General Employees Retirement Board

OFFICIAL MINUTES OF SPECIAL MEETING OF THE STERLING HEIGHTS GENERAL EMPLOYEES' RETIREMENT SYSTEM Wednesday, December 2, 2015 ____________________________________________ _________________________________ Location: Room #201 40555 Utica Road, Sterling Heights, MI 48313 (586) 446-2331 Chairperson Weiler called the meeting to order at 12:10 p.m. BOARD MEMBERS PRESENT: Rich Weiler, Chairperson Brian Baker, Secretary Jennifer Varney, Treasurer Todd Marsh, Trustee BOARD MEMBERS ABSENT: Paul Henig, Trustee (excused) ALSO PRESENT: Timothy Brice, Institutional Consulting Director, Morgan Stanley Graystone Consulting – The Brice Group APPROVAL OF AGENDA: Motion by Baker, support by Marsh to approve the agenda as presented. Ayes: All. Motion carried unanimously. CORRESPONDENCE: Motion by Marsh, support by Varney, to receive and file correspondence: Reports for the quarter ending September 30, 2015 as follows: 1. Morgan Stanley Graystone Consulting – The Brice Group 2. Earnest Partners 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 summarized the current market outlook. Analysis shows that the U.S. economy is still in expansion phase and that stocks have historically demonstrated solid returns during a FED interest rate hiking cycle. The firm sees a high probability that the FED raises interest rates this December. Market uncertainty created the third quarter sell off more than any other factor as fundamentals remain sound overall. For the quarter ended September 30, 2015 the fixed income portfolio gained 1.2% which was in line with the benchmark. The total portfolio lost -6.1% for the quarter with majority of equity money managers failing to meet their respective benchmarks. Brice provided an October 31st performance update that showed some of the managers had narrowed the underperformance gap. Various sector over and under weights contributed to the equity managers underperformance. 1 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 $ 105,774,701 -6.1/89 -2.4/84 6.7/64 7.5/57 5.2/71 Total Fixed Income Western 1 $ 9,117,229 1.1/41 na/na na/na na/na na/na Boyd Watterson 2 $ 18,017,685 1.2/32 na/na na/na na/na na/na Total Equities London10 $ 9,020,611 -5.7/28 na/na na/na na/na na/na S&P Index11 $ 5,514,360 -6.4/na na/na na/na na/na na/na Janus 8 $ 3,569,192 -3.7/10 11.8/3 14.6/34 15.0/33 na/na Winslow 3 $ 4,667,688 -6.0/54 3.9/47 13.5/55 na/na na/na AMI12 $ 5,128,613 -7.3/77 na/na na/na na/na na/na Herndon 4 $ 6,993,292 -8.7/62 -9.0/92 7.6/95 na/na na/na MFS 5 $ 7,277,139 -7.4/32 0.7/15 13.7/28 13.8/26 na/na Earnest Partners 6 $ 17,197,587 -10.9/93 -2.2/87 12.3/81 12.6/78 na/na Cambiar 7 $ 8,556,148 na/na na/na na/na na/na na/na Invesco13 $ 8,425,469 -10.7/51 -7.7/50 na/na na/na na/na Principal REIT9 $ 2,098,512 3.1/na na/na na/na na/na na/na *Peer group ranking within style specific sample. 1 Core Plus fixed income manager hired 04/01/15. 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 manager hired 10/01/15. 8 Large cap growth equities manager hired 12/29/09. 9 REIT manager hired 04/01/15. 10Large cap core equities manager hired 04/01/15. 11Large cap equity index strategy implemented 04/01/15 12Large cap growth equities manager hired 07/01/15 13International / emerging markets equity manager hired 10/01/14. Brice commented that the anticipated interest rate increase cycle environment would prove opportunistic for equity money managers overall. He stated that an updated asset allocation study would be prepared once the capital market assumptions generated by Morgan Stanley became available in 2016. In the context of mitigating single manager risk and introducing more equity indexing to the portfolio, Brice recommended that the Small to Mid –Equity manager allocation be reviewed at the next quarterly meeting. CONFERENCE CALL WITH EARNEST PARTNERS (Small – Middle Capitalization Equity): Patmon Malcom, CFA and associate reviewed the investment portfolio results for the third quarter ending September 30, 2015. The portfolio had a negative return of -10.9% compared to the custom benchmark return of -10.3%. Malcolm explained that the portfolio overweight in the Industrials and Materials sectors detracted from performance. Every sector within the Small Mid Cap category declined in the third period with the exception of Utilities in which the portfolio had an underweight. Malcom reviewed a number of key portfolio holdings and then talked about the sector weightings. The portfolio is underweight in Consumer Discretionary, Health Care and Utilities while an overweight position is 2 maintained in Industrials, Materials and Telecom. Brice questioned Malcom as to the impact of the rising interest rates. Malcom responded that the rising rates overall would have a favorable impact as a shift back to fundamentals and away from MACRO economics would be expected. The Board then thanked Mr. Malcom for the report and the firm’s efforts on behalf of the system. TRUSTEE COMMENTS - None ADJOURN: Motion by Marsh, supported by Weiler, to adjourn the meeting at 1:55 p.m. Ayes: All. Motion carried unanimously. ___________________________________ Brian Baker, Secretary 3