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Board of Trustee Meeting Minutes - June 9, 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, LeRoy Wilkison

Members Absent:  Janelle Davis

Staff Present:  Janet Morgan, John Peterson

Guests:  Brian Casey, Jen Davis, Peter Duffy, Tom Heseltine, Rhett Humphreys, Stephen Loizeaux, David Spika

Recorder:  Laura 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. Cuccia made a motion to approve the minutes of the May 12 board meeting.                     
Mr. Callahan seconded the motion, and the motion passed unanimously.

Investment Committee

Penn Capital

Penn Capital has $6.7 billion in assets under management. The firm focuses on single B and above credit quality, although Penn Capital recently began to manage a double B, high-yield strategy. The firm reported no major staff changes.

As it works to preserve capital and high current income, Penn Capital seeks debt that is senior in the capital structure. Its Defensive High Yield Portfolio offers a conservative strategy for investing in high yield that doesn’t include triple CCC investments or risky companies.

Managers have been pleased with the firm’s performance during the past two years, said       Mr. Duffy. The firm has outperformed its benchmarks year to date and during the last 12 months. Penn Capital trails the overall market only slightly, he said. The pension system has a portfolio value of $68,518,558.

The firm has seen strong results in consumer discretionary, particularly asset-rich areas such as hotels. Penn Capital prefers tangible assets such as buildings that provide downside protection, said Mr. Duffy. The pension system’s portfolio also benefited from investments in energy, telecom and technology. Merger acquisitions contributed to performance as well, he said.

One of the worst sectors is cash because no yields are available, noted Mr. Duffy. Financials also have been a poor sector on the equity side. From the bond side, however, companies have gone out and raised capital. As a result, regional banks and companies such as Alcatel-Lucent have been among the top performers in the county’s portfolio. 

Return potential remains high because the current economic environment favors corporations, added Mr. Duffy. Companies, he said, are flush with cash, and in the high yield area, defaults remain at historically low levels. Managers anticipate slow growth, but slow growth encourages businesses to operate responsibly, he said.

Consumers feel the effects of rising food and energy costs, but the inflation rate could be worse, he added. Corporations are starting to buy back shares and make acquisitions, but they are doing so in a moderate way as they return from their near-death experience of 2008, said Mr. Duffy. The biggest risks include shocks from abroad such as the earthquake in Japan or turbulence in the Middle East.


The county pension system has invested with Westwood since 2006. The firm reported no major changes.

Although the last two years have been difficult, managers believe the economy has returned to a market cycle that favors Westwood’s strategy. Westwood focuses on high-quality, large-cap companies and looks for a limited downside, said Mr. Spika. Year to date the firm is ahead 0.9 percent, he added. Looking at the firm’s performance since inception, Westwood is beating its benchmarks by 2 ½ percent. The county’s portfolio has a market value of $60,356,539.

Contributors to performance included consumer staples and producer durables such as Boeing and Honeywell. Maintaining an underweight position in financial services also helped the portfolio, said Mr. Spika. Detractors included a lack of exposure to health care and utilities. During the year, Westwood sold holdings such as Caterpillar and National Oilwell Varco Inc.  and reinvested funds in companies that are less cyclical, he added.  

In reviewing the market outlook, Mr. Spika said risk aversion has increased, which means fundamentals matter once again. He presented several charts to show how Westwood has benefited from similar economic patterns over the years. As global liquidity declines and profit growth slows, large cap, high-quality companies are likely to outperform. Given the fiscal environment, Westwood feels confident in its strategy.

 New England Pension Consultants

Mr. Humphreys reported a financial composite of -0.3 percent on the pension system’s “flash” report for the period ending May 31. Although most of the equity managers were down for the month, however, he noted a few strong performances. ING, in particular, has beaten its benchmark across all time periods. NEPC recommends taking funds from that portfolio because it has done so well.

All of the bond managers were up, Mr. Humphreys said, and high yield was slightly positive for the month. Loomis Sayles showed a slightly negative return, but the pension system can redeploy profits from that holding as well. Even if the pension board agrees to sell some of the profits, the bank loan can still serve as a hedge against inflation, said Mr. Humphreys.

With these points in mind, Mr. Humphreys presented a memo from NEPC that recommended the pension system raise cash for benefits payments and private equity commitment calls throughout the year. To service these needs, NEPC suggested redeeming $15 million from ING Large Cap Growth Equity and $10 million from the Loomis Sayles senior bank loans.   

Mr. Callahan asked why NEPC recommended an amount of $25 million. Mr. Hammond said the pension system needs $25 million to $40 million in cash. The system is currently in a negative cash flow situation in terms of employer contributions versus benefits going out, he said. That amount should be enough to meet commitments through December, Mr. Hammond added.  

ACTION:  Mr. Callahan made a motion to accept NEPC’s recommendation. Mr. Drain seconded the motion, and the board passed the motion unanimously.

Administrative Report

Mr. Heseltine and Ms. Davis of Clifton Gunderson met with the board regarding the recent audit. The audit did not identify any material weaknesses or significant deficiencies, they reported. 

The auditors noted that contributions and distributions recorded in the general ledger are not reconciled to other applicable reports such as the payroll register. Contributions and distributions per the general ledger should be reconciled at a minimum at the end of the fiscal year. Mr. Drain agreed with the recommendation.

Mr. Wilkison and Mr. Hammond publicly acknowledged Mr. Drain, Mr. Peterson and Ms. Morgan for their hard work on the audit.

Mr. Drain distributed the Comprehensive Annual Financial Report for the year ending December 31, 2010.

Mr. Peterson reported that cost of living adjustment letters are going out to all retirees. Retirements are on track with 11 for June. July retirements might be up a bit, he added.

Ms. Davis’ position is up for election in September. Mr. Hammond said he would get in touch with her regarding her position on the board. He added that a special Investment Committee meeting might be coming up because Mr. Humphreys wants to share information about an investment opportunity.

The meeting ended at 1:50 p.m. The next meeting will take place July 14. Mr. Callahan will chair the meeting for Mr. Hammond, who expects to be absent because of surgery.


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Anne Arundel County, Maryland. 44 Calvert Street, Annapolis, Maryland 21401 | Tele: (410) 222-7000