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

Staff Present: John Peterson, Claire Garner, Janet Morgan, Richard K. Drain

Guests: Dennis Howell, Robert Kinsey, Alan Segars, 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.

Minutes

Mr. Cuccia moved to approve the minutes for the November 13, 2008, Board of Trustees meeting. The motion was seconded by Mr. Howard Brown and approved unanimously.

Investment Committee

ING Equity Investments and Fixed Income

Since the early 1970s, ING has used business momentum, valuation and market recognition to drive its performance. The firm looks for companies that demonstrate strong, improving growth, and price appreciation as well as business momentum that the market has overlooked.

Ninety percent of ING’s excess return is due to stock selection, said Mr. Segars. Reviewing the county’s performance summary for the period ending October 31, Mr. Segars said ING had an excess return of about 350 basis points due to stock selection. 

ING enjoyed particularly strong returns in health care; in fact, that sector provided most of the excess returns in the portfolio during six of the last eight years.  The equity portfolio also benefited from St. Jude and the University of Phoenix. Liberty Media and Advanced Auto Parts were stocks that hurt the portfolio, said Mr. Segars.

Due to the declining market, ING has reduced its consumer discretionary holdings. The firm sold Nike and Advanced Auto Parts. ING also trimmed its industrial weighing by selling SPX Corp. and Roper.  It purchased companies that focus on consumer staples such as General Mills, Coke and Anheuser Busch. Fund managers also added to the financial sector in anticipation of a market recovery sometime in 2009. 

Assessing the marketplace, Mr. Segars said fund managers still see significant counterparty risk perception. Banks are unwilling to lend to each other, partly because no one can seem to put a handle on the value of houses, he said. Further, consumer problems, job loss and no access to credit put increasing pressure on the economy. 

A fiscal stimulus in early 2009 might improve investor sentiments.  Further, large cap growth stocks, a major part of the county’s equity portfolio, tend to do well in recessions. Mr. Segars said equity fund managers are more optimistic than pessimistic heading into the new year.

Regarding fixed income investments, Mr. Kinsey was a bit more pessimistic. He noted, however, that the housing inventory is starting to move in cities such as Las Vegas, which will help clear out the pipeline. However, the country will need more time to get out of the crisis. The county’s bond portfolio has had a rough year and underperformed its benchmarks for the period ending October 31. Mortgages have been the primary source of underperformance.

The foreclosures, forbearance and loan modifications are a concern because ING has the more senior paper and wants to make its money back as fast as possible, said Mr. Kinsey. As a result, bond managers plan to reduce mortgage exposure in the portfolio during the next three to six months and increase investment grade credit/corporate bonds, which offer equity-like returns. The more optimistic bond managers say a turnaround is likely in 2010, said Mr. Kinsey. 

Mr. William Brown asked about ING’s rationale for moving into the mortgage market. Mr. Kinsey said ING thought it could escape pending problems in the credit market by going to AAA mortgages, but fund managers underestimated the risks. However, ING has a reasonable chance of recovering 80 percent of its losses in the next couple of years, Mr. Kinsey added.

New England Pension Consultants

Reviewing the flash report for the period ending November 30, 2008, Mr. Humphreys said market volatility has calmed down somewhat.  Diversification worked for the county in November.  Further, he said, moving out of Huff was a good, defensive posture.  Had the county stayed with Huff, results would have been much worse.  Western reported positive returns of 1.2 percent.   

Bridgewater, which has begun moving the county’s portfolio from an all-weather position to a “safe” portfolio, was up 2.8 percent. 

Noting the extraordinary economic times, Mr. Hammond said the pension fund may face some challenges in meeting its commitments. Relatively speaking, however, the fund is quite sizeable and well diversified. In response to a question from Ms. Davis, Mr. Hammond said county employees don’t need to lose sleep over their pension funds.   

Mr. Hammond also reported that next year the board will not take a break in August because members need to meet with so many fund managers. 

Mr. William Brown will retire early next year.  Leading a round of applause,  Mr. Callahan thanked Mr. Brown for working hard on behalf of the county’s financial well being.  Mr. Drain will replace Mr. Brown.

Administrative Report

Mr. Peterson introduced Ms. Claire Garner, who has joined the administrative team. 

Ms. Fulton reported that a public hearing will take place January 5, 2009, regarding Bill No. 92-08. This is a technical bill to keep the pension plan in compliance with the IRS. The bill was introduced as emergency legislation because the measure must be completed by January 31, 2009.       

The meeting adjourned 1:56 p.m.

The next meeting will take place January 8, 2009.