General Employees Retirement Board

UNOFFICIAL MINUTES OF SPECIAL MEETING OF THE STERLING HEIGHTS GENERAL EMPLOYEES' RETIREMENT SYSTEM Wednesday, August 22, 2012 Location: Room #201 40555 Utica Road, Sterling Heights, MI 48313 (586) 446-2331 Acting Chairperson Baker called the meeting to order at 12:00 p.m. BOARD MEMBERS PRESENT: Brian Baker, Acting Chairperson Jennifer Varney, Acting Secretary / Treasurer Paul Henig, Trustee BOARD MEMBERS ABSENT: Richard Weiler, Chairperson (excused) Todd Marsh, Trustee (excused) ALSO PRESENT: Walt Hessell, Pension Administrator; Timothy Brice, Senior Vice-President, The Brice Group, Merrill Lynch APPROVAL OF AGENDA: Motion by Henig, support by Varney, to approve the agenda as presented. Ayes: All. Motion carried unanimously. CORRESPONDENCE: Motion by Henig, support by Varney, to receive and file correspondence: Reports for the quarter ending as follows: 1. The Brice Group, Merrill Lynch 2. Earnest Partners 3. Cohen & Steers REIT 4. Janus Capital 5. M. D. Sass 6. MFS Investment 7. PIMCO - Allianz 8. NFJ – Allianz 9. Thornburg Investment 10. McDonnell Investment 11. Victory 12. Winslow Ayes: All. Motion carried unanimously. PORTFOLIO PERFORMANCE REVIEW BY TIM BRICE, THE BRICE GROUP, MERRILL LYNCH: Brice distributed an analysis that reviewed the overall fundamentals for the equity market from a historical perspective. The article suggests that stock returns are likely to exceed bonds over the next ten years. Since 1901 there have been eleven 10-year rolling cycles where bond returns exceeded equities. Thereafter without exception, stock returns surpass bonds significantly in each of the ten- year rolling periods that followed. For the quarter ended June 30, 2012, the S&P index fell 2.8% but the US Broad Market Bond Index went up 2.2%. These index outcomes were in response to investor concerns over slowing economic growth domestically and the European debt crisis. Emerging markets faired poorly with an index decline of 8.9%. The fixed income portfolio held by PIMCO and McDonnell outperformed the respective benchmarks and collectively delivered a 2.4% return for the quarter. The equity portfolio recorded a 5.1% decline for the quarter and significantly underperformed the benchmark, however the portfolio still ranked 4th in the public fund sample for the year to date. Value stocks proved more defensive than growth stocks in the down quarter. Overall, large capitalization equities declined less than small capitalization stocks as well. The energy and material sectors suffered the worst due to high exposure to slowing economic growth while utilities and healthcare produced positive returns. The financial sector produced the worst returns of all because of concerns about a more difficult regulatory environment. 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* Market Value 3-month 1-year 3-year 5-year 10-year Total Fund $ 104,495,912 -2.8/45 0.8/38 11.6/23 1.5/62 5.9/39 Total Fixed Income 2.4/23 7.8/29 8.7/34 5.4/78 4.9/88 McDonnell Investment 1 $ 16,024,825 2.1/33 8.1/24 7.6/47 na/na na/na PIMCO 2 $ 16,755,011 2.5/16 6.1/54 8.7/27 na/na na/na Total Equities -5.1/61 -1.8/61 13.6/68 -0.5/56 6.2/47 Janus 8 $ 6,614,481 -2.5/19 11.6/2 na/na na/na na/na Winslow 3 $ 6,451,821 -7.3/87 na/na na/na na/na na/na Victory Capital3 $ 6,446,011 -3.9/24 na/na na/na na/na na/na MD Sass 4 $ 8,399,296 -7.2/94 -8.6/98 11.6/89 -1.2/57 na/na MFS 5 $ 8,502,114 -4.0/57 2.5/36 na/na na/na na/na Earnest Partners 6 $ 13,771,805 -4.0/24 0.3/27 19.8/25 4.0/23 na/na NFJ International 7 $ 8,787,204 -5.9/33 -7.2/19 na/na na/na na/na Thornburg7 $ 8,564,641 -8.6/78 -14.2/68 na/na na/na na/na Cohen & Steers REIT9 $ 4,178,703 2.8/na na/na na/na na/na na/na *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. Brice commented on the underperformance by Winslow and stated that losses on two interrelated securities (Cognizant and JP Morgan) appeared to account for the majority of the negative outcome in their portfolio. Due to the relative new status of the manager no Board action was taken. Brice then discussed the continual underperformance of MD Sass that has not exceeded its benchmark over the last five- year look back. With a one year ranking of 98 as of June 30, 2012, Brice recommended that the Board consider the possibility of replacing MD Sass in the large capitalization value equity allocation. Discussion ensued after Brice distributed a performance study for potential replacement managers. Motion by Henig, supported by Varney, to terminate MD Sass as money manager and to hire Herndon Capital as the replacement. Ayes: All. Motion carried unanimously. With the termination of MD Sass it came to the Boards attention that the event will trigger a closure of the securities lending agreement with Comerica Bank. The Board discussed the pros and cons of this outcome and decided that termination of the securities lending program was acceptable. Brice then pointed out that McDonnell Investment could potentially be moved from the Comerica custodian account onto the Merrill Lynch platform. This move would be desirable in the sense that consolidation of the money managers under the Merrill Lynch platform would allow for a more timely quarterly investment report summary. Motion by Henig, supported by Varney, to instruct Tim Brice to investigate and proceed with the movement of McDonnell Investment over to the Merrill Lynch platform from the Comerica custodian service. Ayes: All. Motion carried unanimously. BREAK – (1:15 p.m. – 1:30 p.m.) CONFERENCE CALL WITH EARNEST PARTNERS (Small – Middle Capitalization Equity): Margaret Champagne, CPA – Product Management and Yash Patodia, Investment Management reviewed the investment report for the second quarter ending June 30, 2012. The portfolio declined 4% in the second quarter that was consistent with the decline with its benchmark. Both Champagne and Patodia expressed confidence that investors were finally returning to fundamentals in the equity markets which bodes well for the portfolio looking forward. The portfolio is underweighted with regard to financials and utilities as well as mortgage REITS. Patodia reviewed a sample of stock holdings within the portfolio and described the investment rational. Champagne noted that there were no material personnel changes within the firm. The Board then thanked Ms Champagne and Mr. Patodia for the report and the firm’s efforts on behalf of the system. CONFERENCE CALL WITH JANUS CAPITAL (Large Capitalization Growth Equity): Nick Thompson, Vice President and Director of US Equity Strategies and Jim Wiaduck, Michigan Director covered the key highlights of the investment report for the June 30, 2012 quarter. The portfolio lost 2.5% for the quarter that was better than the benchmark negative return of –4.0%. For the year to date the portfolio produced a 16.5% return which ranked it number one against its peers. The long duration growth holdings are producing solid returns after struggling with volatility in the prior year. The top five portfolio contributors and the top five detractors were reviewed in detail. Thompson believes that the portfolio holds equities that will grow even in a weaker economic environment due to their pricing power for maintaining or increasing margins. The portfolio is overweight to IT, consumer discretionary and healthcare with underweight positions in consumer staples, energy and materials. The Board thanked Mr. Thompson and Mr. Wiaduck for the report and efforts on behalf of the system. PRESENTATION BY VICTORY CAPITAL (Large Capitalization Growth Equity): Lisa Rosenthal, CFA represented Victory Capital and presented the report for the June 30, 2012 quarter. For the quarter, the portfolio declined –3.9% in line with the benchmark loss of –4.0%. For the year to date, a 12.7 percent return ranked it in the top 11%. While sector allocation produced a positive effect, the stock selection with regard to Cognizant created the single largest negative to portfolio performance. The portfolio is overweight to healthcare, energy and consumer discretionary and underweight to consumer staples and industrials. Rosenthal described the four- person investment team that has a cohesive sixteen- year history. A highly refined stock selection discipline has been a key to the firm’s success. Rosenthal was also optimistic for the portfolio outlook now that investors appear to be returning to fundamentals. The Board thanked Ms Rosenthal for her presentation and Victory Capital’s efforts on behalf the system. PRESENTATION BY WINSLOW CAPITAL (Large Capitalization Growth Equity): Raymond Urban, Managing Director and Matthew Boren, Vice President represented Winslow Capital and presented the quarterly report for June 30, 2012. Urban described the “soft close” that the firm recently implemented in order to more effectively manage their clients’ funds. He also described recent restructurings in the firm’s compensation package that better align key employees with the interests of the firm’s clients. During the quarter the portfolio underperformed the benchmark by 3.3%. A negative attribution from stock selection, especially with Cognizant and JP Morgan were cited as the setback. The portfolio is underweight consumer staples and telecommunication services with an slight overweight to consumer discretionary, energy, financials, health care and industrials. Looking forward the portfolio has been repositioned to reduce exposure to economic growth and raise exposure to earnings growth. The Board thanked both Mr. Urban and Mr. Boren for their presentation and the efforts of Winslow Capital on behalf of the system. All money managers were in agreement over the cautious short-term outlook. The economic slow down, lingering European Debt crisis, November presidential election and fiscal cliff concerns, all portend for continued volatility in equities. However, in the intermediate to long-term view, the fundamentals for the equity market performance appear favorable. BREAK – (3:30 p.m. – 3:45 p.m.) TRUSTEE COMMENTS: None ADJOURN: Motion by Varney, supported by Henig, to adjourn the meeting at 3:57 p.m. Ayes: All. Motion carried unanimously. Jennifer Varney, Acting Secretary / Treasurer