|Board of Trustee Meeting Minutes - February 10, 2011|
Members Present: John Hammond, Howard Brown, Dennis Callahan, Jay Cuccia, Janelle Davis, Richard K. Drain, Jonathan Hodgson, Jay Middleton, M. Kathleen Sulick, LeRoy Wilkison
Members Excused: Andrea Fulton, Jennifer Gilbert-Duran
Staff Present: Janet Morgan, John Peterson
Guests: Faryn Altschuler, Tim Costello (via conference call), Rhett Humphreys
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. Callahan made a motion to approve the minutes of the January 13, 2011, board meeting. Ms. Davis seconded the motion, and the motion passed unanimously.
Newstone Capital Partners
Expressing his apologies and appreciation to the board members, Mr. Costello gave his presentation from Dallas via a conference call. Newstone, a leading provider of mezzanine capital to private equity sponsors, has raised more than $3.7 billion in five funds. The firm expects to close Newstone Capital Partners Fund II in March.
Newstone relies on discipline, strategy and an experienced team to produce attractive results for investors. Mr. Costello reported that one vice president planned to leave Newstone due to a relocation. Newstone’s co-founders have invested in mezzanine together for more than 15 years.
With a focus on minimizing downside risk, Newstone seeks well-established companies that have a diverse supplier base and superior systems and controls. Mr. Hammond asked if Newstone had become more selective. Mr. Costello said fund managers grew much more cautious during 2007-2008 in the aftermath of the economic downturn. In fact, Newstone made only one investment in 2009, he said.
As proof of market improvements since 2010, Mr. Costello noted increased LBO activity, favorable credit standards and a significant amount of private equity capital. Those factors should increase the number of deals the firm can review, he said. Newstone typically cherry picks the best selections after reviewing more than 250 opportunities each year.
Newstone closed five deals in 2010, said Mr. Costello, including vRad, which focuses on radiology services. In response to a question from Mr. Callahan about the health care bill, Mr. Costello said vRad works more with doctors than with patients as it provides ways to better utilize radiologists. Newstone passed on four deals that were more involved with outpatients, an area of the market more affected by changes in health care.
Reviewing Fund I, a vintage 2006 fund, Mr. Costello said Jacuzzi has turned a corner but will likely experience another 12 months of sluggish returns. Like Jacuzzi, Concrete Technologies and Mainline Supply Company also have been affected by slowdowns in construction. Through Fund I, Newstone invested $878 million in 23 companies. The fund has realized $570 million, 65 percent of invested capital.
New England Pension Consultants
Mr. Hammond reviewed the minutes of the February 3 Investment Committee meeting.
Mr. Humphreys briefly discussed the flash report for the period ending January 31 before turning to the pension system’s Executive Performance Report for the fourth quarter. NEPC recommends that the board take a more bullish approach to emerging markets by increasing the pension system’s allocation in this space from 4.8 percent to 6 percent. The U.S. small cap market, on the other hand, has enjoyed a successful run, said Mr. Humphreys, so the board should redeploy profits from this overweighted sector. NEPC also recommends changes in the large cap and emerging market debt areas.
Last, Mr. Humphrey presented the 2011 Asset Allocation and Risk Budgeting Review. Mr. Humphreys said the portfolio’s structure will allow the pension system to receive an 8.5 percent return over 30 years. Using NEPC’s proposed changes, the system’s expected return (5 to 7 year assumptions) is 7.1 percent.
Mr. Humphreys said the Loomis Sayles Bank Loan protects the portfolio from inflation, so NEPC recommends that the board change the current allocation from 0 percent to 3 percent. Funds for this change will come from cash and core bonds.
NEPC also recommends the board put $55 million in profits into emerging market debt. Specifically the recommendation is as follows:
§ Chartwell (Small Cap Equity) - $15 million
§ Buckhead (Small Cap Value) - $10 million
§ ING (Large Cap Equity) - $10 million
§ Westwood (Large Cap Value) - $20 million
§ Marvin & Palmer (Emerging Market Equity) +$15 million
§ PIMCO (Emerging Market Debt) +$40 million
Mr. Hammond reported that the Investment Committee supports NEPC’s recommendations.
MOTION: Mr. Wilkison made a motion that pursuant to NEPC’s recommendations, the board rebalance the pension system portfolio as the Investment Committee suggested. Mr. Callahan seconded the motion. The board unanimously passed the motion.
MOTION: Mr. Drain moved to accept the 2011 asset allocation. Mr. Cuccia seconded the motion, and the motion unanimously passed.
The Investment Committee’s next meeting will take place May 5 at 11:00 a.m.
Mr. Peterson reported that the auditors from Clifton Gunderson were on site. Annual DROP statements went out, and five people retired in February. He also noted that the staff again ran the names of all retirees against death records. The search resulted in two matches already known to the administrative staff.
The meeting ended at 1:30 p.m. The next meeting will take place on March 10.