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Board of Trustee Meeting Minutes - September 8, 2011

Members Present: John Hammond, Howard Brown, Dennis Callahan, Jay Cuccia, Richard K. Drain, Jonathan Hodgson, Jay Middleton, M. Kathleen Sulick, Jim Thomas, LeRoy Wilkison 

Members Excused: Andrea Fulton, Jennifer Gilbert-Duran

Staff Present: Janet Morgan, John Peterson

Guests: Edward N. Antoian, John Heffern, Rhett Humphreys, J. Michael Jaje, Tom Lowman, Sabrina Macdonald, Michael J. McCloskey

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 12:10 p.m. by John Hammond. Newly elected member Jim Thomas replaces Janelle Davis.

Minutes

Mr. Callahan made a motion to approve the minutes of the August 11 board meeting. Ms. Sulick seconded the motion, and the motion passed unanimously.

Investment Committee

Buckhead Capital Management

Buckhead, which oversees a small cap value portfolio for the county’s pension system, has $2.2 billion in assets under management. Ms. Macdonald reported no changes to the firm.

As part of its investment process, the firm looks for companies that demonstrate value as well as the ability to weather the slow economy, said Mr. Jaje. Businesses with strong management, little debt and a differentiation that sets them apart from others are in a position to do well when markets turn around. Buckhead typically maintains 30 to 50 holdings in its portfolios.
Although markets showed strong growth in the first quarter of 2011, the third quarter proved quite difficult and volatile, said Mr. Jaje. In fact, small cap benchmarks were down 13 to 14 percent quarter to date, said Mr. Jaje. Macro-driven events such as politics, the tsunami in Japan and events in the Middle East are driving markets, and companies are trading at fire sale prices right now. Ms. Macdonald added that investors have continued to climb the wall of worry as economic performance slows in the United States and even shows signs of a double-dip recession.

Even so, Buckhead has protected the county’s portfolio on the downside, Ms. Macdonald reported, and the firm can take advantage of good opportunities in the market. Further, even though the pension system has taken out a little more than $30 million over the years, its portfolio value stands at about $34 million as of June. Ms. Macdonald congratulated the board on its timing and asset allocation, adding that Buckhead has been pleased to provide such returns.

Reviewing the names in the county’s portfolio, companies such as Telecom and Kennametal contributed to performance. Coinstar, one of the biggest holdings in the portfolio, continues to add value as well. Detractors included Coopertires and financial services firms such Raymond James and First Horizon. Despite the challenges in this sector, managers are pleased with the banking names in the portfolio, said Ms. Macdonald.

Chartwell Investment Partners

Chartwell manages $5.4 billion in a variety of equity and fixed income investment styles. Among its advantages are experience and the commitment to dig beneath the surface to examine the growth, management and earnings potential of prospective businesses. The county began investing in a small cap growth portfolio with Chartwell in 1998.

Mr. Antoian began the discussion with insights on the market, noting that the U.S. economy started to slow down in April. The tepid recovery has focused on cost cuts rather than jobs growth, and housing and employment are vital for a strong turnaround.

This environment requires Chartwell managers to work harder, said Mr. Heffern. Chartwell typically conducts hands-on research of more than 175 companies during a two-month period. The portfolio typically includes 70 to 90 names, said Mr. Heffern. The top 10 holdings, which make up 25 percent of the portfolio, include such diverse companies as Cheesecake Factory, United Rentals, and KForce, a temporary staffing provider. The Clean Harbor specialty waste company, which Chartwell acquired earlier this year, played an active role in the gulf oil cleanup.

The pension system’s year-to-date performance as of July 31, 2011, is 9.35 percent versus a benchmark of 4.34 percent. In June the portfolio was down -1.67 percent against a benchmark of -2.14 percent. Mr. Heffern noted that the firm’s people and philosophy contribute to its success. Further, the firm consistently sets price targets for its holdings and quickly sells mistakes.
New England Pension Consultants

Mr. Humphreys presented the 2011 Asset Allocation Review to the Investment Committee prior to his meeting with the full pension system board. NEPC provides asset allocation advice to the committee and to the overall board to help the pension system meet its long-term goal of earning an 8 percent rate of return, said Mr. Humphreys.

The board’s ongoing rebalancing efforts have worked well, said Mr. Humphreys, noting that the pension system already is playing with house money with two or three fund managers. In response to NEPC’s recommendations, the Investment Committee supported two major changes. First, the pension system is getting out of bank loans, said Mr. Humphreys, who noted the board had already agreed to hire a fund manager and redeploy $30 million from the Loomis Sayles bank loan into Entrust Special Situations II, an investment in the opportunistic sector.

Second, the board will take money out of the absolute return portfolio and put it elsewhere. Of the 7 percent originally allocated to the absolute return portfolio, 5 percent will now go into the category called risk parity with alpha overlay, said Mr. Humphreys. 1 percent would go into GTAA, and the final 1 percent would go into the large cap equity, portable alpha, portfolio.

Although the overall portfolio doesn’t change much structurally, the pension system will save a bit on fees and will have two less managers to track, said Mr. Humphreys. Summarizing the details, Mr. Hammond said the board will redeploy $10 million into the Attalus portfolio. Bridgewater’s tactical asset portfolio received $55 million and Wellington’s tactical asset allocation received $10 million. The cash portfolio increased by about $16 million, said Mr. Hammond.

Dennis Callahan made a motion to accept the Investment Committee’s recommendations regarding NEPC’s 2011 Asset Allocation Review. Mr. Middleton seconded the motion, and the board unanimously passed the motion.

Mr. Humphreys also presented the “flash” report for the period ending August 31. Although August numbers were down, the county’s pension system isn’t hurting as badly as other pension systems, said Mr. Humphreys. The total equity composite is -8.7 percent versus the benchmark’s return of -7.2 percent. Year to date, the total equity composite is -4.6 percent. The benchmark had a performance of -4.2 percent.

Looking more closely at the equity portfolio, Mr. Humphreys said ING and Southeastern reported positive numbers year to date. In the core fixed income portfolio, good returns from Western, ING Fixed and Aetna helped the county see a positive performance of 0.7 percent last month. The year-to-date return was 5.1 percent. PIMCO, the emerging fixed income fund, reported 0.3 percent for the month and 6.2 percent year to date. Penn and the Loomis Sayles bank loan were both down for the month and year to date, Mr. Humphreys said. Under Global Asset Allocation, Bridgewater was up 2.4 percent for the month and 18.3 percent year to date.


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