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Board of Trustee Meeting Minutes - March 8, 2012

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

Staff Present: John Peterson, Janet Morgan

Guests: Cynthia Duda, Stephen Hansen, Rhett Humphreys

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.

Minutes

Mr. Cuccia made a motion to approve the minutes of the February 9, 2012, board meeting. Ms. Fulton seconded the motion, and the motion passed unanimously.

Investment Committee

Capital Dynamics

Capital Dynamics took over the HRJ Special Opportunities portfolio more than two years ago. With a track record since 1991, Capital Dynamics focuses on private equity, clean energy and infrastructure, and real estate. With the HRJ Special Opportunities fund, the firm looks to take advantage of market opportunities in distressed debt, turnaround and real estate oriented/real asset investments. The portfolio is diverse by industry as well as geography, with core, mid-market investments in the United States, Europe and Asia. The investments in Europe and Asia haven’t performed as well as those in the states, said Ms. Duda.

Managers haven’t called money in this fund since 2009, said Ms. Duda. The firm made a distribution in January of 1.5 percent after a period of delay due to the recession. The next distribution is in April, said Ms. Duda.
Of the portfolio’s 11 funds, the strongest are those that had the ability to remain flexible during the past several years of market volatility. Centerbridge, for example, invested in debt after the Lehman collapse and now invests in equity, said Ms. Duda. The international managers have underperformed for a variety of reasons. Orlando Italy did well to invest slowly, Ms. Duda added, but the investment period has ended, so managers now focus on small follow-on opportunities.

Mr. Hammond noted that Capital Dynamics had nothing to do with making these investments. Ms. Duda added that the underlying portfolios are led by respected managers who just got the timing wrong. Centerbridge is one of the few that invested correctly during this turbulent period. Cerebus, another strong performer, was able to distribute and reinvest within its fund during its investment period. Cerebus also managed to get a return from the sale of Chrysler Financial, Ms. Duda added. Overall, Ms. Duda believes there will be an upside to the portfolio at some point, with a 7 to 10 percent net IRR to the pension system per year.

Lion Properties Fund

The Lion Properties Fund is a large manager with $24 billion in assets under management. This highly diversified fund has beat its benchmark during the last 8 out of 12 years. The fund also has enjoyed a performance of 8 percent during that time period. Mr. Hansen reported no changes to the management team. The county pension system has invested in the fund for about seven years.

The fund has 149 investments in 36 markets, with a gross asset value of $6.4 billion. Properties in the fund include apartments, retail sites, office space and industrial. The 2011 acquisition volume topped 2010, and the deal pipeline is robust, said Mr. Hansen. The firm is underweight to office space but overweight in multi-family apartments, which have done well in the recession. The properties are about 91 percent occupied, up from 88 percent, said Mr. Hansen. Although the portfolio typically focuses on properties on the two coasts, managers have been adding properties in Texas.

Looking into the future, Mr. Hansen said the portfolio will continue to focus on income growth as market fundamentals improve. The firm projects growth in operating income of approximately $40 million during the next three years. The fund will invest new capital selectively in properties with durable income. 2012 should be a strong year with outsized returns better than 8 to 10 percent, Mr. Hansen added. Mr. Wilkison asked a question about Las Vegas. Mr. Hansen said Vegas is getting better but other areas are getting better faster.

New England Pension Consultants

The county pension system is off to a good fiscal year, said Mr. Humphreys. Reviewing the flash report for the period ending February 29, Mr. Humphreys reported a total equity performance of 11.7 percent year to date. All the domestic managers beat their benchmarks year to date. For international equities, State Street Global outperformed its benchmark slightly with returns of 12 percent versus 11.4 percent year to date. GMO and Marvin and Palmer trailed their benchmarks a bit for the same period.

Mr. Humphreys noted that the pension system’s investment committee members reviewed Marvin & Palmer’s performance in detail during a March 1 meeting and concluded that the board should find a replacement manager. Interviews of prospective managers will take place during the next six weeks.

Mr. Humphreys also discussed the pension system’s private equity program. NEPC recommends a $25 million fresh commitment for the year. NEPC further recommends splitting this with $10 million going to mezzanine financing and $15 million going to growth/buyout.

The pension system already has committed $5 million to Crescent Mezzanine Partners IV and $10 million to Crescent Mezzanine Partners V, both of which show positive returns. NEPC recommends that the board make a follow-on commitment of $10 million to Crescent Mezzanine Partners VI for 2012. The investment committee supports the recommendation.

For the balance of the proposed $25 million investment, $15 million, Mr. Humphreys has presented details on a variety of managers and recommended the investment committee conduct interviews. The committee will interview Private Advisors and Sterling Capital Partners on May 10 during a special committee meeting.

Mr. Humphreys added that 2012 will be about getting back to fundamentals and understanding what is and isn’t working. The investment committee will meet on April 23 and 24 to interview replacements for Buckhead and Marvin & Palmer.

Administrative Report

Mr. Peterson reported that $195 was collected from the pension system board members and donated to the ASPCA in memory of board member Dennis Callahan.

Staff members continue to collect data for the valuations, Mr. Peterson said. They also report strong interest in the retirement seminars they have scheduled for the next few months. A new hire will start on March 29, Mr. Peterson added. Jay Cuccia, LeRoy Wilkison and Kathy Sulick will be up for re-election/reappointment during the next few months. Mr. Hammond, serving as the county’s chief administrative officer following the death of Mr. Callahan, will retain his position as chair of the board.

The meeting ended at 1:50 p.m. The next meeting will take place April 12.


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