Members Present: John Hammond, O’Brien Atkinson, 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, Janet Morgan
Guests: Edward Antoian, J. Michael Jaje, Sabrina Macdonald, Michael McCloskey
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 12:13 p.m. by John Hammond. Mr. Atkinson sat in for Mr. Brown during the meeting. Rhett Humphreys of New England Pension Consultants was unable to attend.
Minutes
Mr. Callahan moved to approve the minutes for the August 13, 2009, Board of Trustees meeting. The motion was seconded by Mr. Drain and approved unanimously.
Investment Committee
Chartwell
Chartwell Investment Partners manages $4.5 billion in a variety of equity and fixed-income investment styles. The firm has overseen a small-cap growth portfolio for the county’s pension system for about 11 years. Chartwell serves more than 150 institutional, sub-advisory and private client relationships. Mr. McCloskey reported no organizational changes.
The firm has underperformed during the past 12 months, said Mr. Antoian, with year-to-date returns of 16.66 percent against a benchmark of 21.17. During its investment history of more than 20 years, Chartwell has had only 4 periods of underperformance, including the past 12 months, he said. The financial environment changed, and Chartwell’s style fell out favor for a time.
The firm made a lot of money during 2006 and 2007 as the firm focused on energy and aerospace and invested in companies that provided more energy-efficient products. When oil prices spiked in 2008, however, companies could no longer buy more energy-efficient equipment, and the providers in Chartwell’s portfolio suffered, he said. Chartwell exited most of those investments in the third quarter of 2008. During the past 12 months, Chartwell trailed its benchmark by about 600 points.
Mr. Antoian said 2009 has been a tale of two different environments. As investors realized the country wasn’t going into a depression, they began to focus on companies with high debt levels. Chartwell prefers quality companies with a higher return on equity and low leverage, so its returns have lagged a bit. However, Chartwell will not change its strategy for a short-term environment and expects to outperform the index going forward.
The county’s portfolio has about 70 holdings as of August 31. Those companies continue to deliver earnings even during a difficult environment, said Mr. Antoian, noting that the percentage of companies in the portfolio that beat their expectations was almost 20 points higher than the index. Reviewing the companies in the portfolio, Mr. Antoian said Chartwell has set its sights on wireless Internet in the current environment because more data is moving over wireless structures. SBA, one of the largest investments in the portfolio, is at the center of that trend, he added.
Mr. Hammond noted a large number of health-care names in the portfolio. Mr. Antoian said Chartwell focuses on companies that improve efficacy or lower costs. These companies, for example, develop devices that are less invasive or create new pharmaceutical compounds for diseases that doctors aren’t currently treating. Chartwell has little service provider and no payer exposure, which could hurt the portfolio if no health care reform occurs.
Mr. Middleton asked if Chartwell had found any solid investments in green energy, such as hydrogen or wind. Mr. Antoian said Chartwell did have exposure to solar at some point, but not anymore.
Buckhead
Buckhead has managed a small-cap value portfolio for the pension system for about five years. The 100 percent employee-owned firm had more than $1.8 billion in assets under management as of June 30. Mr. Jaje reported no changes at the firm.
Mr. Jaje said the firm has seen good growth and positive returns during the past year. The firm picked up $200 million in new business during the past 9 to 12 months. Given market appreciation and the firm’s new clients, more current data would probably report the firm has about $2 billion in assets under management, he said.
In addition to seeking good businesses and good value, Buckhead fund managers strive to identify the catalyst that will propel a company forward. Smaller, value-oriented stocks tend to do well coming out of recessions, and Buckhead managers seek companies that the market overlooks. Buckhead’s diversified portfolio tends to hold 30 to 50 names at any one time, said Mr. Jaje.
Chartwell enjoyed strong performance during the second quarter of 2009, said Ms. Macdonald. Year to date through June, the firm was up 2.6 percent, which put Chartwell almost 800 basis points ahead of the benchmark.
Reviewing performance drivers, Ms. Macdonald said companies such as Conway trucking and Marvel Entertainment had done well for the county’s portfolio. Detractors include Coinstar, which drifted a bit in the second quarter, although Buckhead still likes the company, she said. Raymond James, which offers financial products and services, reported a decline in its share price during the second quarter due to an increase in credit costs.
Ms. Macdonald noted Chartwell’s efforts to reduce its consumer discretionary stocks during the past year and a half and shift its focus to financial services. The portfolio, which is almost at benchmark weight in financials, includes six carefully chosen banking names as well as insurance firms and regional brokerages. Mr. Hodgson asked if Chartwell considered banks that received Troubled Asset Relief Program funds. Ms. Macdonald said Chartwell considered that issue as part of its overall review of the prospective companies.
New England Pension Consultants
In the absence of Mr. Humphreys, Mr. Hammond briefly reviewed the “flash” report for the period ending August 30th. The overall composite showed the pension system had an ending market value of $1.1 billion and had a return of 2 percent, he said. Board members will hear a full report when Mr. Humphreys returns in October.
Administrative Report
Mr. Peterson reported the start of a busy retirement seminar season, with three seminars scheduled for September, three for October and two in November.
Reviewing two bills that went before the county council, Mr. Peterson said the passage of Bill 60-09 formally added the Board of License Commissioners (Liquor Board) to the county’s pension system, thereby memorializing an ongoing practice.
The council defeated Bill 61-09, which provided for calculating a pension at the negotiated merit rate for those unions that had an agreement with the county. The vote was 4-1 in favor of the bill, however, because this was emergency legislation it needed five votes to pass. The bill will go back before the council in September as non-emergency legislation. Mr. Callahan noted that the newest council member cast the deciding vote against the bill.
The meeting adjourned at 1:40 p.m. The next meeting will take place October 8, 2009.
