General Employees Retirement Board

OFFICIAL MINUTES OF SPECIAL MEETING OF THE STERLING HEIGHTS GENERAL EMPLOYEES' RETIREMENT SYSTEM Thursday, February 23, 2012 ____________________________________________ _________________________________ Location: Room #201 40555 Utica Road, Sterling Heights, MI 48313 (586) 446-2331 Chairperson Weiler called the meeting to order at 9:10 a.m. BOARD MEMBERS PRESENT: Richard Weiler, Chairperson Jennifer Varney, Acting Secretary / Treasurer Todd Marsh, Trustee BOARD MEMBERS ABSENT: Brian Baker, Secretary (excused) Paul Henig, Trustee (excused) ALSO PRESENT: Walt Hessell, Pension Administrator; Timothy Brice, Senior Vice-President, The Brice Group, Merrill Lynch APPROVAL OF AGENDA: Motion by Marsh, support by Varney, to approve the agenda as presented. Ayes: All. Motion carried unanimously. CORRESPONDENCE: Motion by Marsh, support by Varney, to receive and file correspondence: Reports for the quarter ending as follows: 1. The Brice Group, Merrill Lynch 2. NFJ - Allianz 3. Janus Capital 4. M. D. Sass 5. MFS Investment 6. PIMCO 7. McDonnell Investment 8. Thornburg Ayes: All. Motion carried unanimously. PORTFOLIO PERFORMANCE REVIEW BY TIM BRICE, THE BRICE GROUP, MERRILL LYNCH: Brice distributed a Merrill Lynch CIO Report that provided insight into macro-economic issues impacting the market. Overall good support is seen for the equity market, especially for dividend-rich sectors and higher quality equities that bodes well for the current portfolio. This positive outlook is offset somewhat by inconsistent domestic economic indicators, the threat of ongoing Eurozone sovereign debt crisis and a European economic downturn. Fixed income for the fourth quarter trailed equity returns however posted a strong calendar year performance with the broad market bond index returning 1.1% and 7.8% respectively. Treasuries and Munis were the lead performers for the year with the lower-quality bonds posting the best fourth quarter return at 6.2%. A flight to quality theme once again played out for a large part of 2011. Both McDonnell and PIMCO exceeded their respective benchmarks for the quarter. The equity portfolio delivered an 11.1% return for the quarter and slightly underperformed the benchmark. Small capitalization stocks outperformed large capitalization equities by a small margin and the large capitalization value stock returns exceeded those of the large capitalization growth equities for the quarter. For the full calendar year the inverse was true. The financial sector posted losses for the year since the fourth quarter rally fell short. Likewise, the sell off in international equities could not be reversed with the fourth quarter market improvement. In short, 2011 marked another year of extreme volatility leaving investors with a somewhat cautious outlook for 2012. Brice then reviewed the performance of the portfolio and individual managers relative to the market and their peer group as follows:  Average Annual Return (%) / Rank* 3- 5- 10- Market Value 1-year 3-year month year year Total Fund $ 101,338,057 7.5/6 -1.5/76 10.9/26 1.3/89 5.0/15 Total Fixed Income 1.6/42 6.8/43 8.4/31 4.8/84 4.9/88 McDonnell $ 16,364,571 1.3/47 8.4/13 na/na na/na na/na Investment 1 PIMCO 2 $ 16,071,453 1.8/31 4.7/62 9.5/17 na/na na/na Total Equities 11.1/48 -5.0/71 12.7/65 -0.5/59 4.6/35 Janus 8 $ 5,233,787 8.5/89 -2.6/75 na/na na/na na/na Winslow 3 $ 5,461,936 na/na na/na na/na na/na na/na Victory Capital 3 $ 5,264,175 7.5/86 na/na na/na na/na na/na MD Sass 4 $ 8,096,563 14.1/14 -6.1/89 14.6/26 0.1/31 na/na MFS 5 $ 8,188,574 11.4/78 2.3/24 na/na na/na na/na Earnest Partners 6 $ 15,101,726 15.2/40 -2.2/49 21.7/27 3.8/26 na/na NFJ International 7 $ 8,469,283 7.0/17 -8.8/22 na/na na/na na/na - Thornburg 7 $ 8,376,588 6.5/24 na/na na/na na/na 15.0/66 Cohen & Steers $ 4,709,401 na/na na/na na/na na/na na/na REIT 9 *Peer group ranking within style specific sample. 1 Short to Mid-term fixed income manager hired 3/31/09. 2 Core fixed income manager hired 9/30/08. 3 Large cap growth equities managers hired 9/30/11. 4 Large cap value equities manager hired 7/31/06. 5 Large cap value equity manager hired 11/25/09. 6 Small/mid cap core equities manager hired 4/30/06. 7 International/emerging markets equity managers hired 9/30/10. 8 Large cap growth equities manager hired 12/29/09. 9 REIT manager hired 12/31/11. Due to Janus Capital’s improved 2012 performance as described by Brice, they would be retained as a manager but kept on probationary status. Brice finished his summary by briefing the Board on the status of the potential fee restructuring for the various money managers that could result in reduced costs for the system. For purposes of streamlining the quarterly investment portfolio review meetings and fee reductions, the Board would consider using telephone conferencing with select managers on a schedule determined annually. BREAK – (10:15 a.m. to 10:30 a.m.) CONFERENCE CALL WITH MCDONNELL INVESTMENTS: Mark Giura, Managing Director – Investments and Peter Clerkin, Managing Director - Marketing reviewed the investment report for the fourth quarter 2011. The 8.41% 2011 portfolio return came somewhat as a surprise because further declining interest rates had thought to be extremely unlikely at the beginning of the year. This same theme has resurfaced for the 2012 outlook. Giura described the efforts to underweight Treasuries and to find better returns in asset back securities, collateralized mortgage back securities and taxable munis while still maintaing a high quality portfolio. Efforts were made to overweight to a six to seven year maturity as well in order to enhance returns. The return outlook for 2012 is expected to slightly exceed 2% given no changes to prevailing interest rates and a breakeven scenario was projected should rates climb 50 basis points during the year. While inflation is deemed a threat in the long term, the current lack of wage inflation due to high structural unemployment negates inflation concerns for the foreseeable future and substantiates the Federal Reserves decision to maintain zero rates into 2014. The Board then thanked Mr. Giura and Mr. Clerkin for their report and their efforts on behalf of the system. CONFERENCE CALL WITH PIMCO: Paul Nicodemus, Senior Vice President presented the report for the PIMCO Total Return portfolio. Nicodemus discussed the portfolio breakdown and attribution as of December 31, 2011. PIMCO focused on overweighting to the five through ten year duration with exposure to high quality securities in Canada, Australia and Brazil. Mortgage back securities were over- weighted while high yield bond exposure was reduced. Overall the portfolio was more defensively positioned primarily as a result of the on-going European sovereign debt crisis. Current performance results show that the portfolio has made up in part for the third quarter 2011 underperformance due to the prior underweight in Treasuries. The Board thanked Mr. Nicodemus for his report and PIMCO’s efforts on behalf of the system. PRESENTATION B Y COHEN & STEERS REITS: Terrence Ober, Senior Vice President and Gregg Jones, Regional Sales Director presented the U.S. Realty Total Return portfolio report. In their first ever presentation to the Board since taking over the allocation from INVESCO REIT, they provided a detailed introduction of the firm and stated that over $41 billion was under management. Ober then explained the nature of REITS as compared to private commercial real estate investments and the cyclical market fluctuations unique to each. The actual portfolio property sector weighting was then contrasted to the index. A portfolio overweight in regional malls, shopping centers and office compared to the underweight to health care, free standing net leases and diversified properties was explained. The REIT market outlook was described as positive as lack of construction has virtually nullified any new supply of properties nationally which has offset slow demand. It is the firm’s position that for 2012, the investor demand for predictable cash flows, secure yield and dividend growth will provide an impetus for the REIT asset class. The Board thanked both Mr. Ober and Mr. Jones for their report and their hope for a mutually beneficial investment relationship. DISCUSSION OF ASSET ALLOCATION: Brice presented the year to date asset allocation and discussion ensued. For the foreseeable future, the Small to Mid capitalization stock portfolio will continue to be looked to for the payment of monthly retiree benefits and the portfolio allocation will be maintained at the lower end of the allowable range. TRUSTEE COMMENTS: None ADJOURN: Motion by Varney, supported by Weiler, to adjourn the meeting at 12:10 p.m. Ayes: All. Motion carried unanimously. ___________________________________ Jennifer Varney, Acting Secretary / Treasurer