Members Present: John Hammond, Howard Brown, Dennis Callahan, Jay Cuccia, Janelle Davis, Richard K. Drain, Andrea Fulton, Jennifer Gilbert-Duran, Jonathan Hodgson
Members Excused: Jay Middleton, LeRoy Wilkison, Kathleen Sulick
Staff Present: John Peterson, Janet Morgan
Guests: David Ballard, Rhett Humphreys, Thomas Lowman, Brian Marvin, Terry Mason, Tom Rosalanko, Tom G. Smith
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
Dennis Callahan moved to approve the minutes for the April 9, 2009, Board of Trustees meeting. The motion was seconded by Jay Cuccia and approved unanimously.
INVESTMENT COMMITTEE
GMO
GMO, founded in 1977, has $78 billion in assets under management. The firm has 102 investment professionals and more than 400 employees worldwide.
Although assets have come down, GMO continues to invest in its business and add new staff members as it looks for opportunities in the current economic environment. In March GMO hired its first CEO, a role previously shared by investment leaders within the company. CEO Mark Mayer will focus on day-to-day issues rather than portfolio management decisions.
The county’s International Small Companies portfolio had a market value of about $30 million as of May 14th, said Mr. Smith. He congratulated the board on sticking with its rebalancing program and making a withdrawal from the account during a peak time. Another silver lining for the pension system is that small caps on the international market are cheap now, he said.
GMO blends proven traditional judgments with innovative quantitative methods to find undervalued securities and markets. Mr. Rosalanko said the firm’s portfolio process remains the same despite the market. The partners are fully invested in GMO, he said, so they feel the effects of the market as well.
GMO looks for undervalued companies as well as businesses that exhibit strong momentum. He noted that high-quality stocks tend to win in the long run, but both value and growth stocks have fallen. Further, there aren’t any hot, new trends in the marketplace right now to provide momentum. GMO’s focus on high-quality stocks has hurt performance during the last month or so, he added, because a recent market rebound created a rush to low-grade stocks.
Nevertheless, GMO believes in its investment strategy, said Mr. Rosalanko. The firm has had positive results but sees room for improvement. GMO’s top holdings include such sectors as mining/materials, tech companies, consumer discretionary and consumer staples. GMO believes consumer staples and the more conservative, defensive, high-quality companies will help the portfolio succeed in the current environment.
Fund managers see great opportunities in Japan, so GMO has invested in Japanese firms that focus on consumer discretionary and consumer staples. In response to a question from Mr. Callahan, Mr. Rosalanko noted that many of the attractively valued companies today tend to be domestically oriented retailers rather than the global exporters. GMO has largely avoided the financial sector as well as emerging markets.
Looking at GMO’s seven-year forecast, Mr. Rosalanko said fund managers foresee an annual real return of 13.1 percent for small cap equities. That rate of return isn’t likely to happen anytime soon because the world’s economies still must go through some difficulties. However, that outlook gives clients something to anticipate, he said.
Marvin & Palmer
Founded in 1986, Marvin & Palmer is an independent, employee-owned firm that concentrates on global equity. Marvin & Palmer had $5.1 billion under management as of April 30, 2009.
The county’s account market value as of April 30 was $28,957,300. Total value added since inception in February 2002 is $35,582,394. On a relative basis, the portfolio was down year to date about 5.8 percent, said Mr. Mason. On an absolute basis, the portfolio was up about 11 percent.
Noting that the market has been difficult since July 2008, Mr. Marvin said he thinks a stable foundation is now in place, at least for the short term. Mr. Mason noted that lawmakers put 661 policy initiatives in place during the last 21 months to stimulate economies around the world. More than 500 of those policy changes were during the last 6 months, he said.
Similar to GMO, Marvin & Palmer also seeks quality companies that demonstrate good management. Mr. Mason said health care and technology stocks are down while industrials and consumer discretionary stocks have gone up. The firm was overweight in high-quality stocks within the health care and technology sectors, so a March 9 rally to low-quality stocks hurt performance.
The firm believes emerging markets are poised for growth because these countries are the labor market of the world, said Mr. Mason. When markets pick up and Apple, Dell and Compaq see an increase in orders, those companies will contact their plants in Taiwan, Thailand and Korea. Emerging markets year to date are up about 25 percent, he added, while the world index is up about 2 percent.
Emerging markets should be the first to recover from the turbulence in the markets because Asian banks are much stronger and have a much better structure, said Mr. Mason. Asia, for example, experienced its own banking crisis in 1997; therefore, its financial institutions didn’t purchase any of the bad debt that led to the current financial turmoil. Further, emerging market countries continue to make great strides toward urbanization, so these populations are becoming consumers as well as exporters.
Mr. Callahan asked how government stability plays a role in the firm’s investment decisions. Mr. Mason said Marvin & Palmer considers political stability when looking to invest in an emerging market. The firm had been underweight in Taiwan and Korea, but these countries are beginning to build more cooperative relationships, he said. The firm is also is underweight in Eastern Europe markets because countries such as Poland and Hungary borrowed in foreign currency to develop their infrastructures.
The firm is overweight in Brazil due to the world’s continuing need for commodities such as copper, said Mr. Mason. Overall, the firm assesses areas of outperformance, then considers a country’s currency, sector, and political systems before looking at a particular stock.
New England Pension Consultants
The flash report for the period ending April 30 showed that the county’s pension system was back in positive territory, said Mr. Humphreys. Year to date, the total equity composite was 0.9 percent while the total domestic equity was 1.5 percent.
Buckhead, a defensive portfolio, reported returns of -0.6 percent year to date versus a benchmark of -6.9 percent. Another standout fund manager, Southeastern, reported year-to-date results of 20.1 percent against a benchmark of -9.3 percent.
Mr. Humphreys reminded board members that the pension system had invested $29 million with Marvin & Palmer, taken out $36 million and still had a portfolio value of about $29 million. The firm had done well during the past 7 years, he said. Western and ING, two fund managers that had struggled due to mortgages and credit, reported returns of 2.8 percent and 0.1 percent respectively compared to a benchmark of 0.6 percent.
Bridgewater, which reported -0.7 for the month, soon may transition from its defensive mode back into its regular investment style. The defensive portfolio, which includes treasury inflation protected securities, took a hit during the month, said Mr. Humphreys.
Reviewing equity manager returns as of March 31, Mr. Humphreys said the county’s pension system ranked in the top 27 percent of public funds in the country within a $2 trillion universe. Mr. Brown asked how many funds are part of the ranking. Mr. Humphreys said the Independent Consultants Consortium, the largest such type universe in the country, ranks more than 100 public funds.
Mr. Humphreys said he would review the investment policy statement during the next meeting. All in all, he said, the county had a good month.
ADMINISTRATIVE REPORT
Bolton Partners Actuarial Report
Mr. Lowman reviewed the actuarial valuations for Anne Arundel County employees as well as the fire service, police service and detention officers and deputy sheriffs. All of the plans felt the effects of investment losses, he said, and none of them are 100 percent funded. All of the plans are using a 5-year smoothing method, said Mr. Lowman.
For the employees’ retirement plan, the total recommended employer contribution for plan year and fiscal year ending June 30, 2010, increased from $13,414,470 to 17,078,045. The market value of the plan assets as of December 31, 2008, was $367,773,037, which represents a loss of 29 percent. The overall funded ratio for this plan decreased from 93.6 percent to 85.9 percent.
For the police service retirement plan, the total recommended employer contribution for plan year and fiscal year ending June 30, 2010, increased from 11,268,277 to $13,588,002. The overall funded ratio for the plan decreased from 96.2 percent to 88 percent.
For the fire service retirement plan, the total recommended employer contribution for plan year and fiscal year ending June 30, 2010, increased from 11,185,312 to 14,217,007. The head count went up from 709 to 809, said Mr. Lowman. Mr. Hammond said the county hired additional fire personnel in anticipation of staff retirements. The overall funded ratio for the plan decreased from 95.7 to 89.5.
For the detention officers’ and deputy sheriffs’ retirement plan, the total recommended employer contribution for plan year and fiscal year ending June 30, 2010, increased from 4,019,403 to $4,678,430. The head count went up from 357 to 373. The actuarial value of assets also increased from $74,355,736 to $76,525,847, a sign of good positive cash flow, said Mr. Lowman. The overall funded ratio for the plan decreased from 83.7 percent to 77.7 percent.
NOTE: In other administrative business, Mr. Cuccia made a motion to approve the FY 2010 proposed pension system budget. Mr. Drain seconded the motion and the board approved the motion.
Mr. Peterson discussed the Cost of Living Adjustment. A letter that explains the actual COLA changes for individuals will go at the beginning of June. This year is the first in the history of the plan that the Consumer Price Index has gone down from one year to the next, requiring a negative cost of living adjustment.
Regarding elections, the nomination for the position held by Mr. Wilkison closes June 5th. Plans are in motion in to reappoint Ms. Sulick, whose term is expiring. Mr. Hammond still seeks someone to replace Hunter Calloway.
The meeting adjourned at 2:35 p.m. The next meeting will take place June 11.
