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Board of Trustee Meeting Minutes - July 12, 2012

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

Members Excused: Jay Cuccia, Andrea Fulton, Jonathan Hodgson

Staff Present: John Peterson, Janet Morgan

Guests: Brian O. Casey, Lee Harper, Rhett Humphreys, David S. Spika

Recorder: Laura C. Jackson, Audio Associates

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The meeting of the Board of Trustees of the Anne Arundel County Retirement and Pension System (Board) was called to order at 12:21 p.m. by John Hammond.

Minutes

Mr. Wilkison made a motion to approve the minutes of the June 14, 2012, board meeting. Mr. Drain seconded the motion, and the board approved the minutes. Mr. Humphreys later noted one change to the minutes: Wedge Capital Management will replace Buckhead. Mr. Wilkinson moved to reconsider the minutes to reflect that change, and Mr. Middleton seconded the motion. The board unanimously accepted the motion.

Investment Committee

Southeastern Asset Management
Lee Harper

Southeastern is the pension system’s longest standing manager. The firm, based in Memphis, has $32 billion in assets under management. The firm reported no major changes.

Last year proved one of the toughest in the firm’s 22-year relationship with Anne Arundel County. Southeastern reported year-to-date returns of 7.31 percent versus the benchmark’s performance of 9.49 percent. Southeastern’s one-year performance was -5.66 percent against the benchmark’s 5.45 percent. The firm’s long-term performance still looks good with since-inception numbers of 12.16 percent. The benchmark is 8.39 percent for that same time period.

Southeastern can enjoy a big upside when it purchases valuable companies for a reduced price. This year the firm sold Yum’s, which had reached appraisal with 800+ percent gains over 12 years. Purchases don’t always go according to plan, however. Campbell’s Soup, for instance, didn’t live up to managers’ expectations. What’s more, fear continues to drive the volatility in the current market as large numbers of investors flee to bonds for safety. The market is penalizing uncertainty and leaving great companies behind. On the other hand, this environment allows Southeastern to analyze business fundamentals and buy at a discount.

Contributors to performance include Disney, which saw returns of more than 30 percent. Southeastern also has seen strong returns from its recent purchase of InterContinental Hotels, which owns the Holiday Inn brand as well as several others. The firm also has purchased Franklin Resources, CONSOL Energy and, for the second time, Berkshire Hathaway. Dell, Chesapeake Energy and Level 3 Communications were the biggest detractors in the portfolio.

At the end of her presentation, Ms. Harper asked for some changes to the pension system’s investment guidelines regarding Southeastern.

• The firm requests increasing the amount of American depository receipts (ADRs) it can hold in the county’s portfolio from 10 percent to 20 percent.
• Second, because Southeastern complies with normal policy guidelines, the firm no longer needs a specific statement in the policy regarding disclosures required by the Chartered Financial Analyst (CFA) Institute.
• Third, there is a general guideline in the portfolio that no more than 10 percent of a domestic equity manager’s portfolio may consist of cash or cash equivalent. The firm has been operating under a 20 percent waiver since 2003. Ms. Harper requested a guidelines change so Southeastern can hold up to 20 percent of the portfolio in cash. If market conditions warrant, Southeastern must notify the board if market conditions go above 20 percent.

MOTION: Ms. Sulick made a motion to accept all of Southeastern’s recommended investment guidelines changes. Mr. Middleton seconded the motion. The board unanimously accepted the motion.

Westwood
Brian O. Casey and David S. Spika

Like Southestern, Westwood has experienced challenges due to negative developments in Europe, investor fears, and the effects of the “safety bubble.” The firm, which has managed funds for the county for seven years, added two experienced analysts this year as well as a few research associates. Westwood has $13 billion in assets under management.

Although domestic equity managers face a rough environment, Mr. Casey said he doesn’t expect this trend to last forever. Mr. Spika added that companies are sitting on cash due to uncertainties in the market. Further, although the firm prefers areas of growth potential, safer investments are getting more play. An underweight to utilities, for example, cost the firm. September 2011 and May 2012, periods of significant macroeconomic fear, hurt performance the most. Year to date, the county portfolio shows returns of 6.4 percent (net of fees) against a benchmark of 8.7 percent.

Although Westwood typically does well coming out of a recession, recovery in the United States has taken longer due to the depth of the financial crisis. In response, Westwood has sold companies with too much exposure to Europe. The firm has made other minor tweaks to protect its clients in this challenging environment. Health care makes sense as an area of investment. Technology is another good area despite the perception that it’s a cyclical sector. Energy was hurt in February and March due to the warm winter, but this sector helped the county’s performance in June. Compared to the benchmark, Westwood has done a better job of picking companies that generate greater earnings growth, said Mr. Spika. The firm still owns companies that offer good growth potential and pay good yields.

New England Pension Consultants
Rhett Humphreys

Mr. Humphreys reported all three major investment categories were positive for the “flash” report ending June 30.The domestic equity composite was 8.9 percent year to date whereas emerging market equity reported 12.4 percent year to date. Marvin and Palmer showed results of 12.7 percent for the month and 12.4 percent year to date. Such returns in the midst of a liquidation allow the firm to go out on a high note.

Bonds reported year-to-date returns of 4.4 percent. Western showed returns of 4.3 percent year to date versus the benchmark’s 2.4 percent. Under global asset allocation, Bridgewater’s performance was 5.7 percent year to date. Its benchmark reported 3 percent for the same time period. Wellington, like Marvin and Palmer, made a gracious exit from the portfolio with returns 5.6 percent against a benchmark of 4.9 percent year to date.

Mr. Hammond reported the investment committee will meet August 7 at 11 a.m. The pension system has completed the first phase of its rebalancing process by moving over the liquidated Marvin and Palmer funds to Dimensional. In September the pension system will move funds from Wellington into emerging market equity.


Administrative Report

Mr. Peterson reported that Jay Cuccia was re-elected to the board. In other news, 21 people retired in July. Benefits statements went out successfully. Bolton has begun its experience study.

The meeting ended at 2:05 p.m. The next meeting will take place August 9.

 

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