General Employees Retirement Board

OFFICIAL MINUTES OF SPECIAL MEETING OF THE STERLING HEIGHTS GENERAL EMPLOYEES' RETIREMENT SYSTEM Wednesday, May 24, 2017 ____________________________________________ _________________________________ Location: Room #201 40555 Utica Road, Sterling Heights, MI 48313 (586) 446-2331 Chairperson Weiler called the meeting to order at 12:25 p.m. BOARD MEMBERS PRESENT: Richard Weiler, Chairperson Julie DeClercq, Acting Secretary / Interim Treasurer Paul Henig, Trustee Todd Marsh, Trustee BOARD MEMBERS ABSENT: Jennifer Varney, Vice 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 Henig, support by DeClercq, to receive and file correspondence: Reports for the quarter ending March 31, 2017 as follows: 1. Morgan Stanley Graystone Consulting – The Brice Group 2. AMI 3. Winslow 4. Janus Capital Ayes: All. Motion carried unanimously. PORTFOLIO PERFORMANCE REVIEW BY TIM BRICE, MORGAN STANLEY GRAYSTONE CONSULTING Brice handed out the global investment committee commentary – On the Markets research paper that provided an economic forecast for the remainder of 2017. Earnings growth is surprising to the upside so far this calendar year with the first quarter 2017 sales and earnings growth recording the fastest pace in five years. Equity valuations are increasing supported by fundamentals as the Trump trade fades. The firm sees potential equity gains in the 13% to 14% range over the next twelve months. The total retirement system gained 4.9% for the March 31, 2017 quarter against the policy index of 4.1%. Gains in all asset categories contributed to the outperformance. The fixed income portfolio gained 1 approximately 1.2% in the first quarter with both the core and core plus managers beating their benchmarks. All equity managers easily surpassed their benchmarks for the first quarter with the exception of International equity and REIT managers. As of the meeting date, those underperforming managers had closed the under- performance gap. 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 $ 111,497,277 4.9/17 10.8/44 5.4/52 7.7/49 5.3/80 Total Fixed Income Western 1 $ 13,581,738 1.4/22 3.2/26 na/na na/na na/na Boyd Watterson 2 $ 13,522,355 1.0/58 0.6/81 na/na na/na na/na Total Equities London10 $ 7,741,297 4.5/87 13.6/80 na/na na/na na/na S&P Index11 $ 4,779,800 5.9/na 17.0/na na/na na/na na/na Janus 8 $ 3,664,694 11.0/13 18.0/21 13.0/6 14.1/17 na/na 1000 Growth Index14 $ 803,383 na/na na/na na/na na/na na/na Winslow 3 $ 3,825,387 11.2/10 15.9/47 9.3/63 11.3/81 na/na AMI12 $ 4,695,890 7.4/77 9.8/94 na/na na/na na/na Confluence 4 $ 6,804,788 6.5/9 14.3/84 na/na na/na na/na MFS 5 $ 5,931,057 5.7/17 18.7/48 10.2/18 14.3/17 na/na 1000 Value Index 15 $ 1,215,758 na/na na/na na/na na/na na/na Earnest Partners 6 $ 17,937,229 7.0/2 22.1/20 9.1/48 13.6/49 9.7/24 Cambiar 7 $ 9,124,737 4.0/98 6.6/91 na/na na/na na/na Invesco 7 $ 9,224,020 7.4/76 4.1/97 na/na na/na na/na Cushing MLP Alpha13 $ 6,239,248 3.9/52 na/na na/na na/na na/na Principal REIT9 $ 2,405,894 1.8/na 3.1/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 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 04/01/15 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 13MLP manager hired 01/01/17 14 Large cap growth index strategy implemented 04/01/17 15 Large cap value index strategy implemented 04/01/17 Brice recommended that the phase II of the passive index strategy be implemented. 2 Motion by Marsh, support by Henig, to reallocate assets under phase II of the passive index strategy and to draw equally from all large cap equity managers for the reallocation. Ayes: All. Motion carried unanimously. Brice reviewed the asset allocation review study with the Board. The outcome of the study suggests that potential increased allocations to MLP’s and a dedicated emerging markets manager could enhance returns without increasing overall portfolio volatility. By Board consensus, Brice was invited back to the regular monthly Board meeting of June 15, 2017 to present a detailed plan of action for the strategy. CONFERENCE CALL WITH AMI (Large Capitalization Growth Equity): Matt Dorband and Chris Sessing represented AMI and reviewed the report for the March 31, 2017 quarter. For the quarter, the portfolio gained 7.4% as compared to the benchmark advance of 8.7%. Sessing acknowledged that both the overweight allocation to the Health Care sector and an underweight to Technology had detracted from overall performance. An overweight to the Energy sector likewise created a headwind for the first quarter returns. It is anticipated that the overweight positions will produce solid returns as the Trump trade continues to fade and the market is driven more by fundamentals. Sessing also reviewed key holdings within the portfolio and provided the rationale for the recent purchases and sales of securities. As of the meeting date, the portfolio returns have substantially closed the underperformance gap. The Board expressed it’s gratitude for the presentation and the firm’s efforts on behalf of the system. CONFERENCE CALL WITH WINSLOW CAPITAL (Large Capitalization Growth Equity): Raymond Urban represented Winslow Capital and presented the quarterly report for March 31, 2017. During the quarter the portfolio outperformed the benchmark with a gain of 11.2% as compared to 8.9% for the benchmark. The overweight and stock selection within the Technology sector contributed most to performance. Year-to-date he stated that the portfolio continues to significantly outperform with regard to the benchmark. Historically the portfolio has had a record of rebounding after experiencing a peak underperformance event and this has proved true with the first quarter 2017 results and the year to date. The firm’s opinion is that Growth stocks are relatively cheap when compared to Value stocks. Urban commented the superior portfolio earnings growth rate would drive portfolio valuations higher as it is substantially greater than that of the benchmark forecasted growth rate for the Russell 1000 Growth. The firm is standing by their long proven investment discipline and provided a graph to demonstrate how the 10-year rolling returns validate long-term outperformance. The Board thanked Raymond Urban for his presentation and the efforts of Winslow Capital on behalf of the system. CONFERENCE CALL WITH JANUS CAPITAL (Large Capitalization Growth Equity): Jim Wiaduck, Michigan Director and staff analysts covered the investment report for the March 31, 2017 quarter. The portfolio gained 11.0% for the quarter against the benchmark return of 8.9%. Specific positions in the portfolio for both contributors and detractors were reviewed as well as equity positions that were added or sold off. Financial Services, Info Tech and Healthcare sectors are all over-weighted as of March 31, 2017. Performance was helped in part by the reversal of the Trump trade and increasing focus on market fundamentals. The firm believes that the concentrated portfolio of quality growth companies with “wide moats” will allow it to outperform the benchmark overtime. The Board thanked Mr. Wiaduck and associates for the report and efforts on behalf of the system. 3 TRUSTEE COMMENTS - None ADJOURN: Motion by Marsh, supported by Weiler, to adjourn the meeting at 3:03 p.m. Ayes: All. Motion carried unanimously. __________________________________ Julie DeClercq, Acting Secretary / Interim Treasurer 4