General Employees Retirement Board

OFFICIAL MINUTES OF SPECIAL MEETING OF THE STERLING HEIGHTS GENERAL EMPLOYEES' RETIREMENT SYSTEM Wednesday, May 27, 2015 ____________________________________________ _________________________________ Location: Room #201 40555 Utica Road, Sterling Heights, MI 48313 (586) 446-2331 Chairperson Weiler called the meeting to order at 12:03 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 at 1:30 p.m.) ALSO PRESENT: Walt Hessell, Pension Administrator; Timothy Brice, Institutional Consulting Director, Morgan Stanley Graystone Consulting – The Brice Group 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 March 31, 2015 as follows: 1. Morgan Stanley Graystone Consulting – The Brice Group 2. Earnest Partners 3. Janus Capital 4. Victory Capital 5. Winslow Capital Ayes: All. Motion carried unanimously. PORTFOLIO PERFORMANCE REVIEW BY TIM BRICE, MORGAN STANLEY GRAYSTONE CONSULTING Brice handed out The GIC Weekly which viewed stocks as fairly valued from an equity risk premium perspective. With newly initiated global reflation phase underway, rising interest rates should not be major threat to equities. Overall the firm sees opportunity in global stocks. For the quarter ended March 31, 2015 the fixed income benchmark gained 1.6% while the total equity benchmark returned 2.3%. Due to the transitioning of the portfolio from Merrill Lynch to Morgan Stanley and with the addition of new money managers, the performance summary was limited in its scope. The total portfolio gained 2.0% for the quarter with nearly all money managers meeting or exceeding their respective benchmarks. Only NFJ noticeably underperformed as attributed to its major underweight to Japan. Based upon NFJ disappointing results, Brice recommended that a monthly monitoring of 1 performance to begin and that a Global equities manager study be prepared and presented to the Board at the July 2015 regular monthly meeting. 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 $ 118,126.109 2.0/63 7.8/48 10.1/54 9.4/55 6.7/59 Total Fixed Income 1.0/98 4.8/84 2.8/97 4.4/90 4.1/100 Western 1 $ 9,229,390 na/na na/na na/na na/na na/na Boyd Watterson 2 $ 18,394,899 na/na na/na na/na na/na na/na Total Equities 2.1/70 8.5/29 13.2/43 11.9/38 7.6/51 London10 $ 9,687,932 na/na na/na na/na na/na na/na S&P Index11 $ 5,832,125 na/na na/na na/na na/na na/na Janus 8 $ 3,963,268 8.1/2 21.6/5 17.6/25 14.6/65 na/na Winslow 3 $ 5,831,367 3.7/55 15.9/44 14.9/72 na/na na/na Victory Capital3 $ 5,899,773 4.3/42 13.8/63 13.7/88 na/na na/na Herndon 4 $ 8,196,282 2.0/22 3.6/94 na/na na/na na/na MFS 5 $ 8,253,045 1.1/37 10.9/38 17.4/35 15.0/27 na/na Earnest Partners 6 $ 20,229,788 5.6/57 13.9/36 18.3/38 16.6/53 na/na NFJ International 7 $ 10,084,800 0.0/99 -4.8/89 4.8/99 na/na na/na Invesco7 $ 8,744,484 3.2/87 na/na na/na na/na na/na Principal REIT9 $ 3,778,957 na/na na/na na/na na/na na/na *Peer group ranking within style specific sample. 1 Core Plus fixed income manager hired 04/01/2015. 2 Short to Mid-term fixed income manager hired 04/01/2015 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 04/01/2015. 10Large cap core equities manager hired 04/01/2015. 11Large cap equity index strategy implemented 04/01/2015 Brice then discussed an updated asset allocation summary as of May 22, 2015. He then recommended that the real estate portfolio managed by Principal REIT and the various Large Cap Growth portfolios be targeted for the next three months for purposes of drawing down funds to pay retiree benefits. Given the Morgan Stanley reflationary view and anticipated higher interest rates, a tactical underweight to REITs was logical. Furthermore, it was expected that Small / Mid cap stocks would outperform Large Cap Growth stocks due to the impact of the strengthening dollar internationally. A stronger dollar creates headwinds for companies marketing products overseas and unlike Large Cap Growth, Small / Mid Cap companies had much less exposure as they derive much of their revenue domestically. As an emergent alternate asset class, Morgan Stanley has recommended Master Limited Partnerships (MLP’s) with a midstream emphasis. Brice then distributed a Large Cap Growth Equity manager study. Discussion ensued and the concept of improving the correlation between the managers was deliberated. Per review of the correlation matrix, Brice advised that replacing Victory Capital with AMI Asset Management could be an overall improvement and help position managers within the Large Cap Growth space to better compliment their 2 respective styles. The study also included other data that suggested that AMI as the superior candidate for replacing Victory. CONFERENCE CALL WITH EARNEST PARTNERS (Small – Middle Capitalization Equity): Patmon Malcom, CFA and Aaron Kirchoff reviewed the investment portfolio results for the first quarter ending March 31, 2015. The portfolio had a positive return of 5.36% compared to the custom benchmark return of 5.17%. Malcolm explained that the relative minor holdings in the Energy sector contributed to performance, especially during the sell- off of the Energy in the last year. Kirchoff 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 impact of the strengthening dollar. Malcom responded that a the stronger dollar had only minimal impact to the portfolio and generally the Small / Mid Cap stocks were poised to outperform Large Cap because of the dollar’s strength. The Board then thanked Mr. Malcom and Mr. Kirchoff for the report and the firm’s efforts on behalf of the system. CONFERENCE CALL WITH JANUS CAPITAL (Large Capitalization Growth Equity): Jim Wiaduck, Michigan Director and Jennifer Nichols CFA covered the investment report for the March 31, 2015 quarter. The portfolio gained 7.64% for the quarter that was more than the benchmark return of 3.84%. Nichols reviewed specific positions in the portfolio for both contributors and detractors. Nichols attributed the over-performance to two main facets in the portfolio which were the portfolio overweight to the healthcare sector coupled with strong returns from stock positions within that sector. The portfolio is substantially underweight to the Energy, Consumer Staple and Utility sectors. Health / wellness, Asian travel, Internet of things and electronic payments remain the dominant portfolio themes. The Board thanked Mr. Wiaduck and Ms. Nichols for the report and efforts on behalf of the system. CONFERENCE CALL WITH VICTORY CAPITAL (Large Capitalization Growth Equity): Lisa Rosenthal, CFA and Erick Maronak, CIO represented Victory Capital and reviewed the report for the March 31, 2015 quarter. For the quarter, the portfolio advanced 4.0% as compared to the benchmark gain of 3.84% however results still severely lagged the benchmark for the one year period. Maronak acknowledged that three equity positions had detracted 300 basis points from overall performance. Multiple growth scares over the last year also detracted from portfolio performance. In line with sentiment of the other managers, Victory believes that the eventual FED interest rate increases will create an environment conducive to active management and stock picking. Maronak stated that the very high quality portfolio is expected to have earnings growth rates much faster than the overall market. He also expressed optimism for the portfolio where the fundamentals would step in as the main driver of a stocks performance. The Board thanked Ms. Rosenthal and Mr. Maronak for their presentation and Victory Capital’s efforts on behalf the system. Brice noted the underperformance from Victory Capital since inception (86th percentile ranking) and for each of the performance periods reviewed (one, three and five year) where performance did not meet or exceed the benchmark and rankings never exceeded a 50 ranking or higher. Brice then revisited the study where the correlation matrix and other performance detail implied that replacing Victory Capital with AMI Asset Management as the best choice. Motion by Varney, supported by Weiler, to authorize Tim Brice to terminate Victory Capital and to hire AMI Asset Management for the Large Cap Growth space for an approximate total portfolio allocation of 5%. 3 Ayes: All. Motion carried unanimously. CONFERENCE CALL WITH WINSLOW CAPITAL (Large Capitalization Growth Equity): Raymond Urban represented Winslow Capital and presented the quarterly report for March 31, 2015. During the quarter the portfolio underperformed the benchmark with a return of 3.3% as compared to 3.8% but exceeded the benchmark on a one year basis. The Healthcare and Technology sectors contributed to returns while the Industrial sector detracted. The portfolio remains overweight Healthcare and Technology while underweighting Consumer Staples. Urban commented that while there could be a drop off in the price earnings expansion in the overall market, the superior portfolio earnings growth rate which approximates 20% would propel portfolio valuations higher. The Board thanked Raymond Urban for his presentation and the efforts of Winslow Capital on behalf of the system. TRUSTEE COMMENTS - None ADJOURN: Motion by Henig, supported by Marsh, to adjourn the meeting at 3:15 p.m. Ayes: All. Motion carried unanimously. ___________________________________ Jennifer Varney, Acting Secretary / Treasurer 4