General Employees Retirement Board

OFFICIAL MINUTES OF SPECIAL MEETING OF THE STERLING HEIGHTS GENERAL EMPLOYEES' RETIREMENT SYSTEM Wednesday, March 7, 2018 ____________________________________________ _________________________________ Location: Room #201 40555 Utica Road, Sterling Heights, MI 48313 (586) 446-2331 Chairperson Weiler called the meeting to order at 12:31 p.m. BOARD MEMBERS PRESENT: Richard Weiler, Chairperson Jennifer Varney, Secretary Mary Jaganjac, Treasurer Paul Henig, Trustee Todd Marsh, Trustee BOARD MEMBERS ABSENT: None. 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 Marsh, to receive and file correspondence: Reports for the quarter ending December 31, 2017 as follows: 1. Morgan Stanley Graystone Consulting – The Brice Group 2. Confluence 3. MFS 4. London Ayes: All. Motion carried unanimously. 1 PORTFOLIO PERFORMANCE REVIEW BY TIM BRICE, MORGAN STANLEY GRAYSTONE CONSULTING Brice distributed the “On the Markets” commentary which recaps Morgan Stanley’s view of the current market and near term outlook. The firm perceives the euphoria over the market in general but notes that overall fundamentals have never been better. Corporate tax cuts are pushing earnings estimates much higher than anticipated. For a variety of reasons, volatility has returned to the market and thus offering many opportunities for active managers to pick up stocks at better prices. The firm sees international and emerging markets as more appealing than domestic equities currently. An overweight to inflation protected securities and to master limited partnerships – energy infrastructure is also recommended within portfolios. The firm still sees equities outperforming bonds for the near term outlook even after the S&P 500 delivering a 36% gain over the last 14 months. The total retirement system gained 4.1% for the December 31, 2017 quarter against the policy index of 3.6%. Both the fixed income and equity portfolios posted positive returns. The fixed income portfolio gained 0.5% in the fourth quarter. All fourteen equity managers posted positive results for the quarter with six managers eclipsing their benchmarks. Brice noted the underperformance of a number of managers and then distributed a number of manager studies for review with the Board. 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 $ 114,569,385 4.1/24 16.0/34 7.0/59 9.1/54 5.5/89 Total Fixed Income Western 1 $ 13,691,963 0.4/87 5.7/12 na/na na/na na/na Boyd Watterson 2 $ 13,346,717 0.7/20 5.0/27 na/na na/na na/na Total Equities London10 $ 5,992,319 5.9/73 14.5/94 na/na na/na na/na S&P Index11 $ 4,700,963 6.7/na 21.5/na na/na na/na na/na Janus 8 $ 3,107,894 3.9/94 29.7/40 14.5/17 16.9/43 na/na 1000 Growth Index14 $ 2,783,482 7.9/9 na/na na/na na/na na/na Winslow 3 $ 2,278,489 5.6/79 32.3/26 11.7/59 16.0/61 na/na AMI12 $ 2,301,784 7.0/47 23.6/81 na/na na/na na/na Confluence 4 $ 4,277,728 5.4/74 15.7/71 na/na na/na na/na MFS 5 $ 4,292,064 5.4/74 19.8/27 11.4/17 16.2/23 na/na 1000 Value Index15 $ 3,476,229 5.3/62 na/na na/na na/na na/na Earnest Partners 6 $ 16,471,098 7.7/19 26.7/2 12.6/28 16.1/40 11.4/17 Cambiar 7 $ 12,309,501 4.0/78 21.4/92 na/na na/na na/na Invesco7 $ 7,034,565 3.5/83 20.5/93 4.7/97 na/na na/na Harding Loevner16 $ 6,925,562 3.3/85 na/na na/na na/na na/na HLEMX17 $ 2,166,627 5.6/64 na/na na/na na/na na/na Lazard17 $ 1,117,326 7.9/26 na/na na/na na/na na/na Cushing MLP Alpha13 $ 5,703,455 2.0/54 -4.5/73 na/na na/na na/na Principal REIT9 $ 2,301,784 3.6/na 9.5/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. 2  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 16 International equity manager hired 10/1/17 17 Emerging markets equity managers hired 10/1/17 Brice circulated the portfolio asset allocation breakdown and recommended that the International & Emerging markets phase III and the active / passive phase IV strategies be implemented while placing a hold on Cambiar as far as additional allocations. Motion by Henig, supported by Jaganjac, to reallocate the portfolio according to the International & Emerging markets phase III and the active / passive phase IV strategies while placing a hold on Cambiar as far as additional allocations. Ayes: All. Motion carried unanimously. Brice reviewed with the Board the various money manager studies that had been distributed (Large Cap Core, Large Cap Growth, SMID and International Equity). The current managers were also included in the studies as to provide a fair and impartial evaluation. The risk / reward analysis was studied over the three, five, seven and ten year market cycles. Alpha and beta results were compared along with standard deviation. After review and discussion of the various studies, Brice made the following recommendations: Large Cap Core – John Hancock Asset Management will be invited to present to the Board at the April 19th regular monthly Board meeting for potential hiring. Large Cap Growth – to terminate AMI and Winslow while hiring Clearbridge Advisors to manage 50% of the asset category along with the retained manager Janus also at 50%. SMID - to retain Earnest Partners for 10% of the overall portfolio and to transfer (approximately 4.4%) the excess over 10% to Edge Asset Management. International Equity - WCM Investment will be invited to present to the Board at the April 19th regular monthly Board meeting for potential hiring. Motion by Varney, supported by Henig, to terminate AMI and Winslow and hire Clearbridge Advisors to manage 50% of the Large Cap Growth equity asset category along with the retained manager Janus also at 50%. Ayes: All. Motion carried unanimously. Motion by Varney, supported by Henig, to retain Earnest Partners for 10% of the overall portfolio and to transfer (approximately 4.4%) the excess over 10% to Edge Asset Management in the SMID asset category.. 3 Ayes: All. Motion carried unanimously. CONFERENCE CALL WITH CONFLUENCE (Domestic Large Capitalization Value Equity): The Confluence Large Cap Value portfolio outperformed the benchmark for the quarter with a 5.4% return versus 5.3%. For the year, the portfolio earned 15.7% against the benchmark of 13.7%. Stock selection and allocations to the Consumer Staples sector contributed most to the outperformance while Financial Services and Health Care sectors were the laggards within the portfolio. The firm is optimistic over the 2018 market outlook citing the continuing economic expansion and accommodative fiscal policy. Market valuations are supported by the current inflation rate and outlook. Stock selection is driven by company specific fundamentals and growth aspects. The firm believes the market will allow for investing their existing cash at reasonable prices. The Board expressed its’ gratitude for the presentation and the firm’s efforts on behalf of the system. CONFERENCE CALL WITH MFS (Domestic Large Capitalization Value Equity): The fourth quarter 2017 performance results were discussed where the portfolio gained 5.4% and 19.8% for the quarter and calendar year respectively against the benchmark returns of 5.3% and 13.7%.Stock selection and an overweight to the Health Care sector was the main contributor to the outperformance. An underweight to Technology and Financial sectors detracted from performance. The firm sees a continual movement toward fundamentals as it relates to the pricing of equities. Expectations are that continued volatility in the market will provide ample opportunities to acquire stocks at attractive prices. Overall the firm has a positive outlook as earnings growth is strong, interest rate hikes are gradual and the new tax law is favorable. The Board thanked MFS representatives for the report and the firm’s efforts on behalf of the system. CONFERENECE CALL WITH LONDON (Domestic Large Capitalization Core Equity): The London Company fourth quarter and annual results were reviewed as the firm greatly underperformed their respective benchmarks. For the quarter and calendar year respectively, the portfolio gained 5.9% and 14.5% against the benchmark returns of 6.6% and 21.8%. Underperformance was mainly due to an underweight to the Technology sector which represented a disproportionally high percentage of the benchmark returns. The firm also cites its long-term perspective coupled with its focus on downside protection as further explanations for its underperformance. The portfolio has a much lower beta and standard deviation than the benchmark while the holdings provide a premium dividend yield. Lower downside capture has led to the firms’ excess returns over the full market cycle and the 2018 euphoric market was not an environment where the firm could prove its value. The Board thanked the London Company representatives for the report and efforts on behalf of the system. TRUSTEE COMMENTS - None ADJOURN: Motion by Henig, supported by Jaganjac, to adjourn the meeting at 3:23 p.m. Ayes: All. Motion carried unanimously. __________________________________ Jennifer Varney, Secretary 4