Members Present: John Hammond, William Brown, Howard Brown, Dennis Callahan, Hunter Calloway, Jay Cuccia, Andrea Fulton, Dennis Howell, M. Kathleen Sulick, LeRoy Wilkison,

Members Absent: Jennifer Gilbert-Duran, Douglas Willis, Frank Marzucco, Jay Middleton.

Staff Present: John Peterson

Guests: Steve Hansen, Mike Hotchkiss, Rhett Humphreys, Kevin Maloney, Mike Sramek, George Yepes   

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 12:25 p.m. by John Hammond, Chair.

Minutes

Mr. Wilkison moved to approve the minutes for the February 14, 2008, Board of Trustees meeting. The motion was seconded by Dennis Callahan and approved unanimously.

Investment Committee

Gottex

Gottex has been managing fund of funds since 1999. It has $16 billion in assets under management, the majority of which is in a sector called market neutral investing. As a global firm, Gottex has offices in the United States as well as Europe, Asia, South America and Australia to remain close to its managers and study the markets. Last November, Gottex became a publicly traded company on the Swiss Stock Exchange.

As part of its investment strategy Gottex focuses on risk-adjusted returns, maintains low volatility, invests in market neutral funds and manages a highly diversified portfolio. Because of its focus on market-neutral fund of hedge fund products, return screens should have little correlation to equity products.

At the beginning of last year, Gottex launched a series of portable alpha products. The goal is to combine a low-cost access to a market index (fixed income, equity, and so on) with an investment in its fund of hedge funds.  Gottex has about $350 million invested in S & P 500 portable alpha products. The goal is to generate consistent returns.

Anne Arundel County began investing in Gottex’s portable alpha strategy in October 2007.  During the past few months, a narrowly focused credit crisis has expanded to all financial markets. The portfolio was down in November 4.88 percent while the index was down 4.18 percent.  In December the fund reported returns of -1.28 against index returns of -0.69 percent. Mr. Maloney noted continued declines in the stock market in January. He expected February results to show the portable alpha fund down 2.85 percent against the S&P 500 being down 3.25.

Next, Mr. Maloney discussed what has been happening with hedge funds and the strategies that have and haven’t performed well.  Although Gottex generally runs low volatility and consistent positive returns month by month, the overall turbulence in the financial markets has caused the volatility in the fund to increase.  However, Mr. Maloney said, those who can stay in the game should expect to see the fund recoup its losses.

Mr. Calloway asked if there were any projections on when market volatility might subside. 

Mr. Maloney said the most important thing to do is to watch what the Federal Reserve is doing to lubricate the financial markets. He added that in two years’ time, this period will probably been seen as a great investment opportunity.  

In positioning itself for the future, Mr. Maloney said Gottex is pulling back from merger arbitrage and some event-driven equity strategies and focusing more on asset-based lending because traditional lending channels have pulled back on capital commitments. Investing in corporate distressed securities might also look very attractive later in 2008.  Gottex also expects good results from its options arbitrage strategy because these managers do well in difficult markets. Options arbitrage was a 6 percent allocation in 2007; today it is about 9 percent of the portfolio.  

Sands

In the first quarter of 2008, Sands has been down almost 15 percent and trailing its benchmark, the Russell 1000 Growth, by a little over 500. Even so, Mr. Hotchkiss expressed confidence in the firm’s strategy and portfolio. 

Sands typically runs a concentrated portfolio of 25 to 30 businesses. Sands focuses on buying businesses, not just stocks, and holds outstanding businesses, on average, for about five years. That tends to create a lot of volatility, Mr. Hotchkiss said. But when the market turns around and becomes more rational,  the county should see a strong response from its Sands portfolio.

Noting its yearly investment results against the Russell 1000 Growth, Mr. Hotchkiss said that underperformance in 2006 caught the investment team off guard. Ms. Sulick asked about the cause of the underperformance in 2006.  Mr. Hotchkiss said there are always a couple of bad investment outcomes. Ebay, for example, was one that hurt that year.

Although stock prices may move around in the short term, Sands focuses on holding a business for the long term and making sure company earnings grow each year. Sands, for instance, has owned Microsoft for 17 years. During 2007, Sands added such companies as Amazon.com, Las Vegas Sands, Cerner, and National Oilwell Varco.  It eliminated Ebay and Qualcomm, among others. The portfolio also includes Google, Iron Mountain, and Genentech.

Sands projects earning growth for three to five years and looks to understand the drivers for that growth. Instead of focusing on the stock, Sands focuses on how the business itself will perform.  Sands will consider selling a business when a company has grown so large it can’t grow earnings above average. Mr. Hotchkiss said the companies in the portfolio should grow earnings at 24 percent.  The benchmark will grow at about 14 percent. 

The county’s portfolio is exposed to such sectors as financial services, health care, utilities, information technology, and energy. The highly profitable companies in the portfolio have financial strength and most of them have no debt.  Regardless of whether the country experiences a recession, Mr. Sramek said Sands expects these businesses to continue to grow over the long term.

ING--Clarion Lion Properties Fund

The Lion Properties Fund is a core, US. only, diversified real estate fund. Anne Arundel County has invested in the fund for three years. The portfolio is about $7 billion in gross asset value. It’s comprised of 166 discrete property investments in 35 U.S markets.

Mr. Hansen said the fund is an actively managed fund that focuses on identifying sectors of relative value and generating income. The fund has a turnover rate of 5 percent to 7 percent per year.

The average investment size is $41 million, although most properties range from $25 million to $60 million. The average age of the properties in the fund is 11 years old. The fund has investments in the 10 best performing real estate markets, including Los Angeles, Phoenix, Miami, New York, Boston, and Washington, DC. Mr.  Hansen said the DC market is one of the best risk-adjusted markets. As the country’s economy began to slow down, Mr. Hansen reduced the fund’s exposure to office properties from 40 percent down to 30 percent because this property type is the most volatile. 

The fund’s one-year performance, ending December 31, 2007, was 17.19 percent compared to its benchmark, the NCREIF Fund Index, which had returns of 15.83 percent. The fund’s net asset value is $75,503,406. The fund’s three-year performance was 16.77 percent compared to benchmark returns of 17.37 percent.    

The fund’s priorities for 2008 include reducing financial leverage to 30 percent to 35 percent, continuing an active sales program, and staying in tune with a changing market environment. As part of this, ING will maintain a high-quality portfolio, concentrate on income growth, and look for more attractive pricing and yields on new investments.

New England Pension Consultants

Although the S&P 500 was down -3.3 percent, Rhett Humphreys reported that the county’s total equity composite was down -1.0 percent. Global diversity helped the county’s performance during the period ending February 29, 2008.  Globeflex had positive returns of 3.2 percent and SSgA reported 2.5 percent. The benchmark was 1.7 percent. GMO showed returns of 2.8 percent. In emerging markets equity, Marvin & Palmer’s performance was up 6.8 percent.

In the alternative composite, Mr. Humphreys said Wellington’s returns of 2.6 percent over the benchmark’s 0.3 percent were due to investments in emerging market equity and emerging market debt. Bridgewater, a passively managed fund, was up 2.6 percent.

Action: The investment committee will meet May 2.

Administrative Report

Mr. Peterson reported that retirement seminars for county employees have begun and have been well attended. The seminar planned for detention and deputy sheriffs, however, had no participation, and the first one has already been canceled. Mr. Peterson has contacted those departments and the unions to push for greater advertising of the seminars.   

Mr. Peterson also reported that annual employee benefits statements will go out in mid-June.

Action: Based on the experience study, Mr. Wilkison moved to adopt the findings of the experience study, except the board will not make any change to the investment assumption of 8 percent. The motion was seconded by William Brown and unanimously approved.

The next meeting is scheduled for April 10 at 12 p.m.