Members Present: John Hammond, Howard Brown, William Brown, Dennis Callahan, Jay Cuccia, Janelle Davis, Andrea Fulton, Jay Middleton, M. Kathleen Sulick, LeRoy Wilkison.
Members Excused: Frank Marzucco
Members Absent: Jennifer Gilbert-Duran
Staff Present: John Peterson, Janet Morgan, Richard K. Drain
Guests: Dennis Howell, Brian Lawlor, Tim Maul, Valerie Shey, Rob Zink
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.
MINUTES
Mr. Bill Brown moved to approve the minutes for the October 9, 2008, Board of Trustees meeting. The motion was seconded by LeRoy Wilkison and approved unanimously.
Investment Committee
Wellington
Wellington, a firm that’s about 80 years old, has experienced many changes in the economy and the world, said Mr. Maul. The firm is run by investors for investors and has $486 billion of client assets under management.
The company seeks to increase its global footprint by pushing career analysts into other offices around the world, said Mr. Maul. Wellington is focusing on China, the Pacific basin and other areas where fund managers see the potential for growth.
In looking the county’s investment performance, Mr. Maul said October 2008 was one of the worst months in the history of the stock market. Year-to-date returns for the WTC-CIF Opportunistic Investment fund are -29.6 percent compared to a benchmark of -28 percent. One month returns were -16.5 percent, whereas the benchmark posted results of -13.7 percent.
Due to an extremely turbulent market, growth is slowing across the globe, said Ms. Shey. Wellington’s fund managers anticipate that China should emerge from the current financial crisis in a strong position. Consumers in China are becoming more wealthy, industrialization is happening and opportunities exist to improve farming and agricultural techniques. In response, Wellington has exposure to companies that can benefit from China’s growth, she said.
The opportunistic fund focuses on high-quality assets (bank loans, high yield or structured products) that have been mispriced, Ms. Shey added. The high-quality credit that has been mispriced should come back to normal pricing once markets start moving again.
Mr. Hammond asked if Wellington had made any significant changes to its strategy during the past two months. Ms. Shey said Wellington has taken advantage of price movements in the shorter term. A year ago, the firm has less exposure to China than it does now. In the middle of the year, Wellington trimmed that exposure and took some of the profits to add back to that area. Further, Wellington has added to credit and agriculture and has bought some mortgages. Within the equity portfolio, Wellington is only about 80 percent exposed to the market, Ms. Shey said.
Mr. Hammond further asked if the world has changed as a consequence of the last seven months. Ms. Shey said there is recognition that some institutions created moral hazards and might have outlived their usefulness. The country is debating, for example, whether the government should save GM and Ford if executives didn’t efficiently operate those companies. Government intervention affects risk and therefore investment strategies.
Mr. Maul said the United States became an economic world power after World War II. Although it’s still a leader, leadership is also arising elsewhere, and Wellington is looking at those opportunities.
Bridgewater
Founded 33 years ago, Bridgewater operates on the principles of separating alpha and beta. The firm manages $87 billion in assets. Managers reported no changes in key personnel.
Bridgewater’s all-weather strategy, which has about $18 billion in assets, is a passive portfolio designed to capture market risk premiums. Although many passive funds are equity heavy, Bridgewater’s fund offers more diversified exposure.
Unfortunately, the current environment has had a material impact on the fund, said Mr. Lawlor. Since inception, the fund is down about 15.94 percent. The fund, he said, was holding up rather well in the credit crisis until Lehman Brothers fell in September. Even a well-diversified portfolio would underperform in that type of environment, he said.
As a result, all assets have underperformed cash. Investors have no place to hide in this environment, so they can expect to see negative returns. Still, a typical asset allocation would have underperformed the all-weather portfolio significantly even during this environment, said Mr. Zink.
Mr. Zink noted, however, that certain conditions, such as depressive environments, aren’t good for passive portfolios. A depression, he said, isn’t a more severe recession but a period of time when linkages between monetary policy and market conditions break down. Bridgewater managers believe they are seeing these kinds of signals in the current economic crisis, so they have begun moving assets into a safe portfolio that includes inflation-linked bonds (global), treasury bills and gold. The safe portfolio has no credit exposure. he goal, said Mr. Zink, is to go from wealth maximization to wealth preservation.
Bridgewater began moving funds into the safe portfolio in October. Mr. Callahan wanted to know how long Bridgewater would keep the funds in the safe portfolio. Bridgewater would continue to use a safe portfolio as long as the information fund manages receive suggests the economic environment hasn’t changed, said Mr. Zink.
Mr. Hammond said moving the funds is a dramatic move for a passive fund. Managers agreed but felt the move was a prudent decision. By staying on the sideline for a period of time, Bridgewater should be able to re-enter the market at the appropriate time and rebound quickly. Preserving capital, said Mr. Lawlor, is the right thing to do at this time.
In response to a question from Mr. Howell, Mr. Lawlor reported that the active portfolio, pure alpha, is up about 8 percent for the year plus cash. The target is 12 percent.
Investment Committee Report
The Investment Committee met with ING Fixed Income and the Mariner Investment Group on November 6. Both firms are having a difficult time due to credit markets; however, committee members don’t recommend making dramatic changes at this time.
ING has requested a change to its portfolio guidelines to take advantage of a pocket of the market called senior bank loans. ING would like to hold up to 5 percent of these bonds its portfolio. The committee recommends amending the investment policy. Ms. Sulik asked how long the change would be in effect. Mr. Humphreys said the board could revisit the policy in a few years.
Action: Mr. Howard Brown made a motion to allow ING to hold up to 5 percent of senior bank debt in the pension system’s portfolio. Mr. Middleton seconded the motion. The board unanimously approved the motion.
Mr. Hammond also reported the pension system needs $25 million during the next six months to meet private equity funding requirements and benefits payments. The committee recommends that the Board of Trustees raise the money from the fixed income portion of the portfolio by reducing the holding of the funds managed by Western Asset Management.
Action: Mr. Wilkison made a motion to allow the pension system to raise $25 million by reducing the holdings of the funds managed by Western Asset Management. Mr. William Brown seconded the motion. The board unanimously approved the motion.
New England Pension Consultants
During the Investment Committee meeting, Mr. Humphreys reviewed the third quarter NEPC report. For the quarter, the portfolio experienced a return of -11 percent compared to the 7.4 percent decline in the allocation index. That return placed the fund in the 96th percentile of peer public funds.
For the previous 12 months, the portfolio returned -15.8 percent, placing it in the 72nd percentile of public fund portfolios. The silver lining, Mr. Humphreys said, is that the private markets portfolio is still holding up well.
Administrative Report
Mr. Peterson reported that a staff member has returned and a new pension analyst is on board.
He also reported a slight increase in the DROP program as new people sign up. Coincidentally, a lot of people are coming out of the program. The months of December, January, February and March should be high exit months as well, he said.
Regarding the engagement letter from the auditor, Clifton Gunderson, Mr. William Brown said he will scratch through the paragraph that states that if the county doesn’t pay the auditor within 30 days from the date of billing, the county agrees to pay a monthly rate of 1.5 percent on the outstanding balance. The board gave Mr. Brown approval to make the change and sign the letter.
The next board meeting will take place December 11th.
The meeting adjourned 2:10 p.m.
