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Board of Trustee Meeting Minutes - February 2012

Members Present: John Hammond, Howard Brown, Jay Cuccia, Richard K. Drain, Jennifer Gilbert-Duran, Jonathan Hodgson, M. Kathleen Sulick, Jim Thomas, LeRoy Wilkison

Members Excused: Andrea Fulton, Jay Middleton

Staff Present: John Peterson, Janet Morgan

Guests: Tim Costello, Jim Gereghty, Rhett Humphreys, Cliff Yonce

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 12:20 p.m. by John Hammond. The members observed a moment of silence in honor of member Dennis Callahan, who died February 8.

Minutes

Mr. Cuccia made a motion to approve the minutes of the January 12, 2012, board meeting. Mr. Drain seconded the motion, and the motion passed unanimously.

Investment Committee

Newstone

The Anne Arundel County pension system has invested with Newstone for nearly seven years. This mezzanine investor focuses on debt capital, primarily leveraged buyouts. Founded in 2006, Newstone has raised approximately $1.7 billion of committed capital. The firm will add a vice president in the spring and a new associate during the summer.


Newstone Capital Partners LP is a vintage 2006 fund in which the pension system has invested. The fund, diversified by issuer, industry and sponsor, represents $865 million in committed capital.

Newstone is beginning to see returns from some of the 23 investments in the fund, said Mr. Costello. However, three investments remain a source of concern. Jacuzzi, which suffered from the collapsed housing market, experienced a restructuring in January 2010. Its flat performance is a symptom of what’s going on with housing and the consumer economy, said Mr. Costello. Mainline Supply has improved its performance, and Newstone completed a comprehensive restructuring with the company last fall. Concrete Technologies shows flat returns. Even so, the balance of the portfolio has performed well, said Mr. Costello.

The gross return for the fund is 10.3 percent. Mr. Costello attributed that below-average to the dismal economy, companies’ inability to generate equity, and the three problem investments in the fund. However, the fund expects net returns of 8 percent to 9 percent.

Through the second fund, which is similar to the first, Newstone has invested $297.8 million in seven companies. This vintage 2010 fund represents $800 million in committed capital, and most of the investments are less than a year old, said Mr. Costello. Companies in this fund include Virtual Radiology Corporation, Insight Pharmaceuticals and TNT Crane and Rigging.

Thanks to a lack of competition from banks and the high-yield market, the fund enjoys a strong deal flow, said Mr. Costello. Nevertheless, Newstone intends to stay on strategy and maintain discipline even as it takes advantage of market conditions.

Siguler Guff

Siguler Guff manages Distressed Opportunities fund of funds that allocate capital to underlying managers across the spectrum of opportunities in distressed. The fund seeks to be flexible, tactical and open to the best opportunities available in the market. What’s more, Siguler Guff works to anticipate where market shifts will occur next. With more than
$10 billion in assets, Siguler Guff is the largest player in the space, said Mr. Yonce.

The county pension system has made a $5 million commitment to Fund III, which has a total fund size of $2.4 billion. The county has invested about $4 million so far, or 79 percent of its total commitment. The fund closed in March 2009. The county has committed $15 million to Fund IV, which has a fund size of $1.3 billion. Fund IV, a vintage 2010 fund, will issue another call by the end of the quarter, said Mr. Gereghty.

Although the first half of 2011 was euphoric, the second half experienced turbulence due to the U.S. credit downgrade, the European financial crisis and other issues. Fortunately market conditions have somewhat rebounded, said Mr. Gereghty, and the investment pipeline remains robust.

Taking a closer look at Siguler Guff’s real estate investments, Mr. Gereghty explained how the firm works with community banks around the country to tap into better-than-expected growth opportunities. Siguler Guff’s efforts in this area also help banks get bad assets off the books and return to the business of lending. The firm also focuses on such niche areas as health care.

New England Pension Consultants

Mr. Humphreys discussed the current “flash” report as well as a few recommendations and actionable items with the board.

Reviewing performance for the period ending January 31, Mr. Humphreys reported a financial composite of 4.1 percent, bringing the total composite since inception to 8.2 percent. He also noted a rebound in equities, with a total equity composite of 6.4 percent and domestic equity returns of 6 percent.

The investment committee met with representatives from Buckhead and continues to discuss Marvin & Palmer’s performance. Mr. Humphreys said NEPC will conduct reviews and present to the investment committee formal search books on these managers. The committee can then decide whether to bring the matter before the full board and consider new portfolio managers.

On the fixed income side, all the managers beat their benchmarks, said Mr. Humphreys. Bridgewater enjoyed another nice month, starting the year off at 3.5 percent. Although Wellington performed poorly in 2011, the firm also reported good returns for the month. The pension system is liquidating out of the absolute return portfolios, said Mr. Humphreys.

Reviewing the Executive Performance Report for the fourth quarter of 2011, Mr. Humphreys said the pension system’s restructuring efforts worked. The county is in the top 31 percent of all plans. During the past three years, during the full cycle of economic volatility, the county saw composite returns of 11.7 percent, earning a ranking in the top 32 percent of all plans.

Mr. Humphreys also provided a private equity review for the third quarter, noting how the pension system beat the public equity markets while managing the up-front early losses that can occur in private equity. The private equity program is still in its infancy, Mr. Humphreys added, but the county’s performance is a strong six-year report card.

The 2012 asset allocation reflects such themes as the value of emerging market equities and emerging market debt. NEPC recommended changes that can help the pension system get closer to its desired 8 percent return. In response to a question from Ms. Morgan, the board discussed putting on hold the rebalancing begun in September based upon the new outlook from NEPC. The board will implement the changes over the next few months with specifics.

MOTION: Mr. Drain made a motion to accept in principle NEPC’s recommendation for future asset allocation and rebalancing. To the extent that general policy is inconsistent with what the board has yet to execute on a previous reallocation in September, the board will stay that activity until members have an opportunity to get to the specifics of the actions regarding the implementation of this general reallocation. Mr. Cuccia seconded the motion, and the motion passed unanimously.

Mr. Humphreys also presented NEPC’s recommendations for the county’s 2012 private equity plan. The firm recommends that the pension system consider a $25 million allocation for vintage year 2012 funds. $15 million would go toward buyouts/growth equity. Mezzanine would receive $10 million.

MOTION: Mr. Drain made a motion to accept NEPC’s recommendation to continue implementing the pension system’s private equity program. The pension system will implement the recommendation throughout 2012. Ms. Sulick seconded the motion, and the board passed the motion unanimously.

Administrative Report

 Retirement counts have remained high with 12 in February and 17 in January, said Mr. Peterson. Employees who have maxed out on benefits and aren’t receiving salary increases year to year may be choosing to retire, Mr. Peterson said.

The staff has been working with the actuaries on valuations, Mr. Peterson added. Staff also has started on the benefits statements for June and July. A Pension Points newsletter will go out in February. The department also seeks a new pension analyst.

The meeting ended at 2:20 p.m. The next meeting will take place March 8. The Investment Committee will meet March 1.

 


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