General Employees Retirement Board

OFFICIAL MINUTES OF SPECIAL MEETING OF THE STERLING HEIGHTS GENERAL EMPLOYEES' RETIREMENT SYSTEM Wednesday, February 26, 2014 ____________________________________________ _________________________________ Location: Room #201 40555 Utica Road, Sterling Heights, MI 48313 (586) 446-2331 Chairperson Weiler called the meeting to order at 12:14 p.m. BOARD MEMBERS PRESENT: Richard Weiler, Chairperson Jennifer Varney, Acting Secretary / Treasurer Todd Marsh, Trustee Paul Henig, Trustee BOARD MEMBERS ABSENT: Brian Baker, Secretary (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 Henig, to approve the agenda as amended for the addition of correspondence received from PIMCO and Cohen & Steers. 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. Earnest Partners 3. McDonnell Investment 4. Victory Capital 5. PIMCO 6. Cohen & Steers REITS Ayes: All. Motion carried unanimously. PORTFOLIO PERFORMANCE REVIEW BY TIM BRICE, THE BRICE GROUP, MERRILL LYNCH: Brice distributed the CIO Outlook 2014 research article published by Merrill Lynch. Multiple themes for 2014 were discussed. Research suggests that equities still have a more favorable valuation when compared to bonds. Global economic growth is seen as a catalyst for further gains in equity albeit at a slower rate than the prior two- year market returns. Greater market volatility is expected in 2014 for both equities and fixed income alike. An economic environment that includes moderate inflation and historically low but gradually increasing interest rates along with a strengthening economy is deemed positive for equities. For the year, the total portfolio produced a return of 17.9% ranking it 51st in the Bank of America – Merrill Lynch Public Fund Sample. Fixed income lost –2.8% but equities gained 28.1%. Overall returns for the fourth quarter 2013 were 6.6% and that exceeded the custom index return of 5.7%. For the year, the S&P 500 and the ML Domestic Broad Market returned 32.4% and –2.3% respectively. Small Cap stocks led performance for the year and Growth stocks slightly outperformed Value stocks. International equities produced positive returns with the exception of Emerging Markets that were negative for the year. In the fixed income asset class only the High Yield category was able to post positive gains in 2013. A number of managers had a portfolio quality bias that detracted from performance as the benchmark index includes a number of high performing low quality equities deemed not suitable to hold. However, all managers affected have rebounded in 2014 and are exceeding their benchmarks as of the meeting date. 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 3- 1- 10- 3-year 5-year Value month year year $ Total Fund 6.6/17 17.9/51 9.8/58 12.9/43 7.0/29 116,668,809 Total Fixed Income 0.0/na -2.8/na 3.4/na 5.7/na 3.7/na McDonnell Investment $ 8,562,789 0.0/69 -2.0/72 3.6/52 na/na na/na (1) PIMCO (2) $ 18,601,071 -0.1/78 -2.8/84 3.1/70 6.5/29 na/na Total Equities 9.1/na 28.1/na 13.1/na 16.8/na 8.5/na Janus (8) $ 9,140,562 11.3/33 31.4/77 16.6/33 na/na na/na Winslow (3) $ 9,154,248 10.9/51 36.8/25 na/na na/na na/na Victory Capital (3) $ 8,689,541 11.8/22 34.3/50 na/na na/na na/na Herndon (4) $ 10,312,632 12.1/7 30.8/82 na/na na/na na/na MFS (5) $ 10,874,627 11.3/18 37.0/27 18.0/18 na/na na/na Earnest Partners (6) $ 17,241,256 9.3/41 32.0/80 15.8/52 23.4/22 na/na NFJ International (7) $ 10,691,237 4.3/81 12.3/81 7.5/65 na/na na/na Thornburg (7) $ 9,005,503 4.7/77 12.3/68 5.8/80 na/na na/na Cohen & Steers REIT $ 4,395,343 -0.1/na 3.8/na na/na na/na na/na (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 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. Due to satisfactory performance, no managers were placed on probationary status. Brice discussed the strategy of allowing newly hired managers to perform through the greater part of a market cycle, thereby providing a reasonable period of time for them to meet or exceed their benchmarks. FIXED INCOME MANAGER UPDATE BY TIM BRICE: Brice briefed the Board as to the difficulties encountered with the planned transition of fixed income assets from McDonnell Investment to WAMCO. Due to disclosure requirements under the State of Michigan’s Public Act 347, WAMCO’s legal council has not yet determined an appropriate course of compliance action. The problem stems with mutual fund assets sometimes held within the managed portfolio as a diversification tool. Brice stated that an update from WAMCO would be forthcoming by mid-March. In the event that the disclosure compliance cannot be resolved, other fixed income managers from the recent manager study could be hired in the place of WAMCO. BREAK – (1:30 p.m. to 1:45 p.m.) 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, 2013. For the year, the portfolio lost -2.8% underperforming the benchmark of – 2.2%. Nicodemus stated that the PIMCO goal is to add 100 basis points of alpha consistently from year to year. The “taper tantrum” in mid-year 2013 drove down returns for fixed income. The portfolio underweight to investment grade corporate bonds and agency MBS were negative for returns as was the exposure to Brazilian bonds. Nicodemus indicated that the 2014 carry on securities amounts to 5.0% and has improved from the 2013 carry that was about 3.0%. Nicodemus talked at length in regard to the very publicized departure of Mohammed El-Erian, former Co-CIO from the senior management team. In essence, PIMCO is deep in talent and the investment committees have been revamped from within the company ranks in order to fill the vacancy. The Board thanked Mr. Nicodemus for his report and PIMCO’s efforts on behalf of the system. CONFERENCE CALL WITH COHEN & STEERS REITS: Ryan Finkelstein, Regional Marketing Associate along with a colleague presented the U.S. Realty Total Return portfolio report. The portfolio produced a 3.8% return for the year compared to the NAREIT Index that returned 2.5%. Positive attribution came from both stock selection and sector overweight for regional mall and shopping center sectors. The portfolio overweight to these sectors remains as low supply and improving demand is anticipated. An underweight position is held in health care due to concerns over government fiscal pressures to cut reimbursement rates and the negative impact to lease cash flows. Overall, the firm has a positive market outlook, as the impact of higher interest rates will be mitigated by stronger growth. Historical analysis shows that REITs can perform well in most periods of rising interest rates. The 2013 fourth quarter sell off in REITs was seen as an opportunistic entry point. The Board thanked the Cohen & Steers representatives for the report and the efforts on behalf of the system. DISCUSSION OF ASSET ALLOCATION: Brice noted that new monthly benefit drawdown targets needed to be established as the current fixed income allocation had reached its minimum threshold. Hessell distributed to the Board, the investment policy statement section showing that the lowest allowable range for fixed income at 22% with the asset allocation percentage of fixed income as of the meeting date registering at 21.8%. Brice recommended that the large capitalization growth stocks portfolios now be tapped for benefit payments as this asset class currently holds 22.9% of the total portfolio and is in excess of its allowable upper variance range of 22%. By Board consensus, Hessell was instructed to utilize Janus Capital, Victory Capital and Winslow Capital portfolios for benefit payment funding with the secondary objective of keeping the asset class equally balanced between the three. Upon the next quarterly special meeting scheduled for May, the asset allocation and benefit drawdown targets would be revisited. TRUSTEE COMMENTS: Henig observed that both international equity managers were holding relatively high cash positions as they were very near the 5% upper limit. Brice stated that he would email both managers and request an explanation for their respective cash positions. ADJOURN: Motion by Varney, supported by Weiler, to adjourn the meeting at 2:59 p.m. Ayes: All. Motion carried unanimously. ___________________________________ Jennifer Varney, Acting Secretary / Treasurer