General Employees Retirement Board

OFFICIAL MINUTES OF SPECIAL MEETING OF THE STERLING HEIGHTS GENERAL EMPLOYEES' RETIREMENT SYSTEM Wednesday, November 29, 2017 ____________________________________________ _________________________________ Location: Room #201 40555 Utica Road, Sterling Heights, MI 48313 (586) 446-2331 Chairperson Varney called the meeting to order at 12:13 p.m. BOARD MEMBERS PRESENT: Jennifer Varney, Acting Chairperson Mary Jaganjac, Treasurer / Acting Secretary Paul Henig, Trustee Todd Marsh, Trustee BOARD MEMBERS ABSENT: 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 Jaganjac to approve the agenda as presented. Ayes: All. Motion carried unanimously. CORRESPONDENCE: Motion by Henig, support by Marsh, to receive and file correspondence: Reports for the quarter ending September 30, 2017 as follows: 1. Morgan Stanley Graystone Consulting – The Brice Group 2. Earnest Partners 3. INVESCO 4. Cambiar Investors Ayes: All. Motion carried unanimously. PORTFOLIO PERFORMANCE REVIEW BY TIM BRICE, MORGAN STANLEY GRAYSTONE CONSULTING 1 Brice distributed the “On the Markets” commentary which provided a tactical asset allocation reasoning for the portfolio. The firm recommends an overweight to global equities due to earnings strength and positive earnings revisions. Emerging markets are expected to continue to rally and Master Limited Partnerships (MLP’s) are thought to have stabilized and offer good upside potential. An underweight to U.S. investment grade and global fixed income and REITs as a precaution to the likelihood of continual increases in interest rates is advised. Although the firm sees the prospects for a “pause” in the equity markets rise, they do not believe any sharp sell offs are imminent. The total portfolio gained 3.3% for the September 30th quarter and 12.5% for the year ending September 30, 2017. Both fixed income managers outperformed their benchmarks and proved that active management within the fixed income space is superior to indexing. Any underperformance by equity managers was attributed to a portfolio quality bias and defensive nature of the holdings. Value and dividend paying stocks greatly underperformed compared to the growth style equities. The Board requested that Brice fund the passive investment phase III mandate primarily from those value managers who underperformed their benchmarks. 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 $ 111,965,779 3.3/39 12.5/37 6.6/60 8.6/49 5.1/87 Total Fixed Income Western 1 $ 14,065,713 1.6/4 3.0/15 na/na na/na na/na Boyd Watterson 2 $ 13,262,615 1.3/16 2.0/27 na/na na/na na/na Total Equities London10 $ 6,914,026 1.8/99 12.1/93 na/na na/na na/na S&P Index11 $ 4,440,204 4.4/na 18.5/na na/na na/na na/na Janus 8 $ 2,994,875 4.6/69 23.2/20 15.7/5 15.8/25 na/na 1000 Growth Index14 $ 2,232,081 5.7/44 na/na na/na na/na na/na Winslow 3 $ 2,140,115 5.6/45 21.3/44 11.6/52 14.4/60 na/na AMI12 $ 3,828,299 1.8/100 13.8/97 na/na na/na na/na Confluence 4 $ 4,051,971 2.1/92 12.5/88 na/na na/na na/na MFS 5 $ 4,080,236 3.0/82 19.4/36 11.7/10 15.3/19 na/na 1000 Value Index 15 $ 3,293,492 2.9/78 na/na na/na na/na na/na Earnest Partners 6 $ 16,144,094 6.0/20 24.1/1 11.8/42 15.2/44 10.3/18 Cambiar 7 $ 10,214,971 6.8/46 17.2/78 na/na na/na na/na Invesco7 $ 9,969,880 3.0/93 11.4/96 3.4/90 na/na na/na Harding Loevner16 $ 3,376,881 na/na na/na na/na na/na na/na HLEMX17 $ 2,087,883 na/na na/na na/na na/na na/na Lazard17 $ 735,426 na/na na/na na/na na/na na/na Cushing MLP Alpha 13 $ 5,602,931 -0.6/71 na/na na/na na/na na/na Principal REIT 9 $ 2,505,127 1.5/na 2.1/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. 2  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 16 International equity manager hired 10/1/17 17 Emerging markets equity managers hired 10/1/17 Brice presented the Emerging Markets Equity & Active Passive Investment Proposal Phase study to the Board. Discussion ensured with regard to moving forward with the next phases of the allocation. The underperformance by London and AMI was noted. Motion by Varney, support by Henig, to reallocate assets under phase II of the emerging markets strategy and phase III of the passive value index strategy and to draw the funds from London and AMI to the extent possible. Ayes: All. Motion carried unanimously. After reviewing the underperformance by INVESCO International, the Board decided to rebalance the international equity holdings. Motion by Varney, support by Henig, to reallocate assets from INVESCO International to Harding Loevner so that each will hold equal percentages of the international equity portfolio and to leave the current allocation to Cambiar unchanged. Ayes: All. Motion carried unanimously. Brice commented that all underperforming managers will remain on Morgan Stanley’s due diligence review for further follow up with the Board. He also stated that a study would be forthcoming with regard to small to mid-cap space to evaluate diversification within that asset class. PRESENTATION BY EARNEST PARTNERS (Small – Middle Capitalization Equity): Patmon Malcom, CFA and Gina Lenzi, Ph.D. reviewed the investment portfolio results for the third quarter ending September 30, 2017. The portfolio had a return of 6.0% compared to the custom benchmark return of 4.7%. Malcolm explained that the portfolio had an underweight to Financials and Energy while overweight Industrials and Info Tech. Malcom and Lenzi reviewed a number of key portfolio holdings and then talked about the sector weightings and the respective returns generated over the year. Lenzi described her background expertise in the Healthcare sector and how analysis is conducted for acquiring stocks within that particular area. Brice pointed out that Morgan Stanley due diligence identified a much higher capitalization in the portfolio that would be normally seen in a SMID portfolio. Malcolm pointed out that two stocks had greatly skewed the overall average and the intent was to close the positions out as they had reached the top end range of their price target. Malcolm explained that holding periods on positions can average five years and with annual compounding of returns it was not unusual for the capitalization and value of a stock to climb dramatically from the initial acquisition date. He reassured the Board, that all new 3 positions placed into the portfolio fall well within the small to mid-cap parameters. Brice requested that Malcolm contact Morgan Stanley directly for clarifying the issues brought forth. The Board then thanked Mr. Malcom and Ms. Lenzi 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 3.0% against the benchmark of 6.2%. The underperformance was primarily due to stock selection and an underweight to Emerging Markets and Asia. Both Varney and Brice questioned the portfolio cash exposure in excess of 8%. 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 43 of 45 consecutive quarterly rolling five year periods. Although technically classified as a growth manager, many aspects of the portfolio show value characteristics which were out of favor over the last quarter and year. The Board thanked the representatives from Invesco for the report and their efforts on behalf of the system. CONFERENCE CALL WITH CAMBIAR (International Equities): Molly Cisneros provided the portfolio review for the third quarter ending September 30, 2017. Cisneros apprised the Board of a senior analyst that was added to their team in the third quarter 2017. For the quarter, the portfolio produced a return of 6.8% against the benchmark return of 6.2%. The presentation included a graph showing how many of the international equity markets had room to recover as measured from the 2007 market highs and as opposed to domestic stocks which have returned 63.7% above the 2007 highs. The portfolio is overweight to Europe as the firm believes both rising economic sentiment and rebounding earnings there will produce excellent returns. Cisneros described the firms’ relative value approach to securities selection and how buying near the tangible inflection point can generate total returns of 50% over 1 – 2 time horizon. The Board thanked Ms. Cisneros for the report and efforts of the firm on behalf of the system TRUSTEE COMMENTS - None ADJOURN: Motion by Henig, supported by Marsh, to adjourn the meeting at 3:10 p.m. Ayes: All. Motion carried unanimously. __________________________________ Mary Jaganjac, Acting Secretary / Treasurer 4