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Board of Trustee Meeting Minutes - May 12, 2011

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

Members Excused: Janelle Davis, Leroy Wilkison

Staff Present:  Janet Morgan, John Peterson

Guests:  Ignacio Galaz, Rhett Humphreys, Thomas Lowman, Brian Marvin, Terry Mason, Tom Rosalanko, Tom Smith

Recorder:  Karen Morganelli, 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. Timothy Kingston sat in for Janelle Davis.


Mr. Cuccia made a motion to approve the minutes of the April 7, 2011, board meeting. Mr. Callahan seconded the motion, and the motion passed unanimously.

Investment Committee


Founded in 1977, GMO has $108 billion of assets under management. The firm relies on discipline, value orientation, investment research and other factors to identify undervalued securities and markets. The firm has more than 100 investment professionals and more than 500 employees worldwide. Mr. Smith reported no major changes at the firm.

The value of the pension system’s account is $53.6 million, said Mr. Smith, up from             $42 million last year. All of that gain is from strong market performance, he said.
Mr. Rosalanko added that the markets showed much better results than managers expected. Although the global economy faced all kinds of bad news last year -- including the BP oil spill and the European debt crisis -- the market has optimistically looked ahead to bigger and better times, he said.

Reviewing GMO’s strategy, Mr. Rosalanko said momentum stocks performed well as investors sought out riskier companies. Businesses that focused on manufacturing, industrials, machinery, mining and consumer discretionary saw strong returns, he said.

GMO maintains an overweight in Japan, even after the earthquake/nuclear crisis, because the firm expects the country to rebound due to its rebuilding efforts, said Mr. Rosalanko. The firm is underweight in Australia. GMO managers expect to see greater growth in emerging markets than in developed countries. In response to GMO’s slightly underweight euro allocation,          Mr. Callahan asked about ongoing concerns with that particular currency. Mr. Rosalanko said markets still seem optimistic about the euro, so the firm maintains a small position.

In 2010, the county pension system began investing in PIMCO’s Emerging Markets Bond Fund. This fund is emerging market debt that is denominated in U.S. dollars, said Mr. Galaz. The county’s investment is up to $74 million largely as a result of a recent contribution, he said.

Despite political instability in the Middle East and other global crises, emerging market debt has done well due to the growth potential of emerging nations and the amount of reserves on their balance sheets, which allows them to absorb market volatility, said Mr. Galaz. 
Further, the amount of debt in emerging market countries remains much lower than that of developed countries.

Reviewing sector index returns, Mr. Galaz said emerging market currency positions, local denominated bonds and U.S. dollar denominated bonds were among the highest-performing asset classes during the first quarter of 2011. As a result, PIMCO’s emerging markets bond fund was slightly ahead of its benchmark as of March 31.

Mr. Galaz said country differentiation and security selection remain vital to the firm’s success. PIMCO is currently overweight in Russia, Brazil and Indonesia and underweight in Argentina, Turkey and Venezuela. The firm has some exposure to currencies in emerging markets.

Mr. Galaz ended his comments with a forecast of the U.S. economy. In response to a question from Mr. Middleton, Mr. Galaz said interest rates affect PIMCO’s  U.S. denominated emerging market debt. On the global scene, the U.S. seems to have little ability to force China to pursue cooperative policies. He expects the European financial crisis to drag on until at least 2013. 

Marvin & Palmer

Marvin & Palmer’s highly stable investment team focuses exclusively on equity management. The employee-owned firm had $4.8 billion in assets under management as of April 30, 2011.

A look at total value added explains why the county pension system invests in emerging markets, said Mr. Marvin. Although the county made an initial contribution of $10 million in 2002 and additional contributions of about $44 million, the portfolio has a market value of $82 million, he said, an annualized return of 16 percent since 2002.

This sector has done well because emerging markets have been growing at a rate of 6 to 8 percent or more, said Mr. Mason. He noted, however, the challenge of inflation in India, China and other large developing countries as these governments seek to increase wages.

Coming back from a turbulent 2008, Marvin & Palmer outperformed last year, although the firm faced the challenge of stock and sector selection, said Mr. Mason. Small-cap countries saw greater results as China and Brazil dealt with the struggles of becoming mature economies.

New England Pension Consultants

April was a strong month for the pension system, reported Mr. Humphreys. The “flash” report for the period ending April 30 showed a financial composite of 3 percent for the month and 6.7 percent year to date. In terms of market value, the county was up about $45 million, he said. He reported no negative managers for the month or the quarter.

Mr. Humphreys also discussed the market update/overview presented to the Investment Committee on May 5. Board members briefly reviewed the portfolio’s asset allocation, rankings against other pension plans, and fund manager compliance.

Administrative Report

Tom Lowman of Bolton Partners met with the board to present actuarial valuations. He noted that several developments have benefited valuations this year.

Last month’s changes to the asset smoothing method, for instance, allow the county to accelerate efforts to deal with investment losses from 2008. The county enjoyed good returns last year, he added, so this is a good time to address that issue. Further, pay increases didn’t happen, he said, so the data reflect gains due to pay. Head counts also were down in some plans. The county pension system is in good shape compared to most plans, said Mr. Lowman, but he noted room for improvement. The overall funded ratio decreased in each plan due to the asset method change.

The total recommended employer contribution for the employees’ retirement plan for the plan year and fiscal year ending June 30, 2011, increased from $17,490,119 to $18,882,680. The overall funded ratio for the plan decreased from 86.8 percent to 83.2 percent. The goal is to be 100 percent funded, said Mr. Lowman.

The market value of the detention officers’ and deputy sheriffs’ plan was $79,155,537. As of December 31, 2010, the actuarial value of assets was $87,911,133. The total recommended employer contribution for the plan year and fiscal year ending June 30, 2010, increased from $4,899,725 to $5,089,053. The overall funded ratio for the plan decreased from 75.9 percent to 73.4 percent.

The market value of the police service plan as of December 31, 2010, was $391,828,320. The actuarial value of assets was $435,891,125. The recommended employer contribution increased from $13,803,470 to $14,502,900. In terms of funded ratio, this plan almost reached 100 percent back in 2005, said Mr. Lowman. It has dipped a little since the losses in 2008. The current ratio of 86.8 percent is pretty good, he said, but as with all the plans, the goal is 100 percent.

The market value of the fire service plan as of December 31, 2010, was $383,732,755. The actuarial value was $425,830,155. The total recommended employer contribution increased from $14,209,656 to $14,580,535. A significant drop in participant head count in the fire service plan resulted in a change in payroll from $49 million to under $48 million, said Mr. Lowman.

In other business, John Hammond reported that the pension budget needed to go to the county council.

ACTION: Mr. Callahan made a motion to submit the budget to the council. Ms. Fulton seconded the motion, and the board passed the motion unanimously.

Mr. Peterson reported that Ms. Gilbert-Duran has been elected as the trustee for the detention and deputy sheriffs’ plan. He also noted that spring and summer retirement seminars have begun. Mr. Drain presented a statement of plan net assets.

The meeting ended at 2:18 p.m. The next meeting will take place on June 9.


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