Members Present: John Hammond, Dennis Callahan, Jay Cuccia, Janelle Davis, Richard K. Drain, Jay Middleton, Frank Marzucco, M. Kathleen Sulick.
Members Excused: Andrea Fulton, Jennifer Gilbert-Duran, LeRoy Wilkison
Members Absent: Howard Brown
Staff Present: John Peterson, Janet Morgan
Guests: Rhett Humphreys, Joseph A. Kaufman
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.
Mr. Hammond welcomed Richard K. Drain, who replaces the recently retired William Brown.
Minutes
Mr. Cuccia moved to approve the minutes for the December 11, 2008, Board of Trustees meeting. The motion was seconded by Mr. Drain and approved unanimously.
Investment Committee
TCW Crescent
TCW Crescent is an established mezzanine investor that has invested $5 billion in 126 mezzanine transactions since 1992. Headquartered in Los Angeles, the firm also has offices in New York and Paris.
In the current economic environment, banks have all but stopped lending, said Mr. Kaufman. He noted a sharp slowdown in LBO activity as well as changing financing and a competitive landscape. Securing credit or financing is much more difficult, and what is available is expensive.
Even so, TCW has stuck to a strategy that has worked during the past 15 to 17 years, he said. Further, lower leverage and better pricing play to the firm’s strengths. With the closing of Fund V, TCW has a lot of capital, and factors such as the recession and market volatility help the firm stand out from the competition. Volume is down, and the firm isn’t doing as much business as a year or two ago, said Mr. Kaufman. However, the opportunities are better, and TCW now has a greater share of a smaller pie.
TCW is making careful selections in order to complete the best deals. The firm is in a unique position to be a reliable partner and to add value to its sponsors, said Mr. Kaufman.
Changes in the marketplace allow TCW to move up the capital structure and complete deals that are almost senior secured debt, yet the firm is still able to get mezzanine pricing.
Mr. Callahan asked if TCW gets warrants on everything. Mr. Kaufman said everything TCW looks at now will include warrants on the term sheets, and the percentage on the deals that have warrants is much higher. Few sources of capital are available today, so TCW has a little bit of leverage when making deals, he added.
Providing an overview of Fund IV, Mr. Kaufman said the fund is fully invested. The fund has $1.7 billion in committed capital, and TCW has invested $1,599 million in 24 companies, representing 94 percent of committed capital. The firm realized $331 million through portfolio activity.
The portfolio includes 12 different industry sectors. Almost all the companies are private. The portfolio is not without challenges, Mr. Kaufman said, given that some of the companies have housing exposure. Others specialty retailers have suffered from the pullback in consumer spending.
Seven companies are on TCW’s watch list, including Wastequip, Mattress Firm and Harrah’s. TCW managers stay as close to the these companies as possible.
Mr. Callahan expressed concerns about David’s Bridal, one of the companies in the Fund IV portfolio. Mr. Kaufman said the company is a category killer and is performing well. The company has been part of Fund IV since 2007.
With capital commitments of $2.85 billion, Fund V is off to a good start, said Mr. Kaufman. This fund focuses on non-cyclical companies with defensive capital structures. Target sectors for Fund V include defense and aerospace. TCW has invested $575 million in 6 companies, representing 20 percent of committed capital.
No companies are on a watch list in this fund. One company in the portfolio, Alltel, was slated to be sold, he said. Other companies in the portfolio include Booz Allen Hamilton, Radiation Therapy Services and the Sun Products Corp.
The board will reschedule a meeting with managers from Lexington, who were unable to attend the January 8th meeting.
New England Pension Consultants
Noting the 2009 asset allocations assumptions forecast, Mr. Humphreys said NEPC has increased its forecast for the S&P 500 to 9 ¼. Likewise, the standard deviation or risk on the S&P has gone up from 16 percent to 20 percent. The first six months of 2009 could be just as turbulent as the last quarter, he added.
Mr. Humphreys reported a bit of good news in fixed income. Performance took a big hit during the last year due to problems with credit and mortgages. However, the flash report for the period ending December 31, 2008, showed that Penn had returns of 3.3 percent. Western’s returns were 4.2 percent. Western’s benchmark, BC Aggregate, had returns of 3.7 percent.
In the global asset allocations portfolio, Bridgewater was up 4.4 percent. Wellington reported returns of 5.4 percent against a benchmark of 3.7 percent.
Noting that Southeastern, Sands and Chartwell seem to be lagging behind, Mr. Middleton asked if the investment committee should meet with some of the more troubled fund managers. Mr. Humphreys reported no major changes or personnel turnover at Chartwell. The results for Southeastern and Sands are somewhat understandable given the strategies and structures of those funds, he added. The only firm on the NEPC watch list is Western.
The investment committee will meet on February 5th.
Administrative Report
The Anne Arundel County Council passed a technical corrections bill to keep the pension plan in compliance with the IRS, said Mr. Peterson. Staff will submit the pension code for IRS plan determination by the end of the month.
Mr. Peterson said January typically is a slow month for retirements. He also said about 60 retirees didn’t return health forms during the open enrollment period for health insurance providers. Staff will contact those retirees as quickly as possible, possibly through a certified letter.
Regarding the matter with Prudential, Mr. Peterson responded that there has been no change to this issue and that there appears to be a tacit agreement that Prudential will continue to pay survivor benefits to anyone listed on their files as having a joint survivor benefit. The County pension system will pay the survivor benefits to the spouse, if applicable, of anyone who passes and is not listed as having a joint survivor benefit.
The next meeting will take place February 12th.
