Members Present: John Hammond, Howard Brown, William Brown, Dennis Callahan, Hunter Calloway, Jay Cuccia, Andrea Fulton, Jennifer Gilbert-Duran, Frank Marzucco, Jay Middleton, M. Kathleen Sulick, LeRoy Wilkison, Douglas Willis.

Staff Present: John Peterson

Guests: David Ballard, Dan Elsberry,  Dan Sullivan,  Peter Gerlings, Rhett Humphreys, Thomas Lowman

Recorder: Laura C. Jackson, Audio Associates

The county’s retirement and pension system made an initial investment of $20,000,000 with Mariner in October 2004. The estimated ending balance as of March 31, 2008, was $38,779.153. 

Mr. Sullivan said the last year and a half has been an extremely turbulent period. 2007 has been a difficult and disappointing year; however, this is an optimum time for the type of investment approach that Mariner uses. Mariner relies on fixed income or credit- related activity, which perform well when other markets  are experiencing sizable challenges.

The first half of 2007 was characterized by unusually strong economic growth, and Mariner was up by a little over 4 ½ percent, said Mr. Sullivan. The second half was a dramatic time of credit contraction.

Noting the difficulties in the current economy, Mr. Sullivan said 2000-2002 were volatile years but those financial challenges weren’t global in scope and didn’t touch the average consumer. 

Mr. Sullivan expects substantial volatility for the next several years. The housing market, for example, has reported a loss of $4 trillion, he said. The number one cause of concern is that credit is shrinking and new credit is not yet available, despite federal intervention. In the short term, those who are trying to get money are having difficulty getting loans.  

Even so, he said, concerns about recession or inflation create turbulence, and forced selling creates opportunities. Because banks have had to sell off some of their portfolios, some high-quality assets have been mispriced. Those are areas of extraordinary opportunities. There is risk, of course, he said, but the question is where you take the risk. Based on its historical data, Mariner’s funds have performed well during major loss periods in comparison to other indices.

Mr. Hammond asked how Mariner is making adjustments in response to the market.

Mr. Sullivan expects Mariner to increase its exposure to distressed debt by the end of the year.  Corporate distressed debt is not as cheap as it is going to get yet. Mr. Middleton asked about a worst-case scenario for the markets. Mr. Sullivan said one big concern is that people think the second half of the year will be fine, but Asia and Europe are slowing. Equity prices haven’t hit the bottom yet. 

K2

Founded in 1994, K2 has $6.5 billion under management as of January 1, 2008. The firm has offices in the United States as well as London, Tokyo and Sydney. Mr. Gerlings said K2 is one of the more institutionally oriented hedge funds. Although others often view hedge funds as highly speculative and unregulated, Mr. Gerlings noted that K2 is registered with the SEC and other regulatory bodies.

Mr. Gerlings said K2 is in the “sweet spot” of assets because it is big enough to have a sound staff and research budget but still small enough to move the portfolio around. Given the challenges in the market, Mr. Elsberry pointed out that K2 doesn’t invest in subprime because the firm can’t gauge the risk.

The current value of the county’s K2 Investment Partners II portfolio is $32,043,285. The fund is a balanced fund. Sixty percent of the fund is long/short managers, and 40 percent lower-volatility strategies. On the lower-volatility strategies side, K2 looked to do more with secure bank debt and pulled its exposures back and became more conservative. K2 hopes to get equity-like returns with about a 1/3 of the volatility of the S&P. Mr. Elsberry said efforts to be more conservative have paid off.  The county investment, dating back to October 2004, is up 32 percent. 

In light of the current disconnections in the market -- including the commodities index, low dollar, growth value, and credit spreads -- Mr. Elsberry said K2 fund managers are excited about available opportunities. Mr. Gerlings added that in the long run people tend to get the greatest returns after periods like this. For instance, managers can still take advantage of opportunities outside the United States as well as specific sectors in the market. They agree with Mariner that distressed debt will be another strong opportunity by the end of the year.

New England Pension Consultants

Rhett Humphreys of New England Pension Consultants (NEPC) said total equity was down 80 basis points, which wasn’t bad considering the volatility in the market during the past few months. In small cap equity, Chartwell and Buckhead were up for the month. In large caps, although Gottex had returns of -1.6, ING and Sands both beat the market for the month. Southeastern Asset Management and Westwood balanced out returns with returns of -1.5 percent and 1.3 percent, respectively.  International equity firms Globeflex and SSgA showed negative returns, but to the extent that the benchmarks are reporting negative result, the returns of those funds weren’t as negative as they could have been.

The fixed income side of the flash report reveals how things have changed dramatically in about a year. Western Asset and ING have shown negative returns due to their holdings in mortgages, credit and mortgage-backed securities. Mr. Humphreys advised the board to continue to hold on to the funds and not make any changes. Under high-yield income, Penn Capital’s returns aren’t as bad as the overall market due to its defensive strategy  fund. 

Action: The investment committee will meet Friday, May 2

Bolton Partners

The board met with Bolton Partners to discuss the FY2009 recommended funding and 2008 actuarial reports.  Board members reviewed the actuarial valuation documents for Anne Arundel County employees, the fire service retirement plan, the police service retirement plan and the detention officers and deputy sheriffs’ retirement plan.   

Mr. Lowman and Mr. Bolton will make minor corrections in the documents and return them to the board.  

Mr. Hammond said the actuary recommends $39,887,462  be contributed to the pension plan from the employer’s side for next year.

Action: Mr. Callahan made a motion and Mr. Wilkison seconded the motion to make a contribution for the employees of $13,414,470; for the sheriffs, $4,019,403; for the fire department, $11,185,312; and for the police,  $11, 268,277. The motion passed unanimously.

Mr. Callahan asked if these increases were in line with what the pension and retirement system had expected.  Mr. Hammond said  the system was anticipating a small increase in the pension contribution year to year because of the assumption changes agreed to as a result of the study completed this past year. The board’s work on making sure the county receives an investment return mitigates the increase the county has had to put in, he added.

Administrative Report

Mr. Peterson reported an uptick of retirements in April. Most of the retirement seminars have been going well. The most recent employee sessions were full. The last public safety officers’ session only had six participants. The seminars for detention officers’ have been canceled.    

Benefits statements will be ready in June, and Peterson’s staff is starting to work with Bolton Partners on the cost of living assumptions. 

Nominations have closed in preparation to elect a new detention officers’/deputy sheriffs’ board trustee.     

Action: Mr. Wilkison made a motion that all vendors should provide electronic copies of their reports and presentations so the pension office can keep records in an electronic format. Mr. William Brown seconded the motion. The motion passed unanimously.  

The board reviewed the pension fund’s budget summary 2009. Mr. Hammond said the FY09 budget amount for financial services is $5.6 million versus $5.8 million in FY08. That makes the total budget $7.3 million compared with nearly  $7.4 million in 2008.

Action:  Mr. William Brown made a motion to approve the requested budget for fiscal year 2009 in the amount of $7,339,000. Ms. Sulick seconded the motioned. The motion passed unanimously. 

The next meeting is scheduled for May 8, 2008.