General Employees Retirement Board

OFFICIAL MINUTES OF SPECIAL MEETING OF THE STERLING HEIGHTS GENERAL EMPLOYEES' RETIREMENT SYSTEM Wednesday, December 3, 2014 ____________________________________________ _________________________________ Location: Room #201 40555 Utica Road, Sterling Heights, MI 48313 (586) 446-2331 Chairperson Weiler called the meeting to order at 12:08 p.m. BOARD MEMBERS PRESENT: Richard Weiler, Chairperson Brian Baker, Secretary Jennifer Varney, Treasurer Paul Henig, Trustee Todd Marsh, Trustee BOARD MEMBERS ABSENT: None. ALSO PRESENT: Walt Hessell, Pension Administrator; Timothy Brice, The Brice Group, Morgan Stanley – Graystone Consulting; Rebecca Wolfe, The Brice Group, Morgan Stanley – Graystone Consulting; Thomas Michaud, Legal Counsel, VanOverbeke, Michaud & Timmony, P.C. APPROVAL OF AGENDA: Motion by Marsh, supported by Henig, to approve the agenda as presented. Ayes: All. Motion carried unanimously. CORRESPONDENCE: Motion by Marsh, supported by Weiler, to receive and file correspondence: Reports for the September 30, 2014 quarter ending as follows: 1. The Brice Group, Graystone Consulting 2. Victory 3. Earnest Partners 4. McDonnell Investment Ayes: All. Motion carried unanimously. PRESENTATION BY TIM BRICE, THE BRICE GROUP, GRAYSTONE CONSULTING: Brice distributed and reviewed with the Board, various equity strategy reports that summarized Morgan Stanley’s market outlook. The custom index benchmark for the quarter ending September 30, 2014 was a negative 1.6 percent with equities losing 2.1% and fixed income gaining 0.2%. Geopolitical concerns once again added to the decline in market values. With investor skepticism of economic growth, defensive sectors and value stocks outperformed growth stocks. Global central bank stimulus for 2015 is seen as a catalyst for credit and capital investment cycles that could lead to equity gains in consumer discretionary, industrials, energy and technology sectors. Domestically, improving employment, lower energy costs and a stronger dollar may create a basis for more economic growth. 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- Market Value 1-year 3-year 5-year 10-year month Total Fund $ 115,306,328 -1.1/56 10.5/41 14.5/22 10.1/40 6.9/59 Total Fixed Income -0.2/na 4.0/na 3.1/na 4.7/na 3.9/na McDonnell Investment 8,942,343 0.2/31 4.7/38 2.9/55 4.6/45 na/na 1 PIMCO 2 18,098,931 -0.3/75 3.4/60 3.3/48 4.5/46 na/na Total Equities -1.4/na 13.2/na 20.6/na 13.0/na 8.38/na Janus 8 8,224,985 2.6/15 15.0/83 22.2/51 na/na na/na Winslow 3 8,153,074 1.3/47 16.0/73 na/na na/na na/na Victory Capital 3 8,163,351 1.5/38 16.4/71 19.8/84 na/na na/na Herndon Capital 4 10,764,981 0.0/50 17.6/60 na/na na/na na/na MFS 5 11,348,168 -0.1/53 16.8/72 23.3/51 na/na na/na Earnest Partners 6 18,236,583 -2.6/47 16.2/20 24.8/26 17.9/27 na/na NFJ International 7 10,542,509 -5.0/46 3.4/75 13.1/64 na/na na/na Invesco International 9 8,521,031 na/na na/na na/na na/na na/na Cohen & Steers REIT 4,310,372 -2.8/na 14.6/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 manager 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 manager hired 9/30/10. 8 Large cap growth equities manager hired 12/29/09. 9 International/emerging markets equity manager hired 9/30/14. Brice provided an update of portfolio performance as of the meeting date. All equity managers were showing solid recovery against the negative third quarter portfolio performance that had been reported. PRESENTATION BY VANOVERBEKE, MICHAUD AND TIMMONY, PC: Thomas Michaud, Legal Counsel, reviewed the various assignments completed by his firm during the year. Assistance with Retirement System administration regarding securities litigation issues; auditor letter; summary annual report; custodial issues; Investment Policy Review; tax issues; Medical Director review; re-employee retiree issues; actuarial review and ordinance review were all cited. The Board thanked Mr. Michaud for his report and indicated a high level of satisfaction with the services received during the year. ASSET ALLOCATION REVIEW Brice presented the asset allocation review which forecasted portfolio returns on both a current portfolio and target portfolio basis along with a long-term (secular) outlook and intermediate (strategic) view. The current portfolio and target portfolio had long term return outlooks of 8.7% and 8.2% respectively. The long term outlook is the basis of support for the current actuarial rate of return of 8%. FIXED INCOME MANAGER ANALYSIS Brice distributed the Fixed Income Candidates study that helped the Board to formulate a plan for the fixed income portfolio that would provide more protection against rising interest rates. Brice noted that the core plus style managers have many more tools at their disposal to deal with a rising interest rate scenario. The Board expressed reluctance at terminating McDonnell Investment as the core fixed income manager, however the downside risk to the fixed income portfolio in light of a rising interest rate environment was too great to ignore and that at this time a tactical change to the fixed income portfolio was prudent. Discussion ensued with regard to the various candidates and the best combination of any two to work in tandem. A decision was reached to also replace PIMCO. Motion by Baker, supported by Weiler to authorize The Brice Group to change the fixed income allocation currently with McDonnell Investments and PIMCO over to the Western Asset Core Plus (two-thirds) and Boyd Watterson Core Plus (one-third) in conjunction with the custodial asset transfer from Merrill Lynch to Morgan Stanley. Ayes: All. Motion carried unanimously. LARGE CAP CORE MANAGER ANALYSIS Brice then distributed and reviewed with the Board the large cap core manager analysis. The study included the concept of index funds as a means to achieve more diversification and money manager fee reduction as well as achieving benchmark results. Discussion followed with the Board reaching the conclusion that adding a fourth manager (core) to the large cap equity allocation along with a modest allocation to index funds (S&P 500 index) could enhance returns as forecasted by the study. Motion by Baker, supported by Marsh, to authorize The Brice Group to hire The London Company (core large cap equity manager), implement an allocation to the S&P 500 index and to realign the large cap equity manager allocations as follows and in conjunction with the custodial asset transfer from Merrill Lynch to Morgan Stanley: Winslow Capital Large Cap Growth 5.0% Janus Capital Large Cap Growth 3.4% Victory Capital Large Cap Growth 5.0% London Company Large Cap Core 8.0% S&P 500 Index Passive Core 5.0% Herndon Capital Large Cap Value 6.8% MFS Large Cap Value 6.8% Total allocation percent 40.0% Ayes: All. Motion carried unanimously. TRUSTEE COMMENTS: None ADJOURN: Motion by Varney, supported by Baker, to adjourn the meeting at 1:55 p.m. Ayes: All. Motion carried unanimously. ___________________________________ Brian Baker, Secretary