Members Present:

John Hammond,  Howard Brown, William Brown, Dennis Callahan, Jay Cuccia, Andrea Fulton, Dennis Howell, Frank Marzucco, Jay Middleton, M. Kathleen Sulick, LeRoy Wilkison, Douglas Willis

Members Absent:

Hunter Calloway, Jennifer Gilbert-Duran

Staff Present:

Judi Lohn

Guests:

Rob Kinsey, Richard Welsh, Arnold West

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. Wilkison said the October 11 minutes should reflect that he was excused from the board meeting. Mr. Callahan moved to accept the minutes as amended. Mr. Cuccia seconded the motion. The board unanimously approved the minutes.

Mr. Callahan also made a motion to accept the revised minutes from the July 12, 2007, meeting. Ms. Fulton seconded the motion. The board unanimously approved the revised minutes.

Investment Committee

ING

ING has more than $203 billion in assets under management and more than 270 investment professionals in the Americas. ING has managed funds for Anne Arundel County since 1992. The county made a $10 million contribution this year. The county’s ending balance for large-cap growth and core-fixed income is $166,334,709.25 for the quarter ending September 30, 2007.

Mr. West, senior vice president, has been with the firm 17 years. He’s new to the county’s account following the departure of Doug Bennideto. He reported that ING’s chairman has retired as of this year and a new chair is in place. That should have no impact on the county’s portfolio. Mr. Welsh is now responsible for the county’s equity account following the retirement of an ING portfolio manager.

As part of its investment strategy for large-cap growth equity, ING focuses on paying a reasonable price for equities and searching for companies that the market hasn’t recognized. After identifying growth stocks within the large-cap universe, analysts rely on quantitative screening and fundamental research analysis to construct a portfolio. The county’s portfolio has 53 issues.

Mr. Welsh said growth is back because the market has a large appetite for companies that can grow during slowdowns. Year to date, ING is up 15.50 percent compared to the Russell 1000 Growth Index of 12.68 percent. As of October 7, ING’s returns have been 5 percent ahead of the Russell benchmark.

Several sectors contributed to the county’s performance, although careful stock selection within those sectors drove returns. During the year, important sectors for the county included health care and consumer discretionary. Gamestop was a top contributor to performance as well as Coach handbags. Materials also did well due to demand from emerging markets. ING saw positive results from Monsanto as well as copper. Technology stocks lagged during the 12-month period ending in September. ING was excited about a new product from Citrix, but the company had an earnings shortfall. 

During the third quarter, however, technology stocks performed well. Companies such as Apple and Research in Motion (Blackberry) drove the success of this sector. Mr. Welsh said consumer discretionary was also a winner. McDonald’s has had strong performance in this sector. ING has pushed down its position in the financial sector and increased its position in technology. ING has bought such bellwether companies as Cisco, IBM and Intel.

Mr. Willis asked if ING is making money with cheaper dollars due to the value of the dollar.

As a domestic manager, Mr. Welsh said he doesn’t speculate on currencies, but large-cap companies should do better than small caps for a while because of their European exposure. 

Mr. Kinsey discussed ING’s fixed-income performance. The portfolio was affected by the mortgage crisis in August. Even though ING had high-quality mortgage-backed securities, returns were still affected. He described the mortgage crisis as a textbook financial panic. As a result, ING is pruning its mortgages position. 

Mr. Middleton asked how much blame can be placed on ratings agencies. Mr. Kinsey said the principle of Let the Buyer Beware applies to a certain extent but the ratings agencies most likely didn’t fulfill their fiduciary responsibilities. Mr. Hammond asked about treasuries. Mr. Kinsey said the risk is that longer maturities (10 to 30 years) will drift upward because of inflation. He noted that inflation currently is energy-based, and demand is up for all kinds of commodities.

New England Pension Consultants

Rhett Humphreys of New England Pension Consultants (NEPC) is now working with an assistant, Dave Moore. Mr. Moore is a senior consultant with the firm who has 12 to 13 years of experience. Mr. Humphreys will still serve as the primary consultant. Moore will serve as a backup.

Mr. Humphreys said the total composite for the third quarter is 3.4 percent. The county is in the top 7 percent of public pension plans in the country within a universe of $2 trillion. The year-to-date composite is 11.4 percent, which puts the county in the top 3 percent. The total composite for the last five years is 14.1 percent, which ranks Anne Arundel in the top third.  

Mr. Humphreys also reported that the county’s Private Markets Report reported an internal rate of return of 2.58 percent. He noted that the IRR is usually a negative number for the first two to four years of a private equity program. The county structured the program to mitigate typical short-term negative returns.  

The financial composite for the period ending October 31 is 4.0 percent. He noted that Marvin and Palmer is the star of the flash report on the equities side with 40.6 percent returns per year during the last five years. Year to date the fund is up 56.2 percent.

On the fixed income side, he noted that ING and Western underperformed due to overweighted positions in mortgages. Wellington showed year-to-date returns of 21.2 percent because of its overweighted position in emerging markets.

The county’s investment policy statement has been adjusted to include guidelines for portable alpha strategy managers. Further, the policy statement includes Gottex Fund Management and its exemptions from general guidelines.

Action: LeRoy Wilkison made a motion to approve the new investment policy statement.

Mr. Middleton seconded the motion. The motion was unanimously approved.

Administrative Report

Judi Lohn of the Office of Personnel reported that John Peterson will take her place in handling pension and payroll. Next month he will attend the board meeting instead of Ms. Lohn.

Ms. Lohn also reported 14 retirees for November so far.

Mr. Hammond said that Prudential agreed to pay benefits to about 23 surviving spouses for November. In October Mr. Hammond reported that Prudential planned to cease making those payments because the company believes the annuities the county had for police officers and firefighters were annuities on the lives of the employees and didn’t cover spouses. Mr. Hammond said a meeting has been scheduled with Prudential to continue addressing the matter.

Action: The investment committee will meet on February 7, 2008.

The meeting adjourned at 2:53.