General Employees Retirement Board

UNOFFICIAL MINUTES OF SPECIAL MEETING OF THE STERLING HEIGHTS GENERAL EMPLOYEES' RETIREMENT SYSTEM Wednesday, August 21, 2013 ____________________________________________ _________________________________ Location: Room #201 40555 Utica Road, Sterling Heights, MI 48313 (586) 446-2331 Chairperson Weiler called the meeting to order at 12:12 p.m. BOARD MEMBERS PRESENT: Richard Weiler, Chairperson Brian Baker, Secretary Jennifer Varney, Treasurer Paul Henig, Trustee BOARD MEMBERS ABSENT: 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 Baker, support by Varney, to approve the agenda as presented. Ayes: All. Motion carried unanimously. CORRESPONDENCE: Motion by Baker, support by Weiler, 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. Herndon 6. MFS Investment 7. PIMCO - Allianz 8. NFJ – Allianz 9. Thornburg Investment 10. McDonnell Investment 11. Victory Capital 12. Winslow Capital Ayes: All. Motion carried unanimously. PORTFOLIO PERFORMANCE REVIEW BY TIM BRICE, THE BRICE GROUP, MERRILL LYNCH: Brice distributed an analysis titled “The RIC in Pictures” which continued with the prior theme of increasing allocations to equities while lowering exposure to fixed income. It is anticipated that both intermediate and long-term bond yields will continue to rise and pose a challenge for defensive higher dividend paying stock values as well as bonds. 14 of 15 equity valuation metrics are seen as either in line or undervalued, suggesting that returns on equities have further to go and that large capitalization growth stocks could come into favor. For the quarter ended June 30, 2013 the S&P index rose 2.9% and small capitalization stocks produced 3.2%. Value stocks outperformed growth. The FED’s taper talk and concerns over slowing growth in China subdued returns for the quarter. Financials and Consumer Discretionary sectors produced the highest returns while Consumer Staples, Utilities and Telecommunications trailed. The fixed income portfolio managed by PIMCO and McDonnell lost -3.6% in the quarter compared to the benchmark decline of –2.5%. Contributing to the shortfall was PIMCO’s overweight to TIPS during the quarter, which was highly sensitive to the spike in interest rates. Brice recommended monitoring both fixed income managers on an on-going monthly basis. The equity portfolio gained 0.2% for the quarter with nearly all money managers trailing their respective benchmarks. Only MFS outperformed and attributed its defensive positioning for producing gains as investors sought risk aversion and yield during the quarter. 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 $ 107,302,767 -1.0/74 11.3/55 10.7/44 3.8/81 6.7/25 Total Fixed Income -3.6/87 -1.5/93 3.8/60 3.5/89 3.7/92 McDonnell Investment (1) $ 10,281,369 -3.3/85 -1.1/91 3.8/55 na/na na/na PIMCO (2) $ 20,760,595 -3.7/92 -1.0/90 3.6/60 na/na na/na Total Equities 0.2/80 18.1/68 15.0/78 3.4/92 8.5/49 Janus (8) $ 7,535,676 2.8/52 14.8/89 16.2/77 na/na na/na Winslow (3) $ 7,458,314 1.7/61 16.3/60 na/na na/na na/na Victory Capital (3) $ 6,975,134 -0.4/95 9.0/97 na/na na/na na/na Herndon (4) $ 8,399,296 0.1/98 na/na na/na na/na na/na MFS (5) $ 9,293,675 4.2/34 27.1/27 19.4/25 na/na na/na Earnest Partners (6) $ 14,440,460 0.3/91 21.7/63 17.8/67 9.1/36 na/na NFJ International (7) $ 9,449,356 -4.5/80 13.5/75 na/na na/na na/na Thornburg (7) $ 7,789,988 -0.8/47 5.1/68 na/na na/na na/na Cohen & Steers REIT (9) $ 4,526,787 -1.3/na 9.1/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 9/30/12. (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 circulated an updated investment performance summary for all of the managers as of July 31, 2013. The update showed that both of the money managers on probation (Victory and Janus) were exceeding their benchmarks during the month of July 2013. By consensus the Board agreed to maintain the probationary status for both Victory Capital and Janus Capital. CONFERENCE CALL WITH EARNEST PARTNERS (Small – Middle Capitalization Equity): Patmon Malcom, CFA reviewed the investment portfolio results for the second quarter ending June 30, 2013. The portfolio had a positive return of 0.3% compared to the custom benchmark return of 2.3%. Brice asked Malcom to explain the underperformance. Malcom described the nature of the benchmark holding a number of speculative positions that Earnest Partners did believe appropriate for the portfolio from a risk and valuation perspective. He compared the second quarter of 2013 to the 2006 market scenario where Earnest trailed the benchmark but then within a twelve to eighteen month period returns far exceeded the benchmark. Malcom stated that the third quarter portfolio performance year to date was substantially exceeding the benchmark and that the portfolio was strongly positioned. He believed that the eventual FED tapering would prove beneficial to the portfolio as quality stocks would be rewarded as artificial support was gradually removed from the market. The Board then thanked Mr. Malcom for the report and the firm’s efforts on behalf of the system. PRESENTATION BY JANUS CAPITAL (Large Capitalization Growth Equity): Nick Thompson, Vice President and Director of US Equity Strategies and Jim Wiaduck, Michigan Director covered the investment report for the June 30, 2013 quarter. The portfolio gained 2.8% for the quarter that was better than the benchmark return of 2.1%. For the overall year, Thompson attributed about 300 basis points of underperformance to holdings of Apple, Inc. and FANUC, Ltd. Due to the hiring of a new portfolio manager, portfolio holdings are less concentrated and the top five holdings now constitute about 28% of the portfolio as compared to the prior manager’s 43%. Thompson then reviewed the top five contributors and the top five detractors to the second quarter portfolio performance. In the current third quarter, Janus is exceeding its benchmark and closing the overall performance gap for the year. 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, 2013 quarter. For the quarter, the portfolio declined –0.4% as compared to the benchmark gain of 2.1%. Rosenthal acknowledged that investor aversion to risk and a yield- chasing environment over the last year has not benefited the portfolio. However the current third quarter 2013 returns are exceeding the benchmark and prospects for continual out-performance are optimistic. In line with sentiment of the other managers, Victory believes that the eventual FED tapering will have a positive impact on the portfolio. Rosenthal passed out a review and outlook report that emphasized the firm’s strategy of acquiring stocks that have the strongest earnings growth and free cash flow potential as a means to generate the best overall portfolio returns. The Board thanked Ms Rosenthal for her presentation and Victory Capital’s efforts on behalf the system. CONFERENCE CALL WITH WINSLOW CAPITAL (Large Capitalization Growth Equity): Barry Peters represented Winslow Capital and presented the quarterly report for June 30, 2013. During the quarter the portfolio underperformed the benchmark with a return of 1.7% as compared to 2.1%. A negative attribution from stock selection, especially with Salesforce Com Inc was cited as the setback. The portfolio is underweight energy, consumer staples, financials and utilities with an over-weight to consumer discretionary, info technology and health care. Peters likened high- dividend paying stocks to an investor bond proxy and said that the portfolio underweight in defensive stocks created a headwind of sorts for the portfolio during the quarter. In the third quarter 2013, Winslow is surpassing its benchmark and Peters reported that year to date, a 30 basis point lead over the benchmark has been established. Looking forward the portfolio has been positioned to raise exposure to earnings growth with an expectation of GDP growth from 2 to 2 1/2 percent domestically. The Board thanked both Mr. Peters for his presentation and the efforts of Winslow Capital on behalf of the system. DISCUSSION OF ASSET ALLOCATION AND TRUSTEE COMMENTS: Brice distributed the Strategic Allocation Modeling Study. The study included a “reverse engineering” of sorts to view an asset allocation model that would generate a gross 8.5% return before fees. Mix 2 presented such a model. The current target portfolio mix projects a gross 8.32% return with an expected risk factor of 12.25% based upon the updated capital markets outlook. Brice recommended expanding the minimum and maximum asset allocation ranges across the entire spectrum so that there would be more room for maneuvering into tactical allocations when required. ADJOURN: Motion by Varney, supported by Henig, to adjourn the meeting at 3:58 p.m. Ayes: All. Motion carried unanimously. ______________________________ Brian Baker, Secretary