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Board of Trustee Meeting Minutes - August 9, 2012

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

Members Excused: Jay Middleton, Kurt Svendsen

Staff Present: John Peterson, Janet Morgan

Guests: Kevin P. Campbell, Leo Chenette, Kimberly A. Fetterman, Rhett Humphreys, Curtis Johnson. Christopher D. Pettia

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 12:08 p.m. by John Hammond.

Minutes

Mr. Cuccia made a motion to approve the minutes of the July 12, 2012, board meeting.
Mr. Drain seconded the motion, and the board approved the minutes.

Investment Committee

DuPont Capital Management
Kevin P. Campbell, Kimberly Fetterman and Christopher D. Pettia

DuPont is beginning to move in the right direction as it comes back from a -12 percent internal rate of return (IRR). The firm, based in Delaware, has $28.4 billion in assets under management. The firm is a subsidiary of the DuPont Company that is dedicated solely to investment management. Mr. Pettia recently joined the DuPont investment team. The firm reported no other major changes.

The county pension system invests in DCM Fund II, a well-diversified vintage 2006 fund. The fund has a client side-by-side investment of $1 billion. The fund now has a portfolio level IRR of 2.3 percent. Noting the fund’s vintage year, Mr. Pettia said many of DCM II’s underlying funds stopped investing at the onset of the financial crisis in 2008 and went into survival mode, which created an elongated J curve and a depressed IRR. However, the IRR has been increasing every quarter.

The firm expects to see some significant returns during the first quarter of ’13. Activity in Fortress Fund IV (a special situations investment) and Globespan Capital Partners V (venture capital) should bring $2.3 million into DCM II. Further, the funds DuPont invested the most money with are all performing well. Cerberus Series Four, for example, has a 1.29 multiple, and Abry Senior Equity II has a 1.56 multiple. Managers expect these funds to continue doing well in the future. In response to a question from Mr. Drain, Mr. Campbell said investments such as Blackstone and ATA Ventures II have presented concerns, but managers have seen incremental, positive results from DCM II overall.

Mr. Hammond asked how the DuPont Capital Management determines the county pension system’s management fee. Mr. Campbell said the fee is based on net asset value (NAV) not committed capital. The firm has the potential to reach an IRR in the high single digits or low double digits, Mr. Campbell added.

BlackRock
Leo Chenette and Curtis Johnson

BlackRock has $3.5 trillion in assets under management. The firm will acquire Swiss Re Private Equity Partners AG based in Zurich. Mr. Johnson expects minimal overlap in terms of investment capability. In other news, Mr. Chenette noted a significant change in staff: Sallie Shuping-Russell is on long-term disability although she is still active with the firm in a small way.

Reviewing the different types of investments, Mr. Chenette said separate accounts have been the biggest performance drivers. The pension system invests in the Q-Black Private Capital II fund, which is doing well even though BlackRock deployed the fund during a tough vintage year. Managers have seen a nice uplift to the fund, which has a net annual IRR of 5.3 percent and a total value to paid in capital (TVPI) ratio of 1.20x. Accel IX Strategic Partners, for instance, is an underlying fund that was an early investor in Facebook. A small investment in Accel resulted in strong returns for the portfolio. Further, the OCM/GFI Power Opportunity Fund II is carrying 3.2 times its investment. Segway, on the other hand, suffered from a failed consumer business model.

Fund III, which is 80 percent paid in, is now in the harvest phase. The IRR is 5.8 percent and the TVPI is 1.14x. Although the fund is newer, managers are seeing nice returns. Mr. Chenette said Medivance sold for a little less than 4 times BlackRock’s investment. Detractors to performance include Spatial Photonics, which won’t get the return managers expected. Fund II and III have little exposure to Europe, Mr. Chenette added. The firm is raising a new fund that will have more co-investments and buyouts. Managers may also steer the new fund toward energy and natural resources.

New England Pension Consultants
Rhett Humphreys

Prior to Mr. Humphreys’ report, Mr. Hammond discussed on the outcome of the recent investment committee meeting. The board will implement the second phase of its portfolio rebalancing plan September 4. The board will increase its investment in Dimensional, add $17 million to PIMCO and add $20 million to Penn Capital. Those actions will complete the rebalancing program.

Ms. Morgan has recommended that the board get into State Street’s institutional liquid reserve fund, a secure, short-term investment account. Mr. Hammond asked for the board’s approval.

MOTION: Mr. Drain made a motion to accept the recommendation to use State Street’s institutional liquid reserve fund. Mr. Wilkison seconded the motion, and the board passed the motion.

The “flash” report for the period ending July 31 revealed strong performance across all sectors, said Mr. Humphreys. The plan has averaged returns of 8.6 percent per year since September 1990, which is in line with the pension system’s performance goal of 8 percent. Domestic equity had year-to-date returns of 9.7 percent. The international equity composite, on the other hand, reported returns of 3.3 percent due to challenges in Europe. High yield fixed income manager Penn Capital matched its benchmark with year-to-date returns of 8.4 percent. In emerging fixed income, PIMCO had a year-to-date performance of 10.2 percent. And under the global asset composite, Bridgewater reported year-to-date returns of 9.4 percent. Overall, good news for July, said Mr. Humphreys.

The Executive Performance Report for the second quarter of 2012 showed the pension system defended well compared to the majority of the publicly defined benefits plans in the country. Reviewing risk versus return in the portfolio for the past three years, Mr. Humphreys said the pension system ranks in the top 23 percent in terms of return and in the top 38 percent in terms of level of risk. Further, the five-year numbers for total plan risk/return continue to get better each quarter.

The Private Equity Review for the first quarter of 2012 continues to reveal a strong, solid program. The IRR since the October 2005 inception is 6.43 percent, a good number for a private equity program during this time period, said Mr. Humphreys. Further, the pension system had only one negative return on the executive summary IRR performance report.

Administrative Report

Mr. Peterson reported another strong retirement month in August, bringing the total number to 41 for the start of the new fiscal year. The total number of retirements during this time last year was 26. The imaging system is in, so staff members have begun scanning retirement folder. The staff also is in the middle of Bolton’s experience study. Mr. Peterson is working on a summer issue of Pension Points. On the basis of a question from Mr. Drain, the board will review DuPont Capital’s investment advisory and management fees.

The meeting ended at 1:48 p.m. The next meeting will take place September 13.

 

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