General Employees Retirement Board

OFFICIAL MINUTES OF SPECIAL MEETING OF THE STERLING HEIGHTS GENERAL EMPLOYEES' RETIREMENT SYSTEM Wednesday, August 26, 2015 ____________________________________________ _________________________________ Location: Room #201 40555 Utica Road, Sterling Heights, MI 48313 (586) 446-2331 Acting Chairperson Varney called the meeting to order at 12:02 p.m. BOARD MEMBERS PRESENT: Jennifer Varney, Acting Chairperson, Acting Secretary /Treasurer Paul Henig, Trustee Todd Marsh, Trustee BOARD MEMBERS ABSENT: Brian Baker, Secretary (excused) Richard Weiler, Chairperson (excused) 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 June 30, 2015 as follows: 1. Morgan Stanley Graystone Consulting – The Brice Group 2. Boyd Watterson 3. Western Asset Management 4. Principal Group REIT Ayes: All. Motion carried unanimously. PORTFOLIO PERFORMANCE REVIEW BY TIM BRICE, MORGAN STANLEY GRAYSTONE CONSULTING Brice handed out the Morgan Stanley Investment Perspectives and Positioning articles which addressed the current market volatility. Analysis shows that cheap oil prices are ultimately bullish for equities and that implies that stocks are still more attractive than fixed income. Recent developments in China are being misread by the markets and it is thought that China has considerable financial tools at its disposal to stimulate its slowing economy. For the quarter ended June 30, 2015 the fixed income benchmark lost -1.7% while the total system benchmark lost -0.8%. Due to the transitioning of the portfolio with the addition of new fixed income money managers, the performance was hampered with regard to the fixed income results. A short term spike in interest rates during the quarter also detracted from returns. 1 The total portfolio lost -0.8% for the quarter with majority of all money managers failing to meet their respective benchmarks. Brice provided a year to date performance update that proved most of the managers had weathered the recent market volatility and had narrowed the underperformance gap as of the current meeting date. 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 $ 114,962,172 -0.8/86 3.0/69 10.8/49 10.7/56 6.3/67 Total Fixed Income Western 1 $ 8,983,663 -2.1/98 na/na na/na na/na na/na Boyd Watterson 2 $ 18,017,685 -2.0/94 na/na na/na na/na na/na Total Equities London10 $ 9,564,990 -0.8/81 na/na na/na na/na na/na S&P Index11 $ 5,915,953 0.3/na na/na na/na na/na na/na Janus 8 $ 3,971,302 8.1/2 21.6/5 17.6/25 14.6/65 na/na Winslow 3 $ 5,889,043 3.7/55 15.9/44 14.9/72 na/na na/na AMI12 $ 5,745,574 na/na na/na na/na na/na na/na Herndon 4 $ 7,675,567 -0.7/78 -0.4/91 na/na na/na na/na MFS 5 $ 7,870,620 1.0/29 8.3/17 19.4/33 17.9/29 na/na Earnest Partners 6 $ 19,343,043 -1.4/85 7.0/56 19.4/56 17.9/64 na/na NFJ International 7 $ 10,339,339 2.3/32 -6.9/84 7.7/77 na/na na/na Invesco7 $ 8,787,659 0.2/78 na/na na/na na/na na/na Principal REIT9 $ 2,856,788 -9.3/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 04/01/15 3 Large cap growth equities managers hired 01/01/12. 4 Large cap value equity 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 12Large cap growth equities manager hired 07/01/15 Brice then discussed an updated asset allocation summary as of August 26, 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. Brice then distributed a MLP manager study for the alternative asset class consideration. Discussion ensued and the current extreme volatility in the specific asset class was noted. By Board consensus it was 2 decided that stabilization in energy prices would be necessary before any allocation to a MLP investment would be considered. Brice then contacted Stephanie Mills, Institutional Investing Associate, The Brice Group to move all conference calls up by one-half hour due to the meeting running ahead of schedule. CONFERENCE CALL WITH BOYD WATTERSON (Fixed Income Core Plus): Michael Vandenbossche reviewed the investment portfolio results for the second quarter ending June 30, 2015. Due to the transition of the fixed income portfolio from the prior manager in April 2015, performance was somewhat affected. Since inception, the portfolio lost -1.4% compared to the benchmark of -0.9%. For the current month of August, the performance is positive and is surpassing the benchmark. The portfolio is currently positioned with an overweight to corporate debt and an underweight to Treasuries. The core plus piece of the portfolio consists of approximately 31.4% of securities rated at Baa or below. The firm sees the Federal Reserve increasing rates this year which should flatten the yield curve as increases will be on the front end of the curve. The firm’s yield curve strategy favors a barbell approach in intermediate and short-duration holdings will be structured more defensively. The Board then thanked Mr. Vandenbossche for the report and the firm’s efforts on behalf of the system. CONFERENCE CALL WITH WESTERN ASSET MANAGEMENT (Fixed Income Core Plus): Paul Strebel of Legg Mason and David Paulus of Western Asset Management presented the report for the June 30, 2015 quarter. The firm was also impacted by the transitioning of the portfolio from the prior manager during the quarter. The portfolio lost -2.02% for the quarter compared to the benchmark loss of -1.68%. The portfolio is underweight Treasuries and overweight to Emerging Markets which represents the core plus portion of the portfolio. The firm also anticipates the Federal Reserve normalizing interest rates and favors the long end of the curve due to impending short term rate increases. Opportunities are seen in investment grade corporate bonds, high-yield bonds in select energy firms and emerging markets debt. The firm sees a modest economic growth outlook domestically and expects a soft landing for China’s economy. The Board thanked Mr. Strebel and Mr. Paulus for the report and efforts on behalf of the system. CONFERENCE CALL WITH PRINCIPAL GLOBAL ADVISORS (REIT): Todd Kellenberger, CFA represented Principal Group and presented the real estate securities report for the second quarter ended June 30, 2015. The portfolio lost -9.74% against the benchmark of -10.44% for the quarter. Market sensitively to looming FED interest rate hikes led to a decline in REIT holdings. The portfolio has an overweight to residential, office & industrial, self-storage, lodging. Underweights are seen in healthcare, diversified and net lease. Kellenberger noted that REITS have generated positive returns in 26 out of 33 years. Overall the firm has a positive outlook for the asset class as demand is high for quality real estate and occupancy rates remain high across the spectrum. The firm also believes that the FED will increase interest rates this year but noted the ability of REITS to increase rents as a means to offset the impact of higher rates. The Board thanked Mr. Kellenberger for his presentation and Principal Global Advisorsl’s efforts on behalf the system. TRUSTEE COMMENTS - None ADJOURN: 3 Motion by Henig, supported by Marsh, to adjourn the meeting at 2:25 p.m. Ayes: All. Motion carried unanimously. ___________________________________ Jennifer Varney, Acting Chairperson / Acting Secretary / Treasurer 4