General Employees Retirement Board

OFFICIAL MINUTES OF SPECIAL MEETING OF THE STERLING HEIGHTS GENERAL EMPLOYEES' RETIREMENT SYSTEM Wednesday, May 21, 2014 ____________________________________________ _________________________________ Location: Room #201 40555 Utica Road, Sterling Heights, MI 48313 (586) 446-2331 Chairperson Weiler called the meeting to order at 12:07 p.m. BOARD MEMBERS PRESENT: Richard Weiler, Chairperson Brian Baker, Secretary Jennifer Varney, Treasurer Todd Marsh, Trustee Paul Henig, Trustee BOARD MEMBERS ABSENT: None. 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 Henig, support by Varney, to receive and file correspondence: Reports for the quarter ending as follows: 1. The Brice Group, Merrill Lynch 2. Victory 3. Earnest Partners 4. McDonnell Investment 5. Herndon 6. MFS Investment 7. Thornburg Investment Ayes: All. Motion carried unanimously. PORTFOLIO PERFORMANCE REVIEW BY TIM BRICE, THE BRICE GROUP, MERRILL LYNCH: Brice distributed a Merrill Lynch research paper “The Weekly Letter” that offered an assessment of the current market outlook. While a return of market volatility is expected in 2014, equities are still expected to outperform bonds by calendar year end. U.S. economic growth is projected to grow in part due to corporate capital expenditures as corporations are flush with cash and have positive earnings outlooks. Additionally, more investors are becoming less skeptical of the economic recovery and are gaining more confidence in the equity market as they now begin to participate. The overall bond market yielded 1.96% for the quarter with virtually all bond categories registering gains. Longer duration portfolios outperformed short. McDonnell Investment exceeded the quarterly benchmark whereas PIMCO failed to do so. PIMCO’s shorter duration emphasis was partly to blame for the short fall. The equity portfolio delivered a 1% gain for the quarter that trailed the world equity benchmark of 1.4%. Mid- Cap stocks produced the highest returns at 3.5% followed by Large Cap at 2.1% respectively. Value stocks outperformed Growth and Emerging markets sold off mainly due to geo political concerns. 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 $ 116,174,778 1.1/57 13.3/28 8.7/47 14.4/42 6.6/68 Total Fixed Income 1.7/54 -1.1/82 3.8/54 5.7/38 3.7/88 McDonnell $ 8,740,548 2.2/26 -0.2/71 4.2/41 na/na na/na Investment 1 PIMCO 2 $ 17,767,112 1.4/54 -1.4/90 3.2/76 6.5/31 na/na Total Equities 1.0/64 19.8/42 11.3/45 19.5/51 7.9/68 Janus 8 $ 8,696,475 -1.6/94 23.2/59 15.4/26 na/na na/na Winslow 3 $ 8,750,618 -1.2/91 23.7/53 na/na na/na na/na Victory Capital 3 $ 8,546,680 -1.5/93 22.6/66 na/na na/na na/na Herndon 4 $ 10,451,637 1.5/84 19.6/82 na/na na/na na/na MFS 5 $ 11,019,891 1.5/84 24.2/39 15.9/29 na/na na/na Earnest Partners 6 $ 17,910,453 4.1/19 25.0/45 13.9/53 25.9/32 na/na NFJ International 7 $ 10,646,593 -2.0/65 8.0/74 5.7/69 na/na na/na Thornburg 7 $ 8,814,421 -2.0/89 12.8/65 4.1/77 na/na na/na Cohen & Steers REIT9 $ 4,830,350 10.1/na 6.0/na na/na na/na na/na *Peer group ranking within style specific sample – BofAML Domestic Balanced 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 9/30/2012. 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 noted that with the exception of Earnest Partners and Cohen & Steers, all equity managers substantially underperformed for the quarter. The Large Cap managers collectively underperformed the most during the quarter and discussion ensued with regard to the August 27, 2014 special quarterly meeting at which point the three managers will be summoned for either appearance in person or a conference call under the normal annual / quarterly review process. It was noted however, that as of the meeting date, all portfolios had rebounded to either meet or exceed the respective benchmarks with the exception of Thornburg Investment. Brice stated that Thornburg, as one of the two portfolio international money managers is under Merrill Lynch due diligence review due to material changes to the portfolio management personnel. Brice recommended that a preliminary international money manager study be prepared as a precaution. With regard to draw- downs for the payment of monthly pension benefits for the next three months, Brice recommended a continued focus on the Large Cap Growth managers while also adding in Cohen & Steers REITS as a potential source. Monthly draw- downs are tactically executed in a manner that supports the asset allocation target mix and cause a timely rebalancing of the portfolio. Brice discussed the on-going stalemate with transitioning of assets from McDonnell Investment to WAMCO due to complications with new federal and state legislation involving commingled mutual fund disclosures and legal due diligence. Brice stated that he would continue to monitor developments and / or provide alternative recommendations for a replacement. CONFERENCE CALL WITH NFJ – ALLIANZ (International Equity): Baxter Hines, Portfolio Manager with NFJ reviewed the investment report for the first quarter 2014. The portfolio return was negative and lagged the benchmark during the first quarter. Hines attributed the underperformance to the significant weight to emerging markets within the portfolio. Given the fears of rising U.S. interest rates over the last year, emerging markets were flat. Coupled with global geo political concerns much downward pressure has been exerted on valuations. Hines stated that the portfolio has positioned approximately 27% into emerging markets currently to take advantage of the opportunity. Given the scenario of a growing economy and increasing dividend yields, NFJ currently sees attractive valuations in emerging markets and also Materials and Energy sectors. The Board then thanked Mr. Hines for the report and NFJ’s efforts on behalf of the system. BREAK – (2:00 p.m. – 2:10 p.m.) PRESENTATION BY HERNDON CAPITAL (Large Capitalization Value Equity): Herndon Capital was represented by Marc O. Sydnor Sr. VP Marketing & Client Services and Randall Cain, CFA. The portfolio return for the March 2014 quarter lagged the benchmark. A portfolio quality bias was cited as the reason for the sub-par results as well as the severe winter impact. The portfolio also proved vulnerable to the conflicts in the Ukraine. Looking forward, it is the firm’s belief that the portfolio is positioned to generate measurable out-performance especially within the context of an improving economy. The portfolio is most overweight to the Energy, Materials and IT sectors. Major underweighting can be seen in the Financials, Healthcare and Utilities sectors. The Board thanked both Mr. Sydnor and Mr. Cain for their report and the efforts on behalf of the system by Herndon Capital. CONFERENCE CALL WITH MFS (Large Capitalization Value Equity): Gary Hampton, Senior Analyst, provided the portfolio briefing to the Board on behalf of MFS. For the quarter, the portfolio underperformed the benchmark. Both stock selection and sector weighting had a negative relative contribution for the quarter. An underweight to REITS and Utilities detracted from performance. Many of the portfolio holdings that outperformed in 2013 took a pause in the first quarter 2014. Looking forward, the firm believes that its significant sector overweight to Consumer Staples and underweight to the Energy sector is warranted and that the overall portfolio is extremely well positioned in both the interim and long-term outlook. The Board thanked both Mr. Hampton for the report and the ongoing efforts of MFS on behalf of the system. BREAK – (3:10 p.m. – 3:20 p.m.) CONFERENCE CALL WITH THORNBURG (International Equity): The report for the first quarter 2014 was reviewed with Thornburg personnel. An organizational update that described how Charlie Wilson replaced Lewis Kaufman as co-portfolio manager was discussed. Wendy Trevisani remains a co-portfolio manager. Merrill Lynch due diligence is conducting a review. The portfolio substantially underperformed the benchmark for the quarter and continues to lag the benchmark as of the meeting date. The portfolio experienced headline risk exposure to events in the Ukraine as well as China and Japan. A recent effort has been made to reduce portfolio volatility and to also reduce holdings in emerging markets. The outlook is described as positive for the revamp portfolio. The Board thanked Thornburg Investment for their efforts on behalf of the system. TRUSTEE COMMENTS: None ADJOURN: Motion by Baker, supported by Henig, to adjourn the meeting at 3:48 p.m. Ayes: All. Motion carried unanimously. ___________________________________ Brian Baker, Secretary