General Employees Retirement Board

OFFICIAL MINUTES OF SPECIAL MEETING OF THE STERLING HEIGHTS GENERAL EMPLOYEES' RETIREMENT SYSTEM Wednesday, August 27, 2014 ____________________________________________ _________________________________ Location: Room #201 40555 Utica Road, Sterling Heights, MI 48313 (586) 446-2331 Chairperson Weiler called the meeting to order at 12:02 p.m. BOARD MEMBERS PRESENT: Richard Weiler, Chairperson Jennifer Varney, Acting Secretary /Treasurer Paul Henig, Trustee Todd Marsh, 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 Henig, support by Varney, to approve the agenda as presented. Ayes: All. Motion carried unanimously. CORRESPONDENCE: Motion by Marsh, 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. Janus Capital 4. McDonnell Investment 5. Victory Capital 6. Winslow Capital Ayes: All. Motion carried unanimously. PORTFOLIO PERFORMANCE REVIEW BY TIM BRICE, THE BRICE GROUP, MERRILL LYNCH: Brice handed out two summary RIC Reports which continued to suggest that over half of the equity valuation metrics utilized by the firm indicate that the S&P 500 is trading below its historical average levels. Although geopolitical tensions are on the rise, a large impact on the US economy is not anticipated due to these uncertainties. The firms’ technical analysts see a corrective phase in the near term in an otherwise secular bull market. Eventual interest rate increases by the FED are thought to be manageable within the fixed income portfolio structures. For the quarter ended June 30, 2014 the S&P index rose 5.2% with the Energy sector posting the best gains at 12.1%. Large Cap stocks at a 5.1% advance outperformed Small Cap stocks with a 2.1% return. Overall the bond market was positive with Taxable Bonds, Treasuries and Muni’s turning in quarterly returns of 2.1%, 1.6% and 2.7% respectively. The fixed income portfolio managed by PIMCO and McDonnell gained 2.5% in the quarter compared to the benchmark of 2.2%. The equity portfolio gained 4.1% for the quarter with nearly all money managers trailing their respective benchmarks. Only Earnest Partners outperformed as attributed to its strong stock selection process. 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- 10- Market Value 1-year 3-year 5-year month year Total Fund $ 118,418,251 3.6/45 18.5/8 10.0/43 12.9/34 7.0/62 Total Fixed Income 2.5/27 5.2/39 3.8/52 5.9/42 4.2/84 McDonnell 8,932,382 2.3/32 5.5/35 4.1/44 5.4/49 na/na Investment PIMCO 2 18,181,785 2.4/23 4.9/44 3.3/71 5.9/38 na/na Total Equities 4.1/57 24.5/46 13.0/38 16.6/45 8.3/64 Janus 8 8,364,148 2.4/95 22.7/88 16.3/35 na/na na/na Winslow 3 8,385,942 4.4/55 27.1/51 na/na na/na na/na Victory Capital 3 8,482,473 4.2/63 28.3/37 na/na na/na na/na Herndon 4 10,778,014 3.3/91 23.4/61 na/na na/na na/na MFS 5 11,383,671 3.5/86 23.4/61 17.1/36 na/na na/na Earnest Partners 6 18,766,557 5.0/24 30.9/13 16.9/27 22.3/32 na/na NFJ International 7 11,116,522 4.6/47 18.3/77 7.6/58 na/na na/na Invesco 7 8,987,659 na/na na/na na/na na/na Cohen & Steers REIT 5,039,098 7.2/na 15.1/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 6/30/14. 8 Large cap growth equities manager hired 12/29/09. 9 REIT manager hired 12/31/11. Brice circulated an updated asset allocation summary as of August 26, 2014. He then recommended that the real estate portfolio managed by Cohen & Steers REIT be targeted for the next three months for purposes of drawing down funds to pay retiree benefits. Brice stated that in the course of rebalancing the portfolio, the low end acceptable range of the tactical allocation to REITS would be 2.5% from the current 4.3%. Brice then distributed a Large Cap Core Equity manager study. Discussion ensued and the concept of incorporating index funds on a limited basis into the Large Cap space was deliberated. Brice stated that he could provide an updated asset allocation study with the inclusion of index funds by the next regular Board meeting to be held in September. Varney commented that Large Cap manager interviews were already scheduled for September 18th for the Police and Fire Retirement System and that arrangements could be made for the GERS Board to participate. By consensus the Board agreed to reschedule and move the GERS September 18th regular meeting to Fire Station Number 5 and at a 3:00 p.m. starting time. CONFERENCE CALL WITH EARNEST PARTNERS (Small – Middle Capitalization Equity): Patmon Malcom, CFA and Pavel Sokolov reviewed the investment portfolio results for the second quarter ending June 30, 2014. The portfolio had a positive return of 5.0% compared to the custom benchmark return of 3.4%. Malcolm explained that the quality bias of the portfolio holdings contributed to performance, especially during the March through April 2014 sell off in the more speculative holdings represented in the index. Sokolov reviewed a number of key portfolio holdings that produced sizeable returns and then talked about the sector weightings. The portfolio is underweight in Consumer Discretionary, Health Care and Utilities while an overweight position is maintained in Industrials, Materials and Telecom. Brice questioned Malcom as to the REIT holdings. Malcom responded that a small number of high quality REITS were held but overall the positions were less than the allocations held within the Financial sectors weighting. Malcolm overall expressed optimism with the outlook for fundamentals which should prove beneficial for the portfolio going forward. The Board then thanked Mr. Malcom and Mr. Sokolov for the report and the firm’s efforts on behalf of the system. PRESENTATION BY JANUS CAPITAL (Large Capitalization Growth Equity): Jim Wiaduck, Michigan Director covered the investment report for the June 30, 2014 quarter. The portfolio gained 2.4% for the quarter that was less than the benchmark return of 5.0%. Wiaduck attributed the underperformance to three main aspects inherent in the portfolio. The portfolio growth bias, the lower capitalization (no Apple stock held) and stock selection that detracted from performance. Wiaduck cited the four main portfolio themes, health / wellness, Asian travel, Internet of things and electronic payments. It was his opinion that the early positioning within the concentrated portfolio was desirable for a long term investment horizon but worked as a disadvantage in the near term as many high growth stocks fell out of favor in the second quarter. Wiaduck conceded that year to date, the gap between the portfolio performance and the benchmark has widened even further to about 600 basis points. The Board thanked Mr. Wiaduck for the report and efforts on behalf of the system. PRESENTATION BY VICTORY CAPITAL (Large Capitalization Growth Equity): Lisa Rosenthal, CFA and Jason Dahl, CFA represented Victory Capital and presented the report for the June 30, 2014 quarter. For the quarter, the portfolio advanced 4.2% as compared to the benchmark gain of 5.0%. Dahl acknowledged that investor aversion to risk in March and April 2014 and a yield- chasing environment over the last year has not benefited the portfolio. However the current third quarter 2014 returns are narrowing the gap to the benchmark and prospects for out-performance are improving. In line with sentiment of the other managers, Victory believes that the eventual FED tapering will have a positive impact on the portfolio. Dahl stated that the very high quality portfolio is expected to have earnings growth rates of approximately 20% which is much faster than the overall market. Dahl said that they have also added to their equity positions over the last year when market sell offs of growth stocks have occurred. The Board thanked Ms. Rosenthal and Mr. Dahl for their presentation and Victory Capital’s efforts on behalf the system. PRESENTATION BY WINSLOW CAPITAL (Large Capitalization Growth Equity): Ryan De Silva, CFP and Raymond Urban represented Winslow Capital and presented the quarterly report for June 30, 2014. Urban noted that the firm has been acquired by TIAFF, however the parent company would remain Nuveen. During the quarter the portfolio underperformed the benchmark with a return of 4.4% as compared to 5.0%. The portfolio growth bias detracted from performance in the March – April 2014 investor de-risking event and the more recent geopolitical tensions. The firm used both of these occasions as an opportunity to add to positions. Year to date, the performance gap to the benchmark has lessened. Urban commented that there are two main drivers to the portfolio performance as in the price earnings expansion due to the FED taper and the superior portfolio earnings growth rate which approximates 20%. De Silva explained a summary demonstrating that active Large Cap Growth managers outperform the equity index about two-thirds of the time as analyzed from 1982 through 2014 on a 3-year rolling return basis. The Board thanked both Mr. De Silva and Raymond Urban for their presentation and the efforts of Winslow Capital on behalf of the system. TRUSTEE COMMENTS: Hessell distributed the Abel / Noser trial measurement offer that had been tabled from the August 21st regular meeting. Discussion ensued and Brice went on record to state that all trading costs on the Merrill Lynch platform are inclusive of the quarterly fees and that a trial measurement for the trading costs was not merited. He also commented that analysis of trade execution is an arbitrary conjecture at best and that every effort is made on the Merrill Lynch platform to execute trades in a cost effective manner. Motion by Henig, supported by Marsh, to decline the trial measurement offer made by Abel / Noser. Ayes: All. Motion carried unanimously. ADJOURN: Motion by Henig, supported by Marsh, to adjourn the meeting at 3:52 p.m. Ayes: All. Motion carried unanimously. ___________________________________ Jennifer Varney, Acting Secretary / Treasurer