Members Present: John Hammond, O’Brien Atkinson, Dennis Callahan, Jay Cuccia, Richard K. Drain, Jennifer Gilbert-Duran, Jonathan Hodgson, Jay Middleton, M. Kathleen Sulick, LeRoy Wilkison
Members Excused: Andrea M. Fulton, Howard Brown
Members Absent: Janelle Davis
Staff Present: Janet Morgan, John Peterson
Guests: Bruce Emge, Jeffrey Gardner, Sarah Gilfillan, Rhett Humphreys, Timothy Maul, Andrew Mikolasy, Keith Stronkowsky
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 John Hammond. Mr. Atkinson sat in for Mr. Brown during the meeting.
Minutes
Mr. Callahan moved to approve the minutes for the October 8, 2009, Board of Trustees meeting. The motion was seconded by Mr. Wilkison and approved unanimously.
Investment Committee
Wellington Management
Since 2006, Wellington has managed funds for the county’s pension system in the WTC-CIF Opportunistic Investment Portfolio. An initial investment of $52 million has a total market value of $57,848,132 as of October 31, 2009.
The portfolio’s year-to-date returns are 28 percent against a benchmark of 20.4 percent, which means the product is working as it should, said Mr. Maul. He reported no major staff changes.
Wellington seeks to outperform core markets by investing opportunistically in non-core areas. Ms. Gilfillan reported that the firm has put its focus on China and other emerging markets as well as industrial metals. During the fourth quarter, managers increased the portfolio’s exposure to gold, and Wellington enjoyed strong returns from bank loans.
Mr. Hammond asked if emerging markets could turn into the next investment bubble. Ms. Gilfillan said some of Wellington’s investment themes are in the early stages, whereas others have reached their peak. Managers avoid problems in emerging markets by constantly changing the focus, she said, and although bank loans boosted returns, managers have trimmed those investments a bit.
In discussing the firm’s focus on climate change, Mr. Maul said Wellington looks for firms that will benefit from the public’s growing interest in recycling, improved efficiencies, better mileage and so on. He noted, for example, that the Cash for Clunkers program encouraged the purchase of more fuel-efficient cars and stimulated the economy.
Mr. Hodgson asked about companies’ business incentives to “go green.” Ms. Gilfillan noted that the cost of doing business the old way creates incentives as businesses face pressure to adapt.
Ms. Gilfillan noted, however, that many sectors that helped the portfolio prior to September 2008 detracted from performance as of October 2009. Coming into the end of 2009, the top contributors to alpha were credit opportunities, China, and emerging markets. The firm anticipates a week dollar and ongoing choppiness in investment markets.
Bridgewater
Bridgewater, founded 34 years ago, has been investing with Anne Arundel County since 2001. The firm manages $20 billion in an all-weather strategy and $51 billion in a pure alpha strategy.
Although the all-weather strategy typically generates consistent returns over time due to balanced risk allocation, occasionally the strategy performs poorly, said Mr. Gardner. In fall 2008, Bridgewater shifted funds from the all-weather portfolio into a safer strategy. The firm has since shifted 60 percent of the funds back into the all-weather portfolio. The other 40 percent remain in the safe strategy.
Mr. Gardner noted that although the federal government has stimulated growth, the private sector still shows signs of weakness. Given the risks of inflation or even deflation, no one knows how the recovery will play out, he said. Bridgewater predicts slow growth that will not accelerate fast enough to offset unemployment.
Bridgewater has proposed a hybrid of its all weather and pure alpha strategy. The firm designed this portfolio to offer superior returns to the All Weather product while reducing risk because the two portfolios complement one another. Bridgewater would manage $142 million in the combined portfolio. Bridgewater expects this portfolio to have a return of 7 percent net of fees.
According to the minutes from the November 5, 2009, investment committee meeting, the fee for the pure alpha portfolio is 125 basis points. Because only 1/6 of the current all-weather portfolio would be moved to the pure alpha portfolio, the fee increase for the Bridgewater investments would increase from 45 basis points to 58 basis points. The amount that would transition into the pure alpha portfolio would be approximately $24 million, according to New England Pension Consultants, which recommends the change.
ACTION: On the basis of a written recommendation from NEPC, Mr. Callahan made a motion to move 1/6 of the current all-weather portfolio managed by Bridgewater into the firm’s pure alpha portfolio. Mr. Cuccia seconded the motion. The board unanimously passed the motion
New England Pension Consultants
Mr. Humphreys reviewed the “flash” report for the period ending October 31, 2009. Although the financial composite was -1.1 percent, year-to-date performance was 16.7 percent, ahead of the benchmark’s 13.3 percent. The pension system’s 5-year performance was back in the positive with a return of 2.6 percent.
A few managers played a key role in the county’s equity performance, said Mr. Humphreys. Year to date, Buckhead reported returns of 16 percent versus the benchmark’s 8.6 percent. Southeastern had a year-to-date performance of 45.5 percent against a benchmark of 11.3 percent.
Mr. Humphreys and Mr. Stronkowsky also reported on the pension system’s third quarter performance. Regarding the Total Fund Asset Growth Summary, they noted that since inception, net external growth is -$143,572, but return on investment is $331,889. On the ranked “flash” report, they noted Gottex had year-to-date performance of 29.2 percent versus a benchmark of 19.2 percent. As a result, Gottex ranked 4th in NEPC’s total public fund universe.
Administrative Report
Mr. Peterson reported the pension audit would begin soon. Also, another issue of Pension Points will be available in January.
In other news, the passage of Bill 74-09 by the county council will require the recalculation of 19 pension benefits. The council considered bill 78-09 on November 16.
The meeting adjourned at 2:25 p.m. The next meeting will take place December 10.
