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Board of Trustee Meeting Minutes - May 10, 2012

Members Present: John Hammond, Jay Cuccia, Richard K. Drain, Jonathan Hodgson, Jay Middleton, M. Kathleen Sulick, Jim Thomas 

Members Absent: Howard Brown, Jennifer Gilbert-Duran

Members Excused: Andrea Fulton, LeRoy Wilkison

Staff Present: John Peterson, Janet Morgan

Guests: David Ballard, Rhett Humphreys, Tom Lowman, Tom Rosalanko, Tom Smith, Robert W. Spencer, James E. Thorsen

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 Rick Drain. O’Brien Atkinson sat in for Howard Brown.


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

Investment Committee

State Street Global Advisors
Robert W. Spencer and James E. Thorsen

With $11.3 billion in assets under management, State Street Global Advisors (SSGA) seeks opportunities to add value above and beyond passive benchmarks. Managers build portfolios in a systematic way using research, stock selection, portfolio construction and portfolio review.

Although the firm takes a long-term approach, its strategy falls out of favor with investors at times. Indeed, the pension system’s performance especially struggled during the second quarter of 2009 and the third quarter of 2011. As a result, managers met with the pension system board members during a special meeting in October to discuss challenges to performance and ways the firm could get better returns for the county. Now seven months later, Mr. Spencer and Mr. Thorsen came before the board to discuss the firm’s efforts to make corrections.

Mr. Spencer noted that after that October meeting, SSGA hired external talent and worked internally to improve its performance. Further, managers have developed a dynamic model that will take the pulse of the market and assess investor sentiments. When the firm met with the board in October, managers had just finished an analysis that encouraged them to buy risk. The firm saw positive results from that decision, and upon receiving similar signals in December, the firm enjoyed strong results in January and February.

The results of these preliminary changes have encouraged SSGA’s fund managers. The enhancements made to the firm’s stock selection process seem to be gaining speed; however, managers noted a slight pullback in April. SSGA asked for the pension system’s patience as it continues to make changes. The firm reported year-to-date and three-month returns of 10.94 percent versus a benchmark of 10.84 percent. The benchmark, however, outperformed for the month -0.46 percent against SSGA’s -0.99 percent. In response to a question from Mr. Hodgson about economic events in Europe, Mr. Thorsen said he expects a bumpy second half of 2012.

Tom Rosalanko and Tom Smith

GMO, based in Boston, has $104 billion in assets under management. The firm blends traditional judgments with innovative quantitative methods to find undervalued securities and markets. Reporting on changes at GMO, Mr. Smith said the firm has a new CEO. The CEO does not have portfolio management responsibilities.

The fund in which the pension system has invested declined during the year, although not as bad as the benchmark. Performance during the quarter showed the effects of a market rally, however, with the benchmark reporting returns of 14.86 percent versus GMO’s 13.64 percent. The county has had a nice run for three years, although the five-year returns show the results of the financial crisis. Overall, the pension system has had gains of about $30 million.

Although stock selection was good in 2011, Mr. Rosalanko said selection has dragged down results in 2012. Cyclical holdings in chemicals, metals, mining and materials are no longer top holdings in the portfolio. Now the firm focuses on financials, real estate and consumer discretionary holdings such as auto parts stores. The investment process is still the same but different companies are in the mix as market opportunities fluctuate. Country sectors remain the same, however. GMO still favors Japan because stocks there tend to be cheap, whereas Australia is more expensive. And despite the turbulence in Europe, the firm still seeks undervalued opportunities.

New England Pension Consultants
Rhett Humphreys

Active portfolio management has been working for the pension system, said Mr. Humphreys as he reviewed the flash report for the period ending April 30. He reported composite returns of 6.6 percent year to date and 8.3 percent since inception. Total assets stand at $1.4 billion.

All the domestic managers beat their benchmarks year to date, including Buckhead, which is under review. On the international scene, State Street Global Advisors fell behind with year-to-date returns of 8.2 percent versus the benchmark’s 8.7 percent. Marvin and Palmer, which is also under review, reported year-to-date returns of 11.9 percent against a benchmark of 12.7 percent.

In fixed income, Western, with a year-to-date performance of 3.1 percent, has done well against the benchmark’s returns of 1.4 percent. Penn also is ahead 5.8 percent versus 5.5 percent. Under total global asset allocation, Bridgewater showed year-to-date returns of 5 percent and since-inception returns of 8.3 percent. Further, the first four months of 2012 have paid off for Wellington, which has returns of 8.7 percent versus the benchmark’s 7.5 percent.

Reviewing the Executive Performance Report for the first quarter, Mr. Humphreys said the pension system ranked 49 within the universe of public funds measured by NEPC. Further, 75 percent of the plans are much riskier. Overall, the pension system is in the top 14 percent based on risk-adjusted returns. Board members’ efforts to restructure and adjust the portfolio four years ago have worked.

The fourth quarter private markets review showed an IRR of 5.1 percent, strong returns for a program in its infancy. Board members successfully paired complementary investments to mitigate risk. What’s more, the pension system has already received nearly $15 million in distributions. For 2012, the plan calls for two new commitments. The investment committee has begun interviewing possible firms, and NEPC has a recommendation as well.

NEPC also recommends replacing Marvin and Palmer. The board also is considering replacements for Buckhead. The board should be able to make some decisions and begin working with new managers by July.

MOTION: Mr. Drain made a motion to make a $15 million commitment to Private Advisors and accept Dimensional as a replacement for Marvin and Palmer. Board members will hold on making a decision about the third manager. Jim Thomas seconded the motion, and the board unanimously passed the motion.

Administrative Report

Tom Lowman of Bolton Partners met with the board to present actuarial valuations.

The market value of plan assets as of December 31, 2011, was $472,580,960. The average investment return for the fund on a market basis for the year ended December 31, 2011, was 2.2 percent and 0.6 percent on an actuarial basis.

The total recommended employer contribution for the employees’ retirement plan for the plan year and fiscal year ending June 30, 2012, increased from $18,882,680 to $20,764,948. The overall funded ratio for the plan decreased from 83.2 percent to 79 percent. In 2004 the plan was 100 percent funded, but began to decline particularly after the investment losses of 2008.

The market value of the detention officers’ and deputy sheriffs’ plan assets as of December 31, 2011, was $82,318,946. The total recommended employer contribution for the plan year and fiscal year ending June 30, 2013, increased from $5,089,053 to $5,193,501. The overall funded ratio for the plan decreased from 73.4 percent to 71.7 percent.

The market value of the police service plan as of December 31, 2011, was $391,467,842. The actuarial value of assets was $430,342,941. The recommended employer contribution increased from $14,502,900 to $16,557,738. 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 is 81.8 percent.

The market value of the fire service plan as of December 31, 2011, was $389,223,947. The actuarial value of assets was $426,196,539. The total recommended employer contribution increased from $14,580,535 to $15,895,667. The current funded ratio of this plan is 87.7 percent. Even at that ratio, this plan is better than most plans, said Mr. Lowman.

Mr. Lowman ended his presentation with a review of the impact of GASB rules on Anne Arundel County to help board members understand proposed new pension accounting standards.

In other news, retirements are up again, said Mr. Peterson, who reported 15 for May 2012 versus 10 in May 2011. Mr. Wilkison was re-elected to the board as the fire plan representative. Pension staff members are finishing up their work with the auditors, and they are on track to release statements at the end of June.

The meeting ended at 2:30 p.m. The next meeting will take place June 14.


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