GMO has been managing a portfolio of international small companies for the county since 2004, and returns have been strong on an absolute basis. GMO has holdings in Australia, Germany, Sweden, France and the UK. Top investment sectors include industrials, financials and consumer discretionary.

The account is 19.3 percent since inception, which is in line with the overall index. Last year, GMO anticipated some softness in the market, and Mr. Smith noted that the county demonstrated good timing in withdrawing $20 million before the fund began to drift downward. Returns were positive in April, and GMO saw better results than the index.

GMO plans to change its benchmark index at the end of May to MSEI Small Cap. Mr. Callahan asked the reason for the change. Mr. Smith said that the MSEI is a superior index and better reflects what GMO does. The previous benchmark, S&P/Citigroup, was starting to include larger companies.  Further, MSEI’s data is more timely.

In looking at the fund’s performance for the period ending March 31, 2008,  Mr. Rosalinko said the markets are losing some of the ground gained over the past few years in terms of excess returns.  Year to date the county was down roughly 6 percent and the benchmark was down 7 percent. Further, GMO has seen great volatility in the markets during the past six months. As a result, GMO is making some changes because its usual processes don’t seem to be working.

GMO typically looks for high-quality companies and cheap stocks. The firm also looks for stocks on the basis of strong momentum. But during volatile periods, Mr. Rosalanko said, the marketplace doesn’t reward value stocks. High-quality stocks are starting to do a bit better, but cheap, high-quality stocks haven’t done well. Companies that offer growth and high quality have seen better returns. 

Finally, GMO tends to seek trends to follow. In volatile times, said Mr. Rosalanko, the trend isn’t there. So GMO has made some small changes in anticipation of where the market may be going.

He noted that financials have been suffering during the last six months or more and will probably get even cheaper. Mr. Rosalanko anticipates that the worst is ahead for financials and GMO wants to wait until they go even lower. 

Mr. Callahan asked about GMO’s projected levels for purchasing financials. Mr. Rosalanko said GMO doesn’t have a projected level; indeed, GMO may wait a year or more due to its research of banking crises during the past 30 years.

GMO also has broadened its strategy to consider pricier, high-quality stocks that should outperform over time. Mr. Rosalanko said the market is still volatile and small caps might not get the high performance of the past few years; however, small caps still may do better than such asset classes as larger cap international stocks.   

Mr. Callahan said he appreciated that GMO was willing to discuss its challenges and tweak its strategy. Mr. Rosalanko said that as part of a quantitative process, firms build models to work, and models that have worked during the past 20 years should succeed going forward. However, sometimes professionals must steer away from changes that are coming down the road.

Ms. Sulick asked a question about the reasons for market volatility. The volatility is coming from markets overall, not just small caps. Further, added Mr. Rosalanko, the issues in the subprime market made people afraid and everybody rushed toward safer investments at the same time. Finally, the markets have had many years of excess, which led to overvalued stocks. All of those elements contributed to the current market, he said, and no one can predict what will happen next.

Marvin & Palmer

Marvin & Palmer is an independent employee-owned firm with nearly $11 billion under management.  Founded in 1986, the firm focuses on identification of country and sector leadership, identification of quality growth companies and mandatory sell disciplines. All portfolio managers are partners in the firm.

Anne Arundel County made its initial investment with Marvin and Palmer in 2002. The account market value as of April 30, 2008, is $70,682,300. Mr. Marvin said emerging markets have been a great investment sector. During the last three years, he said, the county has annualized over 30 percent returns. 

Mr. Mason said emerging markets took a good hit during the first quarter of 2008. He added that the U.S. government has done a good job of adding liquidity and trying to stimulate the economy. He noted that even with a bad first quarter last year, the fund exceeded the benchmark by 11 percent during the calendar year.  In similar fashion, he expects the county to recover its losses later in the year.

In reviewing the fund’s performance drivers during the past 12 months, Mr. Mason said Marvin & Palmer has been underweight in financials and consumer discretionary in the emerging markets area, particularly because of inflation. China was down close to 30 percent in the first quarter because inflation went from 2 to 3 percent to about 8 percent. Rising food costs have been a big concern during the first quarter, particularly in emerging markets, because food, as a percentage of disposable income for emerging markets participants is a much higher proportion of expenditures. When people don’t make a lot of money, they spend a lot of it on food, said Mr. Mason.

On the other hand, materials and energy costs have been beneficial for emerging markets, said Mr. Mason. Although goods and products were cheaper to produce in emerging markets at one time, within the last year and half emerging markets have been providing goods that the rest of the world requires. These countries now provide mainstays needed in society, including energy and commodities, and the portfolio has shifted as a result. 

Brazil, for instance, is one of the biggest producers of iron ore and coal in the world. 

Marvin & Palmer has noted strong trends in industrials, energy and materials, so it is overweight in all those areas. Among other reasons, the firm is overweight in these segments because residents in emerging markets are starting to move into the middle class. Two to three billion people that were below the poverty line are now middle-class consumers.

Countries also are spending heavily on infrastructure. Russia, for example, has committed $500 billion in spending during the next five years for sewer and water systems, electricity, highways and more, said Mr. Mason. The demand for steel, cement, copper, aluminum and iron ore will continue to be stable and probably stronger as time goes on, he said. Companies involved in these areas are a big part of Marvin & Palmer’s portfolio.

The firm also has increased its exposure to companies that provide Internet access as people in emerging countries gain more access to telephones and computers. Revenues for companies such as Ten Cents Holdings in China are beginning to experience the same growth seen in such U.S. companies as Google and Yahoo a few years ago. That trend is going to continue, Mr. Mason said.

Marvin & Palmer is slightly underweight in Asia and overweight in Latin America due to its raw materials. Its neutral in the middle east and eastern Europe. The firm expects emerging markets to continue to be a good place for investments. 

In response to a question about the political stability of these countries, Mr. Mason said Marvin & Palmer is concerned about Chavez in Venezuela. The middle east is always going to be questionable. China appears to be stable. The firm has nine portfolio managers, and six of them have at least 13 years’ experience, so the knowledge base of these various regions is very high, Mr. Mason said. 

Investment Committee Report

Mr. Hammond reported that the investment committee talked with State Street Global Advisors about its personnel changes. The committee also has a game plan to commit $10 million of private equity money in 2008 in the areas of mezzanine and distressed. Rhett Humphrey of NEPC has suggested putting the $5 million in mezzanine in TCW, a current fund manager. The committee will talk with TCW in June. Regarding distressed debt, the committee will talk with three managers in July and come back to the entire board with a recommendation.

Action: The next regular meeting of the investment committee is August 7, but a special meeting will take place June 12.

New England Pension Consultants

Mr. Humphreys reported returns of -6.3 percent in the First Quarter 2008 Executive Performance Report. He noted, however, that the structure that the board put in place worked well for the first quarter. Although the total policy index was -4.5 percent, the county ranked in the top 26 percent of public funds in the country. 

Looking at the three-year risk/return versus median public funds, the county had a composite return of 8.9 percent and ranked in the top 19 percent of public funds for that three-year time period. The Sharpe Ratio, return over risk, put the county in the top 31 percent.

For the five-year risk/return, the composite was 11.9 percent, which ranked the county in the top  38 percent among its peers in public funds. The Sharpe Ratio of put the county in the top half.

In the April flash report, the county’s financial composite was up 3.8 percent. That brought the year-to-date returns up to -3.4 percent, so the county dug out of a hole about halfway in one month, Mr. Humphreys said. 

On the equity portion of the flash report, Mr. Humphreys noted that GMO has seen returns of 18.3 percent during its three-year cycle, over a benchmark of 16.2 percent. Eighteen percent over three years is a good return on a $50 million portfolio, he added.

Reviewing the volatility of the Marvin & Palmer fund, Mr. Humphreys noted the importance of moving profits out of that account into other funds during up cycles on a disciplined, consistent basis.

Under Global Asset Allocation, Bridgewater returns for last year were 12.4 percent while Wellington’s performance was 11.1 percent. The composite for the two funds is 12.1 percent for the last year.  Those returns were 1.2 percentage points of value added to the total plan, Mr. Humphreys said. 

Mr. Humphreys also discussed in greater detail GMO’s change to the MSEI Small Cap Index benchmark and recommended that the county approve an index change for GMO as well as Globeflex and State Street Global Advisors.

Action: Mr. Callahan made a motion to approve the benchmark change. Mr. Cuccia seconded the motion. The board unanimously approved the motion.

Comprehensive Annual Financial Report

Tom Heseltine of Clifton Gunderson LLP discussed the audit of the county’s retirement and pension system. Clifton Gunderson didn’t identify any significant deficiencies related to the audit. The audit report focuses on the investment areas because systems are becoming more complex. Although auditors can understand the value of stocks and bonds, alternative investments require more time and scrutiny. Auditors also focused on benefit payments, actuarial information and contributions reported by the county as well as amounts from the employees,

Janet Morgan noted that the auditors were able to complete the process smoothly because NEPC and Bolton Partners provided data quickly. The entire document also is in PDF format and available for the county Web site. 

Administrative Report

Mr. Peterson discussed the cost of joining the Mid-Atlantic Plan Sponsors group. If more than two trustees are interested in going to MAPS conferences, it would make sense to join the organization.  The nonmember conference cost is $250. Members pay $100. The cost for the board to join MAPS is $500.

Mr. Peterson also mentioned that the corrected actuarial valuation books are available.

Ms. Sulik asked a question about her role on the audit committee. Mr. Peterson said he will need assistance during the board’s RFP process.

Ms. Fulton noted Mr. Peterson’s six-month anniversary with the county’s pension and retirement system and acknowledged his contributions to the system and the board.

Jennifer Gilbert-Duran has been re-elected to the board. Mr. Middleton is in the process of being reappointed.

The next meeting is scheduled for May 8, 2008.

Meeting adjourned at 2:10 p.m.