As of August 31, the market value of that investment is $57,393,726. Although the county has not been invested in the fund for a full business cycle, Mr. Maul and Mr. Rodriguez are pleased to get started with a strong trend. Opportunistic investment is meant to provide a return over and above standard benchmarks or traditional asset classes. Wellington’s objective is to outperform the S&P 500 and the Lehman Brothers Aggregate by providing opportunistic exposure to a variety of non-core investment areas and new product ideas. Wellington adds value by focusing on niche asset classes that may have strong growth potential. To tap into the natural resources niche, for example, about three years ago Wellington’s portfolio included commodities-related equities and stand-alone commodities. It has since amended that niche to include only commodities-related equities. Teams work together to determine if a particular niche is likely to outperform the S&P. Other teams ask the same question in relation to the bond market. Niche markets are attractive but volatile, so teams move in and out of them quickly. The investment horizon is one to three years. Wellington also focuses on high alpha asset classes/approaches. Twenty-three percent of the county’s Opportunistic Investment portfolio is in unconstrained alpha funds such as Global Contrarian Equity, Technical Equity and Select Intrinsic Value. These funds add value through bottom-up security selection. The success of these funds depends on the skill of the money managers. Fifty-eight percent of the portfolio is in funds such as Emerging Markets Equity, China Opportunities, Japanese Equities and inflation hedges. These volatile funds are offset by funds in health care, a more defensive sector, and non-US bonds. Mr. Callahan asked a question about the types of non-U.S. bonds included in the portfolio. Mr. Rodriguez said the portfolio includes European bonds and New Zealand bonds. Bridgewater Bridgewater has been working with Anne Arundel County for more than five years. Founded 32 years ago, Bridgewater manages approximately $160 billion in assets. Bridgewater staff members met with the board about a year ago to discuss converting the county’s global fixed income account to the company’s All-Weather Strategy. Bridgewater has been managing the new account for about eight months. Mr. Casal met with the board to give an update on the company and review the basic principles behind the portfolio that Bridgewater manages for the county. Bridgewater relies on diversification to avoid risk. Fund managers also think separately about beta and alpha. Beta is a fund’s exposure to the markets. Alpha is the value added or subtracted through fund managers’ expertise. Bridgewater has been managing pure alpha accounts for 15 years. Mr. Willis asked for an explanation of alpha and beta. Mr. Casal said that when people invest in the market, such as with a Vanguard index fund, what they get from that fund is beta. Beta is pure exposure to the market. When people invest in an actively managed equity fund, they get two things: exposure to the stock market (beta) and the fund manager’s skill in adding value, which is called alpha. Bridgewater’s All-Weather Strategy is its most-diversified asset allocation strategy. It is a pure beta fund. For this portfolio, Bridgewater has put together a set of asset classes to balance risk and secure a consistent performance. The portfolio includes equities, nominal bonds, commodities and inflation-linked bonds. Because some asset classes tend to have low risk and low returns, Bridgewater ensures consistency by using moderate amounts of leverage. What that means, Mr. Hammond said, is that the firm borrows money, and the expectation is that excess returns from the returns on the borrowed money will exceed the cost of borrowing. Using leverage helps Bridgewater allocate equivalent amounts of risk to, say, inflation-linked bonds and equities. Anne Arundel County’s Bridgewater portfolio has a value of about $63 million. The portfolio had a total return of 1.34 percent for the month of August. Mr. Casal said those returns essentially are below Bridgewater’s expectations, but the firm did well during the tough economic months of July and August. Mr. Middleton asked which asset classes helped Bridgewater in July, which was a terrible month for investors. Mr. Casal said global mixes of bonds and treasuries, as well as a mix of commodities, helped Anne Arundel County get a total return of 3.10 percent in July. During first eight months of 2007, most asset classes other than equities did not deliver much of a return above cash. New England Pension Consultants In August the investment committee heard a presentation from Rhett Humphreys of New England Pension Consultants highlighting the components of a portable alpha program. The program would involve exposure to the U.S. equity market (beta source) using futures and/or swaps to replicate the S&P 500 index, and an alpha source employing a multiple manager (fund-of-funds) absolute return strategy. The purpose of a portable alpha strategy is to produce superior returns to the returns of the underlying index (S&P 500). During the board meeting, Mr. Humphreys said the portable alpha program is a more cutting-edge strategy that others are using. The Virginia Retirement System, for example, has 30 percent of its portfolio in this same type of strategy. Mr. Hammond reported that the investment committee interviewed three managers: GAM USA Inc., Gottex Fund Management and Morgan Stanley. The committee recommends that the board select Gottex. Because this is a new investment strategy for the board, the committee recommends a fund manager that stresses low volatility and not a lot of fluctuations in the returns. Mr. Hammond said assets that currently are with State Street Global Advisors in the S&P index fund will be managed by Gottex. Mr. Hammond and Mr. Humphreys recommend that the board begin by putting $50 million in the portable alpha strategy. Roughly $42 million would come from the S&P index fund. The rest would come from cash. Mr. Humphreys said that as the board reviews the results from the portable alpha strategy, the members could increase the amount. Action: Mr. Wilkison moved that the board pursue the portable alpha strategy. Mr. William Brown seconded the motion. The motion passed unanimously. | 
