General Employees Retirement Board

OFFICIAL MINUTES OF SPECIAL MEETING OF THE STERLING HEIGHTS GENERAL EMPLOYEES' RETIREMENT SYSTEM Thursday, March 5, 2015 ____________________________________________ _________________________________ Location: Room #201 40555 Utica Road, Sterling Heights, MI 48313 (586) 446-2331 Chairperson Weiler called the meeting to order at 12:04 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 ALSO PRESENT: Walt Hessell, Pension Administrator; Timothy Brice, Senior Vice-President, The Brice Group, Morgan Stanley Graystone Consulting APPROVAL OF AGENDA: Motion by Marsh, support by Henig, to approve the agenda as presented. Ayes: All. Motion carried unanimously. CORRESPONDENCE: Motion by Marsh, support by Henig, to receive and file correspondence: Reports for the quarter ending December 31, 2014 as follows: 1. The Brice Group, Morgan Stanley Graystone Consulting 2. Victory Capital 3. Earnest Partners 4. McDonnell Investment 5. Herndon Capital 6. MFS Investment 7. NFJ Allianz 8. INVESCO Ayes: All. Motion carried unanimously. PORTFOLIO PERFORMANCE REVIEW BY TIM BRICE, THE BRICE GROUP, MORGAN STANLEY GRAYSTONE CONSULTING: 1 Brice distributed a Morgan Stanley research paper “Asset Allocation Special Report” that presented an overview of the current market outlook. An anticipated normalization of Federal Reserve policy will allow for a more typical market return outlook with a reversal of the anomaly that occurred in the 2014 where global diversified portfolios were at a disadvantage. The investor chase for yield led to plummeting bond interest rates while the valuations of utilities and REITS soared. Now more than ever it is believed that the markets’ propensity to revert to the mean is at hand and global diversified portfolio strategies will be rewarded. The overall bond market yielded 1.9% for the quarter. Longer duration portfolios outperformed short. McDonnell Investment met 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 3.4% gain for the quarter that exceeded the world equity benchmark of 1.1%. Mid- Cap stocks produced the highest returns at 5.5%. Growth stocks outperformed Value with both producing positive returns. International /Emerging markets valuations declined over concerns about the health of the European economies and other geopolitical 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 $ 116,476,698 2.8/28 6.6/47 12.8/na 9.8/na 6.4/na Total Fixed Income 1.3/na 5.4/na 3.0/na 4.9/na 3.9/na McDonnell Investment 1 $ 9,102,992 1.8/na 6.6/na 3.0/na 4.9/na na/na PIMCO 2 $ 18,239,890 0.9/na 4.5/na 3.0/na 4.7/na na/na Total Equities 3.4/na 7.2/na 17.7/na 12.5/na 7.4/na Janus 8 $ 8,384,452 7.1/na 10.7/na 21.7/na 13.5/na na/na Winslow 3 $ 8,383,729 5.5/na 10.3/na 19.9/na na/na na/na Victory Capital3 $ 8,396,332 3.0/na 7.3/na 18.1/na na/na na/na Herndon 4 $ 10,572,869 -1.6/na 3.2/na na/na na/na na/na MFS 5 $ 12,029,874 6.2/na 11.4/na 21.4/na 15.8/na na/na Earnest Partners 6 $ 19,212,027 5.5/na 12.3/na 21.2/na 17.2/na na/na NFJ International 7 $ 10,094,292 -4.1/na -4.9/na 9.0/na na/na na/na INVESCO7 $ 8,472,917 -0.4/na na/na na/na na/na na/na Cohen & Steers REIT9 $ 3,587,324 13.9/na 30.7/na 16.6/na na/na na/na *Peer group ranking within style specific sample – Ranking unavailable due to asset transition. 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 9/30/14. 8 Large cap growth equities manager hired 12/29/09. 9 REIT manager hired 12/31/11. Brice noted that Winslow, Janus, MFS and INVESCO outperformed for the quarter while the rest of the managers collectively underperformed. It was noted however, that as of the meeting date, a number of the portfolios had rebounded to either meet or exceed the respective benchmarks. To address the 2 underperformance concern, Brice noted that a number of measures were going to be taken in conjunction with the transfer of the fiduciary / custodian control from Merrill Lynch to Morgan Stanley by the end of March. With regard to draw- downs for the payment of monthly pension benefits for the next three months, Brice recommended that the Pension Administrator continue to request monthly direction from The Brice Group. Monthly draw- downs are tactically executed in a manner that supports the asset allocation target mix and cause a timely rebalancing of the portfolio. Hessell commented that the Boyd Watterson money manager contract (fixed income) had been executed and that the Victory Capital contract would be signed and delivered within the week. BREAK – (1:15 p.m. – 1:30 p.m.) CONFERENCE CALL WITH HERNDON CAPITAL (Large Capitalization Value Equity): Herndon Capital was represented by Randall Cain, CFA. The portfolio return for the December 2014 quarter lagged the benchmark return of 5.0%. Stock selection and sector allocation combined to produce a negative return of -1.6%. The portfolio proved most vulnerable to the decline in energy prices as the portfolio was overweight to the sector and the firm attempted to be opportunistic and add to energy positions during the decline. Year to date the portfolio return has exceeded the benchmark by about 400 basis points partially reflecting the recovery in oil prices and nine out of ten sectors has had positive attribution. 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. Cain for the report and the efforts on behalf of the system by Herndon Capital. CONFERENCE CALL WITH MFS (Large Capitalization Value Equity): Kurt McGrath led the portfolio briefing to the Board on behalf of MFS. For the quarter, the portfolio outperformed the benchmark with a return of 6.2% to the benchmark’s 5.0%. Both stock selection and sector weighting had a positive relative contribution for the quarter. An underweight to REITS and Utilities detracted from performance and an underweight to energy contributed. Looking forward, the firm believes that its significant sector overweight to Consumer Staples and underweight to the Energy and Utility sectors is warranted and that the overall portfolio is extremely well positioned in both the interim and long-term outlook. The Board thanked both Mr. McGrath for the report and the ongoing efforts of MFS on behalf of the system. CONFERENCE CALL WITH NFJ – ALLIANZ (International Equity): Baxter Hines, Portfolio Manager with NFJ reviewed the investment report for the fourth quarter 2014. The portfolio return was negative (-4.1%) and lagged the benchmark (-3.9%) during the fourth quarter. Hines attributed the underperformance to the overweight in Energy and underweight in Consumer Staples. The price earnings ratio of the portfolio approximates 11 times earnings as opposed to the benchmark PE of 14 time earnings. Hines stated that the portfolio has positioned approximately 25% into emerging markets currently with 9% allocated to China. Given the scenario of a growing economy and increasing dividend yields, NFJ currently sees attractive valuations in emerging markets. The Board then thanked Mr. Hines for the report and NFJ’s efforts on behalf of the system. 3 CONFERENCE CALL WITH INVESCO (International Equity): The report for the fourth quarter 2014 was reviewed with Doug Rentschler. The portfolio return (-0.4%) substantially outperformed the benchmark (-2.4%) for the quarter and continues to exceed the benchmark as of the meeting date. Rentschler reiterated the firms’ bottom up stock picking process with minimal sway to macro events. A slight overweight to the Energy sector confirms the firms’ cautious approach to this sector and positive attribution for the quarter. With regard to country diversification, the portfolio is underweight Japan and overweight Great Britain. Consumer Staples and Financials remain underweighted in the portfolio. International equity valuations are seen as superior to domestic equities as far as outlook. The Board thanked Mr. Rentschler for the firms’ efforts on behalf of the system. TRUSTEE COMMENTS: None ADJOURN: Motion by Henig, supported by Weiler, to adjourn the meeting at 3:17 p.m. Ayes: All. Motion carried unanimously. ___________________________________ Jennifer Varney, Acting Secretary / Treasurer 4