General Employees Retirement Board

OFFICIAL MINUTES OF SPECIAL MEETING OF THE STERLING HEIGHTS GENERAL EMPLOYEES' RETIREMENT SYSTEM Wednesday, November 30, 2016 ____________________________________________ _________________________________ Location: Room #201 40555 Utica Road, Sterling Heights, MI 48313 (586) 446-2331 Chairperson Weiler called the meeting to order at 12:13 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 1:00 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 Baker, support by Marsh to approve the agenda as presented. Ayes: All. Motion carried unanimously. CORRESPONDENCE: Motion by Baker, support by Henig, to receive and file correspondence: Reports for the quarter ending September 30, 2016 as follows: 1. Morgan Stanley Graystone Consulting – The Brice Group 2. Earnest Partners 3. INVESCO Ayes: All. Motion carried unanimously. PORTFOLIO PERFORMANCE REVIEW BY TIM BRICE, MORGAN STANLEY GRAYSTONE CONSULTING Brice distributed the Morgan Stanley Wealth Management Perspectives report which described possible sector outcomes in relation to the Trump presidential election victory. Industrials are seen with the most upside potential as infrastructure build and boosted military spending are likely. Financials could benefit from a decreased regulatory environment. Energy and Healthcare both face positives and negatives under the new administration. Interest rate – sensitive assets may face headwinds as the added fiscal spending may spur inflation and cause a continual rise in interest rates. For the quarter ended September 30, 2016 the fixed income benchmark gained 0.5% while the core plus manager and core fixed manager gained 1.2% and 0.6% respectively. A slight uptick in interest rates during the quarter detracted from returns. 1 The total portfolio gained 2.5% for the quarter with only four of the money managers meeting or exceeding their respective benchmarks. Brice provided a year to date performance update that indicated that most of the managers had narrowed the underperformance gap as of the current meeting date. By general consensus, the money managers see that a market emphasis on improving fundamentals will provide an opportunity for active management over passive. 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 $ 107,584,487 2.5/78 9.3/52 6.1/57 10.2/33 5.4/83 Total Fixed Income Western 1 $ 9,743,658 1.2/31 7.5/21 na/na na/na na/na Boyd Watterson 2 $ 18,608,387 0.6/74 4.9/93 na/na na/na na/na Total Equities London10 $ 8,263,131 -0.1/96 12.4/59 na/na na/na na/na S&P Index11 $ 5,181,695 3.8/na 15.0/na na/na na/na na/na Janus 8 $ 3,824,924 5.7/38 12.2/44 13.0/12 18.0/14 na/na Winslow 3 $ 4,639,461 6.4/27 10.6/64 10.0/68 na/na na/na AMI12 $ 5,296,920 1.3/99 7.0/92 na/na na/na na/na Confluence 4 $ 6,816,397 2.6/81 na/na na/na na/na na/na MFS 5 $ 7,527,426 2.4/84 16.0/27 10.9/19 17.0/23 na/na Earnest Partners 6 $ 17,441,199 3.7/83 15.5/23 9.4/46 17.0/46 9.2/46 Cambiar 7 $ 8,777,322 5.0/85 3.2/93 na/na na/na na/na Invesco7 $ 9,010,173 4.4/90 7.5/73 na/na na/na na/na Principal REIT9 $ 2,453,793 -1.0/na 22.5/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 04/01/16. 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 10/01/15. 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 commented on how the two fixed income managers’ variations in portfolio duration management relative to the benchmark complemented each other’s style. He noted that the conservative and defensive style of the REIT manager led to a slight underperformance for the year-to-date and one year results. Brice stated that the partial allocation to passive index funds (S&P 500 EFT) provided a lift to the portfolio as the current market environment has favored passive over active management. Additional passive indexing opportunities will be given consideration where applicable in the future portfolio design as Brice will present an analysis at the next regular monthly Board meeting to be held in December. PRESENTATION BY EARNEST PARTNERS (Small – Middle Capitalization Equity): 2 Patmon Malcom, CFA and Kevin Pope reviewed the investment portfolio results for the third quarter ending September 30, 2016. The portfolio had a return of 3.7% compared to the custom benchmark return of 6.6%. Malcolm explained that the portfolio had an underweight to Financials and no exposure to biotech companies which were one of the best performing groups in the third quarter. Notable was the market’s anticipation of rising interest rates which caused a third quarter sell off in Utilities and Telecom sectors and a complete reversal to earlier year performance. Malcom and Pope reviewed a number of key portfolio holdings and then talked about the sector weightings. The portfolio is underweight in Consumer Discretionary, Financials, Real Estate and Utilities while an overweight position is maintained in Industrials, Info Tech, Materials and Telecom. Malcolm described the firm’s five year roll forward monthly performance analysis as one of the best metrics to measure portfolio returns. He also stated that the coming investment environment will be conducive to active style management over passive as rising interest rates will create a performance gap between the quality companies the portfolio invests in and the rest of the market. The Board then thanked Mr. Malcom and Mr. Pope for the presentation and the firm’s efforts on behalf of the system. CONFERENCE CALL WITH INVESCO (International Equities): Invesco International Growth portfolio underperformed the benchmark for the quarter with a return of 4.4% against the benchmark of 6.9%. The underperformance was primarily due to stock selection, an overweight to the UK and an underweight to Emerging Markets. Both Varney and Brice questioned the portfolio cash exposure in excess of 9%. The firm’s position is that cash is needed to pursue buying opportunities and that the current market is not offering attractive pricing. The quarterly rolling 5-year annualized returns prove that the firm has outperformed the market in 41of 41 consecutive quarterly rolling five year periods. The firm sees the international equity market as a less efficient market that creates opportunity for active style management over passive indexing. The Board thanked the representatives from Invesco for the report and their efforts on behalf of the system. CONFERENCE CALL WITH CAMBIAR (International Equities): Nancy Wigton provided the portfolio review for the third quarter ending September 30, 2016. For the quarter, the portfolio produced a return of 5.0% against the benchmark return of 6.9%. The portfolio had an overweight to the UK which was negatively impacted by the BREXIT earlier in the year and underweights to Energy and Emerging Markets which recently rallied. Wigton noted that the defensive tilt in the portfolio did not help performance in the third quarter and that the portfolio has now been reconfigured toward growth aspects going forward. As of the meeting date, much of the underperformance has been made up with a current lag of 110 basis points. Wigton stressed the importance of maintaining risk aversion in the portfolio and the selection of inexpensive stocks that are selected from a bottom up approach. The Board thanked Ms. Wigton for the report and efforts of the firm on behalf of the system. TRUSTEE COMMENTS - None ADJOURN: Motion by Varney, supported by Weiler, to adjourn the meeting at 2:55 p.m. 3 Ayes: All. Motion carried unanimously. ___________________________________ Jennifer Varney, Acting Secretary / Treasurer 4