Members Present:  John Hammond, Howard Brown, Dennis Callahan, Jay Cuccia, Janelle Davis, Richard K. Drain, Andrea M. Fulton, Jennifer Gilbert-Duran, Jonathan Hodgson, Jay Middleton, M. Kathleen Sulick, LeRoy Wilkison   

Staff Present: John Peterson

Guests: O’Brien Atkinson, Jim Barton, Brian O. Casey, Lee Harper, Dave Moore, David S. Spika, Jean Tinsley 

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 12:15 p.m. by Mr. Hammond.

Minutes

Mr. Callahan made a motion to approve the minutes of the June 11, 2009, Board of Trustees meeting. The motion was seconded by Mr. Wilkison and approved unanimously.

Investment Committee

Westwood

Westwood, based in Dallas, has managed funds for the county’s pension system since 2006. With a focus on large cap value stocks, the firm seeks to manage overall portfolio risk and pursue superior risk-adjusted returns. Despite declines in the market, Westwood still has the same level of assets under management, approximately $8 billion, as last year. Westwood also added 11 employees in 2008.

Mr. Casey said Westwood’s extensive, team-based research process protected the firm from the more toxic companies that made headlines or went bankrupt during the last year. The period challenged anyone invested in the financial markets, he added, but Westwood typically tends to lose less than other firms in these environments.    

Mr. Spika reported that the county’s portfolio has been down about 29 percent during the past 12 months, which is right in line with the benchmark. Although Westwood did well during the first half of that period, a rally in low-quality stocks during the second quarter of 2009 caused a lag in returns.  In April the firm gave up almost 5 percent versus the benchmark, he said, noting quarterly returns of 12.6 percent against a benchmark performance of 16.7 percent. Since mid-May the market’s focus has shifted from financials and consumer discretionary stocks to technology and consumer staples, and Westwood has recovered lost ground.

Westwood expects technology to remain a strong sector, said Mr. Spika.  In contrast, financial services, energy and materials and processing were the most negative for the firm during the last 12 months. Mr. Hammond asked a question about limits on overweighting or underweighting sectors. Mr. Spika said the firm will not own more than 25 percent on an absolute basis in a sector.  He added that 3 percent is the maximum position size for any one stock to limit the loss potential.    

Ms. Sulick asked about the purchase and sale of Merck and Thermo Fisher Scientific Inc. Mr. Spika said those companies didn’t meet expectations so Westwood sold those stocks. Fund managers let go of Disney due in part to declining ad rates for the ABC and ESPN networks. 

Reviewing Westwood’s purchases, Mr. Spika said Deere & Co. should benefit from global food demand, and Research in Motion enjoys considerable market share. To increase its holdings in financial services,  Westwood purchased BB&T, which has good capital levels and much better credit quality. Blackrock, another purchase in the financial sector, manages $3 trillion in assets worldwide.

Westwood expects a muted rate of growth for the next year or two. Consumer spending makes up 70 percent of the economy, said Mr. Spika, and consumers still feel the headwinds of high unemployment, foreclosures, debt levels and other problems. Westwood still encourages investment in equities, but urges investors to use great caution in making stock purchases.

Southeastern Asset Management

Southeastern has maintained a relationship with Anne Arundel County’s pension system for 19 years. As part of its investment philosophy, Southeastern purchases stocks at prices significantly below business value and sells those stocks when they approach corporate worth. Buying stocks at a substantial discount protects capital from significant loss over the long term and allows for large returns when the market realizes the value of those stocks.

Ms. Harper noted that the previous 12-month period was one of the most difficult for the firm, whereas the quarter that just ended was one of the best. Frozen credit markets and exposure to oil and gas companies hurt the firm during the fourth quarter of 2008. Further, although analysts anticipated an economic slowdown, the recession ran longer and created more turbulence than Southeastern projected. 

Since then Southeastern has recalibrated its appraisals and assumes a 1 to 2 percent growth rate coming out of 2009. Southeastern sold 6 companies, more than usual for a 12-month period, to buy more high-quality businesses. Southeastern got rid of UBS and GM, for instance, and purchased Marriott, Berkshire Hathaway and Aon. Southeastern sold Walgreen because slower credit markets prevent the company from opening new stores. Unlike Westwood, however, Southeastern believes Walt Disney still has long-term value.    

Mr. Wilkison asked about General Motors. Mr. Barton said international sales of GM cars and trucks, has been strong. Further, Southeastern had expected GM to see better returns once it sold its post retirement health-care liability, which would have saved the company $6 billion a year starting in 2010.  Unfortunately, U.S. car sales dropped to 8 million per year, which played a role in the company’s bankruptcy.

Ms. Harper said Southeastern loves its current portfolio and expects values to continue to grow.  Any return to economic growth would further benefit the firm’s holdings. She added that a return of inflation plus 10 percent is doable during the next 5 to 10 years.

New England Pension Consultants

Mr. Moore of New England Pension Consultants said returns for June were flat as market volatility continues. 

Reviewing the “flash” report for the period ending June 30, he noted strong results for the last three months although negative forces remain in the economy.  The total equity composite was down -0.3 percent whereas the performance for the last three months was 18.8 percent.

With benchmark returns of 23.4 percent and 18 percent during the last three months, the small-cap sector had its best quarter since 2003, said Mr. Moore.  Small caps tend to lead the economy out of recessions, he added.  He noted that Chartwell, which reported returns of 17.9 percent during the last 3 months, benefited from the rally to low-quality stocks. As the market begins to seek better-performing companies, however, Chartwell could experience challenges.  Although board members plan to meet with the firm in October, Mr. Moore said they should consider discussing these concerns with Chartwell prior to that meeting.     

The “flash” report also indicated a bit of a selloff for international and emerging market equities.  Marvin and Palmer reported -2.5 percent versus the benchmark’s -1.4 percent for the month.  However, Marvin and Palmer generated almost a 35 percent return for the pension system during the last 3 months, said Mr. Moore.  

Mr. Moore reported total fixed income composite returns of 1.8 percent during the last month.  

High yield fixed income was up 2.6 percent. Those returns have driven  the pension system’s performance and served as a bright spot during the second quarter,  he said. Credit spreads contracted, and the pension system’s bank loans did extremely well during this period. 

Action Item:  The investment committee will meet on August 6 at 11:00 a.m.

Administrative Report

Mr. Wilkison was re-elected to the board. Now the pension system staff is working on the non-represented employees election, said Mr. Peterson.  Nominations closed with three candidates. The election closes July 31. Staff members also have begun working on the summer issue of Pension Points.      

The annual pension benefits statements were mailed out in June. The July pension payments included the cost of living adjustments which in many cases were negative adjustments. The office received a few calls but not many, Mr. Peterson said, because the office mailed individual letters beforehand.

Mr. Hammond reported that two bills have come before the city council. Bill 61-09 deals with the interest rate on the DROP program for the police retirement plan. The interest rate in the proposed bill decreases from 8 percent to 4.25 percent.

For Bill 60-09, the council must consider whether three positions on the liquor board can opt into the employees’ plan.  Mr. Peterson and Ms. Fulton will attend a council work session on both bills.      

The meeting adjourned at 1:55 p.m.  The next meeting will take place August 13.