HomeMy WebLinkAbout1996-10-31 - Agendas - Final•
FAYETTEVILLE
-THE CITY OF FAYETTEVILLE, ARKANSAS
TRACI PAUL, CITY CLERK
•
TO:
FROM:
DATE:
SUBJECT:
Firemen's Pension Board Members
Traci Paul, City Clerk/Treasurer
•
October 22, 1996
Firemen's Pension Board Meeting
The next Firemen's Pension Board meeting is Thursday, October 31,
1996, at 11:00 a.m., in room 326 of City Hall. Attached, please
find a copy of the agenda for the upcoming meeting, the minutes
from the September 26 meeting, the pension list for November, 1996
and a letter from Ben Mayes regarding the Insurance Turnback funds.
Attachments
113 WEST MOUNTAIN 72701 501 575-8323
•
AGENDA
FIREMEN'S PENSION AND RELIEF BOARD
October 31, 1996
11:00 a.m.
City Hall Room 326
1. Approval of the minutes of September 26, 1996.
2. Approval of Pension List for November 1996.
3. Investment Report, Merrill Lynch
4. Old Business
5. New Business
a. Investment of Insurance Turnback money.
6. Adjournment
•
•
•
•
MINUTES OF A MEETING OF THE FIRE PENSION BOARD
A meeting of the Fayetteville Firemen's Pension and Relief board
was held on Thursday, August 29, 1996, at 11:00 a.m., in room 326
of the City Administration Building 113 W. Mountain, Fayetteville,
Arkansas.
PRESENT: Marion Doss, Ron Wood, Howard Boudrey, Darrell Judy, and
- City Clerk/Treasurer Traci Paul
ABSENT: Mayor Fred Hanna & Pete Reagan
CALL TO ORDER
Doss called the meeting to order.
MINUTES
Judy, seconded by Wood, moved to approve the minutes of the July
25, 1996, meeting. The motion passed unanimously.
PENSION LIST
Paul stated there are no changes in the pension list. Accounting
is working on the situation with Bill Morris' pension. Denise Land
has requested documentation on the law that entitles a volunteer to
an extra $5 per month for each year served over 20.
Doss stated he would providethe documentation.
Boudrey, seconded by Judy, moved to approve the September pension
list. The motion passed unanimously.
NEW BUSINESS
Investment Report
The Board reviewed a faxed investment report from Richard Yada at
Merrill Lynch.
OLD BUSINESS
Payment to PRB for Increase Request
Paul stated she received a bill in the amount of $925 from PRB
for the benefit increase request. With a regular check request, a
check will be mailed next Thursday. They are holding the insurance
turnback check until this bill is paid. Paul asked if the Board
wanted a check processed before Thursday.
•
August 29, 1996
In response to a comment from Doss, Paul stated the first benefit
increase request costs $600, the second amount requested costs
$250, and there is a $75 processing fee.
In answer to a question from Paul, the Board decided that mailing
a check on Thursday would be fine.
There being no further business the meeting adjourned at 11:13 a.m.
•
MINUTES OF A MEETING OF THE FIRE PENSION BOARD
A meeting of the Fayetteville Firemen's Pension and Relief Board
was held on Thursday, September 26, 1996, at 11:00 a.m., in room
326 of the City Administration Building, 113 W. Mountain,
Fayetteville, Arkansas.
PRESENT: Mayor Fred Hanna, Marion Doss, Pete Reagan, Ron Wood
(arrived late), Howard Boudrey, Darrell Judy, and City
Clerk/Treasurer Traci Paul
CALL TO ORDER
Mayor Hanna called the meeting to order.
MINUTES
Boudrey moved to approve the minutes of the August 29, 1996,
meeting. Doss seconded. The motion passed unanimously.
PENSION. LIST
Paul reported that Bill Morris's pension was increased to $65 per
month. In response to a question, Paul reported that Morris did
receive back pay; he received an $80 check for this last month.
• Reagan moved to approve the pension list for October. Boudrey
seconded. The motion passed unanimously.
MERRILL LYNCH INVESTMENT REPORT
Richard Yada, of Merrill Lynch, reported July was a tough month.
The market was down 100. August made a little recovery. New
Mexico Capital value is at $4,026,000. The income account is
$3,856,000 at the end of August. Keystone was $1,083,000 at the
end of August. Treasury Bills are up 3.48%. New Mexico Capital
is up 3.99%. The income account is down 1.5%. The Keystone is
up 5.79%.
Growth is still outdoing value investing, but value may pick up
going into next year. The Dow Jones is up 11%. Standard &
Poor's 500 is up 7.46%. The stock market is up between 7% and
11%. The bond market and long-term treasury is down 8.4% and
high-grade corporate bonds are down 5.23%. That is where the
income account and New Mexico returns are being affected. The
consumer price index was up 2.28%.
•
Overall, we continue to stay ahead of the ball game. We are
taking $300,000 out of New Mexico and shifting it to the income
account for the Select 10 program. Keystone has $1,083,000.
Asset allocation is stocks 47.7%; fixed income, 44%; cash, 6.8%;
and other 1.5%.
•
•
•
September 26, 1996
In response to questions from Reagan regarding the Select 10,
Yada reported that the summer series is down a little bit. The
winter series is up. Japan is down in both series, and DOW is up
in both series. Overall, we are up a little bit. We just got in
this week on the fall series. Everything is in place and he
feels it is a good area. It is shown in the income account.
They are included in the stock Asset allocation. In the winter
series, we put $75,000 into DOW, the United Kingdom, and Japan.
In the summer series, we put $75,000 in each one. We just got
into the fall series and have $75,000 in each one.
Wood arrived.
Yada reviewed the
we needed to have
now is $9,045,000.
$148,000.
actuary report. For the current income test,
$173,401; we had $386,432. The total liability
We have assets of $8,897,000. Unfunded is at
Yada stated that occasionally money needs to go from the income
account to the checking account to pay benefits and money has to
be wired. To do it legally, they want an original form
authorized by the Board and signed by a majority of the Board
members. He will keep them on file. He asked the Board to sign
the forms.
NEW BUSINESS
In response to a question from Reagan, Paul reported she had not
received the insurance turn back money.
ADJOURNMENT
There being no further business, the meeting adjourned at 11:20
a.m.
FIREMEN'S RELIEF AND PENSION FUND
NOVEMBER 1996
TRACI PAUL TREASURER
• THE FOLLOWING ARE THE OBLIGATIONS OF THE FIREMEN'S RELIEF FUND FOR THE
MONTH OF NOVEMBER 1996. YOU ARE HEREBY INSTRUCTED TO ISSUE CHECKS TO THE
PAYEES, IN THE AMOUNTS SHOWN, AND FOR THE PURPOSE SO STATED.
•
EMP# NAME GROSS FED. TAX
43 BAIRD, RICHARD H.
2 BLACKARD, PAUL
63 BOLAIN, ANN
44 BOUDREY, BETTY MRS.
45 BOUDREY, HOWARD
49 BOUDREY, JACK
4 CARL, FLOYD JR
5 CASELMAN, ARTHUR
57 CATE, ROY
6 CHRISTIE ARNOLD
8 COUNTS, WAYNE
61 DAVIS, BEULAH F.
10 DEARING, EMMA MRS.
11 FARRAR, ALONZO
38 FRALEY, JOSEPH G.
33 HARRIS, BILL C.
34 HARRIS, JAMES E.
64 JORDAN, CHARLIE
47 JUDY, DARRELL
37 KING, ARNOLD D.
54 KING, ARVIL
12 LANE, HOPE MRS
13 LAYER, MERLIN
14 LEE, HAROLD
51 LEWIS, CHARLES
60 LEWIS, MARVIE
55 LEWIS, ROGER
40 LOGUE, PAUL D.
50 MASON, LARRY
39 MC ARTHUR, RONALD A
35 MC CHRISTIAN, DWAYNE
15 MC WHORTER, CHARLES
29 MILLER, DONALD
42 MOORE JAMES H.
17 MORRIS, WILKIE MRS.
16 MORRIS, WILLIAM H.
62 MORRISON, EUENE
48 MULLENS, DENNIS W.
58 OSBURN, EDWARD
46 OSBURN, TROY
53 POAGE, LARRY
20 POLLY, GRACE A. MRS.
22 REED, JOE
30 SCHADER, EARVEL
41 SCHADER, TROY
23 SKELTON, BURL L.
24 SKELTON, LEE
56 SKELTON, ROY
36 SPRINGSTON, CARL
25 STOUT, ORVILLE
27 TUNE, MILDRED MRS.
26 TUNE, BILLIE SUE
916.20 100.00
55.00
55.00
1,266.21 180.00
1,066.66
837.68 287.68
50.00
75.00
909.50
50.00
55.00
377.50
50.00
707.84
953.38 100.00
55.00
55.00
1,192.17
837.68
828.42 100.00
1,131.00 130.00
50.00
417.50
55.00
837.68
439.16
439.17
11469.38 175.00
829.35 29.35
891.62 100.00
55.00 30.00
885.14 50.00
863.01 125.00
55.00
50.00
65.00
70.00
1,114.11
1,284.63 160.00
965.81 65 81
1,201.98 200.00
50.00
55.00
915.78
783.74 20.00
692.50 42.50
390.00
1,626.02 126.02
609.88
590.36 50.00
70.00
70.00
ST. TAX NET
816.20
55.00
55.00
1,086.21
1,066.66
50.00 500.00
50.00
75.00
909.50
50.00
55.00
377.50
50.00
707.84
10.00 843.38
55.00
55.00
1,192.17
837 68
10.00 718.42
1,001.00
50.00
417.50
55.00
837.68
439.16
439.17
20.00 1,274.38
800.00
791.62
25.00
835.14
738.01
55.00
50.00
65.00
70.00
1,114.11
1,124.63
900.00
30.00 971.98
50.00
55.00
915.78
763.74
650.00
390.00
50.00 1,450.00
609.88
540.36
70.00
70.00
28 WATTS, DONALD
59 WATTS, WAYNE
52 WRIGHT, RANDALL
•
400.00
921.17
877.68
31,614.91
96.17
150.00
2,317.53 170.00
400.00
825.00
727.68
29,127.38
WE, THE UNDERSIGNED, DO SOLEMNLY SWEAR THAT THE ABOVE OBLIGATIONS ARE
JUST AND CORRECT; THAT NO PART THEREOF HAS BEEN PREVIOUSLY PAID; THAT
THE PENSION PAYMENTS SO CHARGED ARE IN ACCORDANCE WITH THE ACTIONS OF
THE BOARD OF TRUSTEES OF THE FIREMEN'S RELIEF AND PENSION FUND; THAT
THE SERVICES OR SUPPLIES FURNISHED, AS THE CASE MAY BE, WERE ACTUALLY
RENDERED OR FURNISHED; AND THAT THE CHARGES MADE THEREFORE DO NOT •
EXCEED THE AMOUNT ALLOWED BY LAW OR THE CUSTOMARY CHARGE FOR SIMILAR
SERVICES OR SUPPUES.
•
SECRETARY
CHAIRM • A D PRE IDENT
ACKNOWLEDGEMENT
STATE OF ARKANSAS )
COUNTY OF WASHINGTON) )SS
•
SWORN TO AND SUBSCRIBED BEFORE ME THIS VA DAY OF Mh,veA ia.{ 1996.
N Y PUBLIC
MY COMMISSION EXPIRES: 3-/-07cc
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•
FAYETTEVI LLE
THE CITY OF FAVETTEVILLE. ARKANSAS
DEPARTMENTAL CORRESPONDENCE
•
•
To: Mayor Fred Hanna and
Fire Pension Board members
From: Ben Mayes, Administrative Services Director
Subject: State Insurance Turnback
Date: October 11, 1996
The City received $235,798.64 in State Insurance Turnback funds on
October 7, 1996. The funds were divided between the Firemen's
Pension and Relief Fund and LOPFI as follows:
Plan participants:
Active Retired Total
Firemen's Pension and
Relief Fund 21 56 77
LOPFI 47 47
Total participants 124
Funds received $235,798.64 divided by 124 = $1,901.6019
Firemen's Pension and Relief Fund $1,901.6019 x 77=$146,423.35
LOPFI $1,901.6019 x 47=$ 89,375.29
Total $235,798.64
The Firemen's Pension and Relief Fund portion of the funds are
currently in the regular checking account. A cash flow projection
indicates a balance of approximately $140,000.00 will be available
for transfer to the money manager at the Pension Board's direction.
We will discuss this at the October 31, 1996, Pension Board
meeting.
•
City of Fayetteville
Fire Pension Fund
Cash Flow Projection — City held funds only
•
10/01/96 — 12/31/96
Cash on hand beginning of month
Receipts:
Property Taxes
Employee Contribution
Employer Contribution
Interest —Checking
State Insurance Tumback
Total Receipts
Total Cash Available
Expenditures:
Pension payments
Total Cash expended
Transfers (to)/from Money Manager
Cash balance end of month
Total Cash and Investments end of month
October November December
1996 1996 1996
6,468 162,893 61,890
25,623
5,231
10,462
300
146,423
60,000
3,487
6,975
150
3,000
3,487
6,975
75
188,039 70,612 13,537
194,508 233,505 75,427
(31,615) (31,615) (31,615)
(31,615) (31,615) (31,615)
(140,000)
162,893 61,890 43,812
162,893 61,890 43,812
•
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P.01
j ARKANSAS FIRE & POLICE PENSION REVIEW BOARD
P.O. DRAWER 34164REC QNTED LITTLE ROCK. ARKANSAS 72203
TELEPHONE (501) 682-1745
FAX; (501) 682.1751
1p 2 61996
CITY CLERKS OFFICE
MEMORANDUM
TO: Mrs. Pam Looney
Arkansas Insurance Commission
FROM: Cathyrn E: Hinshaw
Executive Director
RE: Compliance with Act 700 of 1979
DATE. September 18, 1996
The following pension fund has now complied with Act 700, as
amended, for fiscal and calendar year 1995, and is ?eligible to
have its Turnback released:
Fayetteville Fire Pension Fund
Thank you for your assistance in this matter.
CC: Ms. June Barron
Office of Legislative Audit
Arkansas State Capitol
Room 172
Little Rock, AR
CC: By FAX to Mr. Pete Reagan
501-575-8257
September 26, 1996
•
•
•
•
eOC_T�2or96a111i:11:2_rnrJ APFF.-GEHL FAYETTEVILLE ,. 15019730106
ARKANSAS PROFESSIONAL FIRE FIGHTERS
Affiliated *11?
AFL -00 -CLC
INTERNATIONALASSOCIATION OF FIRE FIGHTERS
8619 CHICOT ROAD
UTILE ROCK, ARKANSAS 72209
(501) 565-1660
President
PETE REAGAN
1015 Lake Sequoyah
Fayetteville, AR 72701
442-6131 Fire Station
521-7542 Home
Mayor Arnold Feller
Chairman ,PRB
P.O. Box 448
Mulberry, Ar. 72947
Dear Arnold,
10/26/96
Leptstative Chairman
BILL LUNDY
7 Apple Tree Circle
UN Rock, AR 72209
663-9172 Rio Station
435-0834 Home
P.01
In my letter dated 9/30/96 to Strib Boynton concerning Fayetteville's Insurance turn back
funds I was concerned about two items.
1. The amount of time lapse between the PRB meeting ( July 11, 1996) and the
memo from Cathryn Hinshaw dated Sept. 18, 1996. A total of (89) days passed
before we received our Insurance turn back check in the amount of S 235,798.64
on October 7,1996.
2. The Fayetteville Fireman's Pension and Relief Fund, and The City of Fayetteville
have both lost interest on this money because of the delays in notification.
I would appreciate it if you would contact the appropnate agency in an effort to re -coup
our losses in interest . As a Trustee of The Fayetteville Fireman's Pension and Relief
Fund I feel it is my fiduciary responsibility to seek these losses.
If 1 can be of any further assistance in this matter , please feel free to contact me.
Pete Reagan , Trustee
Fayetteville Fireman's Pension and Relief Fund
2340 N. Green Acres Rd. Suite 16
Fayetteville Ar. 72703
(501) 973-0053
cc: Cathryn Hinshaw
FFD Pension Board
Bill Lundy
Post -It- Fax 7671. (0Z%9..
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OCT -09-96 WED 14;16
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P. 01
ARKANSAS LOCAL POLICE & FIRE RETIREMENT SYSTEM
ARKANSAS FIRE & POLICE PENSION REVIEW BOARD
From!
Date:
FAX TRANSMITTAL
Time: 3 • (0 f.44 -
Please Deliver the Following Slar Pages To:
Name: (� .-I >/tt&ct&A , UV X)
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Company:
FAX#:
union National Nate
124 W. Capitol. Suite 940
Little Rock. Arkansas 72201
P.O. Box 34164
Little Rock. ArkansaS 72203
Telephone (501) 682.1745
Fax: (SO 1)682.1751
Message: 04110-1/44,-1
ImListnrt of 40 ta¢
ASAL tut enk4-tk 4040
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—Teta Asso c.Ito ti -c tits
If transmission is incomplete, please call (501) 682-1745. Our
FAX number is (501) 682-1751.
RECEIV
DCT 3 1 1996
CITY CLERKS OFFICE"
•
u -U8-86 WED 11.1:2b
Osborn, Carreiro & Associates, Inc
ACTUARIES • CONSULTAN'T'S • ANALYSTS
October 9, 1996
Mrs. Cathym Hinshaw, Exeurtive Director
Arkansas Fire and Police Pension Review Board
One Union National Plaza, Suite 940
124 West Capitol Avenue
Little Rock, Alt 72201
RE: Fayetteville Firefighters Benefit Increase Proposal
Dear Cathym:
P.02
One Union National irlaze,$ulte 1690
124 West Capitol Avenue
Little Rack Arkansas 72201
(501)376-0043
Attached please find two benefit increase proposal letters for the Fayetteville Firefighters Pension
Fund. These are the standard format for benefit increase proposal letters The request from the
pension fund asked for a cash flow valuation to show the soundness of the proposals, but they
were initially billed for two "standard format" proposals (i.e_ $600 for thefirst, $300 for a second
and $75 processing). Since this is what we received we decided to first fry the benefit increases
using the regular tests for actuarial soundness. As you can see, the 65% proposal did not pass the
funded percentage test. The 60% proposal came close but did not quite meet the fiinded
percentage test. This leads me to think that the 60% proposal would pasti on a cath flow
valuation and the 65% proposal might pass. ;
Our normal fee for a cash flow valuation is $1,750 as you laiow. Since we have already
completed this work and have been paid $900, I think it would be fair to charge $1,000 extra to
complete a cash flow valuation. Please let ine know how we should proceed.
If you have any questions or comments, please let me know.
Sincerely,
ody Carreiro, A.S.A, M.A.A.A.
Associate Actuary
•
VDl-U9-86 WED I1.1:2b
•& •
P,03
Osborn, Carreiro & Associates, Inc.
ACTUARIES • CONSULTANTS • ANALYSTS
City of Fayetteville
Firemen's Relief and Pension Fund
PROPOSAL TO INCREASE RETIREMENT BENEFITS
The cost of this proposal is calculated using the same methods, assumptions, rind data as were used in the
December 31, 1995 actuarial valuation_ "Previous benefit provisions" refry to the provisions in effect on
December 31, 1995.
Proposal 1: Increase the basic formula for full aid fires
Salary (the additional amount for service over 20 ears is unchanged),
), and change Foul the basic
6 r of Foal
Y sed), the basic formula for
volunteer firefighters to a S55/mo. base.
Previous
Paid Volunteer
Increase due
After Proposal j to Proposal
Paid Volunteer Paid Volunteer
Normal Cost $ 201,692 $ 0 $ 259,344 $ 0 $ 57,652 $ 0
Unfunded Accrued Liab.
Active Lives 12,320 0 107,461 0 95,141 0
Retired Lives 0 0 230,560 ' 2463 230,560 2,263
Total $ 214,012 $ 0 $ 597.365 $ 2,263 $ 383,353 $ 2,263
. Less Member Contrib. - 40,611 0 - 40,611 - 0 0 0
Net Employer Contrib. $ 173,401 $ 0 $ 556,754 $ 2,263 $ 383,353 $ 2,263
i
Employer Rate 25.6% 82.3% ! 56.7%
•
Short Condition Test
Computed Actuarial Liabilities
(1)
Active
Member
Contrib.
Previous 418,412
Proposed 418,412
Sincerely,
Steve Osborn, F.S.A.
Actuary
(2)
Retirees
and
Inactives
5,101,995
6,595,951
(3)
Actives
Employer
Financed
3,525,576
Valuation
Assets
8,897,591
4,671,523 8,897,591
October 3, 1996
Portion of Liabilities
Covered by Assets
(I) (2) (3)
100% 100%
100% 100%
Funded
Percent
96% 98.4%
40% 76.1%
•
OUT -Os -96 WED 10:25 P.04
Osborn, Carreiro & Associates, Inc.
ACTUARIES • CONSULTANTS • ANALYSTS
City ofFayetteville •
Firemen's Relief and Pension Fund
PROPOSAL TO INCREASE RETIREMENT BENEFITS
i
The cost of this proposal is calculated using the same methods, assumptions, d data as were used in the
December 31, 1995 actuarial valuation. "Previous benefit provisions" it t6 the provisions in effect on
December 31, 1995.
Proposal 2 • Increase the basic formula for full -paid firefighters from 50% of Final Salary to 60% of Final
Salary (the additional amount for service over 20 years is unchanged), and change the basic formula for
volunteer firefighters to a $55/mo. base
Normal Cost
Unfunded Accrued Liab.
Active Lives
Retired Lives
Total
• Less Member Contrib.
Net Employer Contrib.
Employer Rate
Increase due
Previous After Proposal I to Proposal
Paid Volunteer Paid Volunteer Paid Volunteer
$ 201,692 $ 0 $ 239,394 $ 0 $ 37,702 $ 0
12,320 0 77,626 ;'• 0 65,306 0
0 0 153,706 2,263 153,706 2,263
$ 0 $ 470,726 $ 2463 $ 256,714 $ 2,263
$ 214,012
- 40,611
$ 173,401
25.6%
- 0 -40,611 - 0 0 0
$ 0 $ 430,115 $ 2,263 $ 256,714 $ 2,263
63.5% 37.9%
Short Condition Test
Portion of Liabilities
Covered by Assets
Computed Actuarial Liabilities
(1)
Active
Member
Contrib.
Previous 418,412
Proposal 418,412
Sincerely,
jea
Steve Osborn, F.S.A.
Actuary
(2) (3)
Retirees Actives
and -Employer
lnactives Financed
5,101,995 3,525,576
6,102,299 4,312,175
October 3, 1996
t
Valuation (1) (2)
Assets
8,897,591 100% 100%
8,897,591 100% 100%
(3) Funded
Percent
96% 98.4%
55% 82.1%
REC!JVED
• OCT j 1 1996
•
TEL:501-375-3451 Oct 30'96 11:28 No.001 P.02
CITY CLERK'S OFFICE
FAYETTEVILLE FIRE DEPT PENSION AND RELIEF FUND
PORTFOLIO PERFORMANCE 12/31/95 TO 09/30/96
12/31/95 09/30/96
NM CAPITAL MANAGEMENT 831891,670
- 40,000
- 300,000
INCOME ACCOUNT
KEYSTONE ASSET MGT
3 -.MONTHS TREASURY BILLS
DJIA W/DIV REINVESTED
9 & P 500 W/DIV REINVEST
LONG TERM TREASURY BONDS
HIGH GRADE CORP BONDS
CPI (JUNE)
NM CAPITAL (time wtd)
INCOME ACCOUNT
KEYSTONE ASSET MGMT
WITHDRAWALS:
03/13/96
04/12/96
08/13/96
09/11/96
$16.000
10,000
10,000
20, 000
$3,755,839
3,848,643 4,215,877
+ 40,000
+300,000
1,018,776 1,135,385
12/31/95 09/30/96
+ 5.46 +3.95
+35453
+16.92
+34.94 +13.48
+27.63 - 5.82
+23.51 - 2. 7$
+ 2.67 + 2.48
+15.68 + 4.76
+15.61 + 0.50
+11. 13
INVOICE
October 30, 1996
Curtis Williams
Merrill Lynch
425 West Capital STE 200
Little Rock, AR .72201
RE: Fayetteville Firemen's Relief Fund a/c #56305G88
Market. -Value on -9/30/96:---
$1,134,967.94 -
Investment Management Fee for the Quarter Ended September 30, 1996:
FEE
$2,837.42
...rete _ ...
Fee Schedule:
nC
First-'$ -3,000-207102i 0.3250% (per quarter)
Minimum Fee: $2,500.00
cc: Ms. Traci Paul
- 1P.O. Box 2121, Boston, Massachusetts 02106-2121 Phone: (800) 343-2898
•
•
October 16, 1996
City Clerk of Fayetteville
113 West Mountain Street
Fayetteville, AK 72701
Dear Sir or Madam:
• 0 KEYSTONE
I N V E S T M E N T
Enclosed please find the October appraisal for your portfolio showing values as of September
30, 1996._ Appended to the appraisal are summary transaction and performance statements. Also
enclosed is atopy of our quarterly Investment Commentary.
•
r *-0Despitea sharp correction in the stock market early in July, and the continuation of a bond
market correction which began at the start of this year, capital market returns were generally positive
for the quarter as.a whole.
In the equity market, -large market capitalizations and favorable earnings growth trends
continued as the most favored characteristics. Positive earnings comparisons for the current year,
upward revisions to 1997 estimates, and high price -to -book value relationships were especially
prized. Conversely, the value style did not provide superior returns nor did mid or small sized
equities, generally speaking.
In the bond market, yields have been trending irregularly lower since an interim peak reached
in June; however, most of the quarter's return was realized during a bond market rally which began
in early September.
Trends in both stock and bond markets reflected the economic background, and that was
characterized by favorable economic growth statistics, low inflation, rising employment and
increasing incomes. That is, the equity market focused on growth because growth was there.
Conversely, bonds which had recoiled from accelerating economic growth trends early in the year,
entered a trading range in early April. They still remain within that range despite strength late in the
quarter Also, as is true in periods of strong economic growth, lower quality bonds provided the
highest returns.
Unquestionably, however, market participants were concerned over the economic backdrop.
They worried that continued strong growth and rising wages would in time push up reported
200.Berkeley Street, Boston, Massachusetts 02116-5034. Phone: (617) 210-3200
City Clerk of Fayetteville
Page Two
October 15, 1996
inflation. The linkage here,, to the extent that it exists, involves a complex set of relationships which
we have attempted to explore in greater,detail in the Commentary. Essentially, although higher
wages can be'offset throug'.increased productivity, productivity does not seem to have been as great
as was thought to be the case not long ago. There are solid reasons, however, for believing that
inflation statistics are overstated; and that productivity statistics are therefore understated. If correct,
the likelihood of a resurgence of inflation is reduced. So far, we see -little evidence that inflation is
accelerating, and in fact the numbers reported for August show virtually no inflation currently.
We have anticipated for some time that the outlook will be characterized by a slowdown in
economic growth toward more acceptable trend levels. This remainsour best -case view. The very
strong second quarter GDP growth figure (+4.7%) was inflated by non-recurring factors, and recent
trends suggest that GDP will grow in a 2.5-3% range during the second half of this year.
Our investment policy continues to call for a fully -invested posture, with balanced portfolios
at 60% equities, 40% fixed income. Bonds continue to offer a substantial real return on the order
of 4% for the longest -dated U.S. Treasury bond, a figure in the middle of the range experienced over
the last decade. As long as :economic growth and inflation'are not threatening, this real return should
be realized in time. Equity fundamentals continue to appear promising, with S&P 500 profits
continuing to surpass analysts' estimates and valuations still reasonable.
Please let us know if you have any questions or comments on any of the foregoing.
Sincerely,
4yJ�/12--C
Andrew G. Baldassarre, CFA
Vice President and Portfolio Manager
AGB/klh
Enclosures
cc: Mr. Curtis Williams
Mr. Richard Yada
•
INVESMUENr
OMMENTARY.
.THIRD QUARTER 1996
KEYSTONE
SOUND AND FURY, SIGNIFYING
NOTHING
U.S. capital markets got off to_a rocky start itt
the third quarter, but managed to post posi-
tive returns almost across the board for the
three-month period overall. The stock market began to
enter a corrective phase in late June, and moved lower
until mid-July when it stabilized and subsequently
began a recovery which continued -through the end of
the quarter. For the S&P 500, the correction amounted
to some 7.5% using closing prices, but ort an intra -day
price basis the correction came to 10%. So, stocks did
experience the much-discussed and long-awaited "5 -
to -10% correction" in July.
The correction in the bond market which started
around the turn of the year continued into early July
when yield levels peaked and began to move irregular-
ly lower. The overall correction in yield of some 20%
for the 30 -year Treasury bond since December 1995
(from 5.95% to 7.18%) constituted a bear market for
bonds by the standards of the intermediate-term past.
(Of course, increases in yields were correspondingly
less for shorter -maturity bonds) Point-to-point over.
the quarter, however, yields were largely unchanged.
U.S. TREASURY YIELD CURVE
3M 6M lY 2Y 3Y
7.0
6.5
6.0
5.5
5.0
45
5Y 10Y 30Y
Source: Barrons
Taking the quarter as a whole, the Dow Industria s
provided the highest return (+4%), followed by the
NASDAQ Composite (+3.5%). The other large capital-
ization indices, and for that matter the mid cap index,
provided lesser returns in the +2.5% zone. The small
cap indices were mixed, with the S&P Small Cap 600
somewhat stronger than the S&P 500 at +2.9%, and the
Russell 2000 trailing at -0.1%. Style trends continued to
favor growth over value, as has been true on a trend
basis for most of the past 2 3/4 years. For example,
upward revisions to 1996 and 1997 earnings estimates,
together with high price -to -book value ratios, were the
three factors .most highly correlated with positive stock
returns during the quarter.
THIRD QUARTER SCOREBOARD
(Price only; not total return) ,
9/30/96 6/28/96 % Chg_
5882.17 5654.63 4.0.
2079.02. 2181.76 -.. -4.7
216.88 220.30 -1.6
687.31 670.63
344.67 334.48.
354.69 348.05
366.771 357.10
367.33 359.20
571.49 576.79
1226.92 1185.02 • 3.5-
346.39
241.92
Index '
DJ Industrials
DJ Transportation
DJ Utilities
S&P 500 •
S&P Growth
S&P Value
Russell 1000
NYSE Composite
Amex
Nasdaq OTC.Composite
Russell 2000 .
S&P Mid Cap 400
25
3.0
1.9
2.7.
2.3
-0.9
S&P Sthall Cap 60Q • 137.98
Wilshire 500 (Bil. $) ' 6765.65
Federal Funds,(%) - Target 5.25
91 -Day T -Bill Yield (%) - 5.01 5.04 -0.6
10 -Year T -Note Yield (%) 6.69 6.70 • -0.1
30 -Year T -Bond Yield (%) . 6.92 6.89 0.4
Dollar (in ten) 111.40 109.15 2.1
Dollar (in Marks) 1.52 . 1.53 -0.7
Gold (Troy oz., London) 379.00 382.00 -0.8
Crude Oil (Nearby Future) 24.38 20.92 16.5
KR-CRB Index 245.63 248.66 -1.2
•
Source: Keystone Investments, Inc.
346.61
236.00
134.03
6612.77
5.25.
-0.1 .
2.5:
2.9
2.3
0.0
The dollar declined very slightly against the mark, but
was up against the yen. Commodity indices were not
much changed despite asharp advance in the price of
oil, and gold was down somewhat. The oil price surge
would appear to have been due to a number of factors
including growing worldwide demand, low inventory
levels, and the presumably temporary postponement
of sales of Iraqi crude•for "humanitarian" purposes.
•
Trying to correlate the behavior of stock and bond
markets with developments in the economy is a tricky
business, because the markets do constitute a discount-
ing mechanism, even if they sometimes discount incor-
rectly. That said, it seems the markets were riveted
throughout the third quarter on the pace of economic
-growth and the implications of that growth for infla-
tion and fiscal policy. As can be seen in the following
graph, real GDP was unexpectedly strong during the
second quarter, rising 4.7% at an annual rate according
to the latest revision of the data. (When we say "unex-
pectedly," keep in mind that due to the very weak
fourth quarter last year, there was a serious question as
the year began as to the imminence of recession! Keep .
in mind also that the average rate of growth for the first
•
8/30/96
• ••
•••
•
•
•
•-'"
•
••
•,.
9/29/95
1
R
1
9/27/96
1 1
1
1 I
I
3M 6M lY 2Y 3Y
7.0
6.5
6.0
5.5
5.0
45
5Y 10Y 30Y
Source: Barrons
Taking the quarter as a whole, the Dow Industria s
provided the highest return (+4%), followed by the
NASDAQ Composite (+3.5%). The other large capital-
ization indices, and for that matter the mid cap index,
provided lesser returns in the +2.5% zone. The small
cap indices were mixed, with the S&P Small Cap 600
somewhat stronger than the S&P 500 at +2.9%, and the
Russell 2000 trailing at -0.1%. Style trends continued to
favor growth over value, as has been true on a trend
basis for most of the past 2 3/4 years. For example,
upward revisions to 1996 and 1997 earnings estimates,
together with high price -to -book value ratios, were the
three factors .most highly correlated with positive stock
returns during the quarter.
THIRD QUARTER SCOREBOARD
(Price only; not total return) ,
9/30/96 6/28/96 % Chg_
5882.17 5654.63 4.0.
2079.02. 2181.76 -.. -4.7
216.88 220.30 -1.6
687.31 670.63
344.67 334.48.
354.69 348.05
366.771 357.10
367.33 359.20
571.49 576.79
1226.92 1185.02 • 3.5-
346.39
241.92
Index '
DJ Industrials
DJ Transportation
DJ Utilities
S&P 500 •
S&P Growth
S&P Value
Russell 1000
NYSE Composite
Amex
Nasdaq OTC.Composite
Russell 2000 .
S&P Mid Cap 400
25
3.0
1.9
2.7.
2.3
-0.9
S&P Sthall Cap 60Q • 137.98
Wilshire 500 (Bil. $) ' 6765.65
Federal Funds,(%) - Target 5.25
91 -Day T -Bill Yield (%) - 5.01 5.04 -0.6
10 -Year T -Note Yield (%) 6.69 6.70 • -0.1
30 -Year T -Bond Yield (%) . 6.92 6.89 0.4
Dollar (in ten) 111.40 109.15 2.1
Dollar (in Marks) 1.52 . 1.53 -0.7
Gold (Troy oz., London) 379.00 382.00 -0.8
Crude Oil (Nearby Future) 24.38 20.92 16.5
KR-CRB Index 245.63 248.66 -1.2
•
Source: Keystone Investments, Inc.
346.61
236.00
134.03
6612.77
5.25.
-0.1 .
2.5:
2.9
2.3
0.0
The dollar declined very slightly against the mark, but
was up against the yen. Commodity indices were not
much changed despite asharp advance in the price of
oil, and gold was down somewhat. The oil price surge
would appear to have been due to a number of factors
including growing worldwide demand, low inventory
levels, and the presumably temporary postponement
of sales of Iraqi crude•for "humanitarian" purposes.
•
Trying to correlate the behavior of stock and bond
markets with developments in the economy is a tricky
business, because the markets do constitute a discount-
ing mechanism, even if they sometimes discount incor-
rectly. That said, it seems the markets were riveted
throughout the third quarter on the pace of economic
-growth and the implications of that growth for infla-
tion and fiscal policy. As can be seen in the following
graph, real GDP was unexpectedly strong during the
second quarter, rising 4.7% at an annual rate according
to the latest revision of the data. (When we say "unex-
pectedly," keep in mind that due to the very weak
fourth quarter last year, there was a serious question as
the year began as to the imminence of recession! Keep .
in mind also that the average rate of growth for the first
•
half of the year was 3%, which is essentially in line
with the•long-term growth rate of the economy. No dis
' aster. there. In -fact, the current situation has been
dubbed in some quarters the "Goldilocks economy: not
too strong; not too weak; lust right!" )-
To review, beginning in early 1994 the Fed initiated a
• process which resulted ultimately in g doubling of the •
Fed funds rate to.6%. Although they.had begun to:ease
,late in 1995, by January of this year the targeted rate
had been reduced by -only 75 basis points to. the current
5.25%. Shortrafes were thought to be rather restrictive.
and•tlie betting in the spring focused on when and by -
how much the Fed would further lower rates. Starting
in May, though, evidence of growing econothic
• strength caused the markets to shift focus abruptly.
Concerns grew over rapidly rising ernployment levels,
• increasing rates of wage gain; the implications of high-
er wages forinflatior , and the growing likelihood that
the Fed's next move would be to tighten rather than to
further ease credit. Presumably, it was this set of con-
cern; against a .background of higher long-term interest
rates that set off the June -July correction. That set of
concerns has dominated investor thinking to there -
sent, despite the Fed's decision at their September 24th
meeting not td raise rates.at-this time. .
We wrote in the last Commentary.that the surgein sec-
'ond'quarter growth was importantlya function of sev-
.eral non-recurring factors whichhad combined to.
• over -stimulate consumer deinand. Further, we antici-
pated that the economy Would slow•as the.year pro-
' greased and the effects of these various stimuli less-
ened. (See Volume•XVI, No..2,.dated' July 1, 1996.) That ,
remains our expectation, and we anticipate:a 2 1/2
3% rate of growth overall during. the second'half.
Although the evidence of any emerging slowdown
remains mixed, a considerable number of slowing
trends have become apparent. Private sector payrolls
• have been'declining for three months; total manufac-
' turfing output has been slowing since April; the growth
- rate of consumer installment credit has been slowing ,
, and retail sales have been sliiggish'since June; durable
goods orders were'down.sharply lin August; the trend
, of help -wanted advertising in newspapers is down.
since June;. and initial claims for state unemployment
insurance have been rising since late July. And, just as
-interest rates moved up earlier in the year:in advance
of the surge in, the economy, they have been trending
erratically lower since early July.
Further, monetary and fiscal. policy are already restric
five by historical standards The Fedfunds rite is cur-
rently some 250 basis points above the core inflation
rate compared with itS long-term average spread of 175
basis points. Bond yields remain some 400 basis point -a . •
above•the inflation rate,.a,"real'-rate.about in the mid--
dle.of the range of the past ten years. As.to fiscal poli-
cy, the Federal deficit -is expected"to amount to some
.$115 billion during the fiscal yearjust ended, equiva-
lent to 1:5% of. GDP, by that measurement the smallest
deficit since 1974. Excluding interest payments, the- -
U.S. will run a "primary", budget surplus equal to 1.7%
'of GDP for fiscal 1996. By that measure fiscal policy .
has. never been more restrictive. -,
THE PRODUCTIVITY DILEMMA
oncerns linger because of one central reality: the •
unemployment rate is low and falling, arid -
the same time wages are rising. For example, ..
hourly earnings rose at an annual rate of 4.4% in the
three month's to August, compared to only 2.5% in the
- three prior months. Of course, theoffset to rising
wages is higher productivity. Here, according to recent-
ly -revised statistics, the trends have not been so hot.
- --• REAL GDP-. -
Percentage change atannual rate
WHAT REVOLTJTION.?
woductivity" in the business
average % increase
,. 01973-95
4%
France
Japan"
4i
•1
..
..
Itaw .1
1
-
t
Britain
.
• 230.
_
f.
�
_
Canada
•.
•
- - - Output per worker
' United States
1West Germany prior to 1991
r S 1973-94 S1973-93
•,
_ -2%
_ •
1992
. 1993 -' 1994 .1995 1996 -
Source: Wall Stieet Journal 9/30/96 .
To review, beginning in early 1994 the Fed initiated a
• process which resulted ultimately in g doubling of the •
Fed funds rate to.6%. Although they.had begun to:ease
,late in 1995, by January of this year the targeted rate
had been reduced by -only 75 basis points to. the current
5.25%. Shortrafes were thought to be rather restrictive.
and•tlie betting in the spring focused on when and by -
how much the Fed would further lower rates. Starting
in May, though, evidence of growing econothic
• strength caused the markets to shift focus abruptly.
Concerns grew over rapidly rising ernployment levels,
• increasing rates of wage gain; the implications of high-
er wages forinflatior , and the growing likelihood that
the Fed's next move would be to tighten rather than to
further ease credit. Presumably, it was this set of con-
cern; against a .background of higher long-term interest
rates that set off the June -July correction. That set of
concerns has dominated investor thinking to there -
sent, despite the Fed's decision at their September 24th
meeting not td raise rates.at-this time. .
We wrote in the last Commentary.that the surgein sec-
'ond'quarter growth was importantlya function of sev-
.eral non-recurring factors whichhad combined to.
• over -stimulate consumer deinand. Further, we antici-
pated that the economy Would slow•as the.year pro-
' greased and the effects of these various stimuli less-
ened. (See Volume•XVI, No..2,.dated' July 1, 1996.) That ,
remains our expectation, and we anticipate:a 2 1/2
3% rate of growth overall during. the second'half.
Although the evidence of any emerging slowdown
remains mixed, a considerable number of slowing
trends have become apparent. Private sector payrolls
• have been'declining for three months; total manufac-
' turfing output has been slowing since April; the growth
- rate of consumer installment credit has been slowing ,
, and retail sales have been sliiggish'since June; durable
goods orders were'down.sharply lin August; the trend
, of help -wanted advertising in newspapers is down.
since June;. and initial claims for state unemployment
insurance have been rising since late July. And, just as
-interest rates moved up earlier in the year:in advance
of the surge in, the economy, they have been trending
erratically lower since early July.
Further, monetary and fiscal. policy are already restric
five by historical standards The Fedfunds rite is cur-
rently some 250 basis points above the core inflation
rate compared with itS long-term average spread of 175
basis points. Bond yields remain some 400 basis point -a . •
above•the inflation rate,.a,"real'-rate.about in the mid--
dle.of the range of the past ten years. As.to fiscal poli-
cy, the Federal deficit -is expected"to amount to some
.$115 billion during the fiscal yearjust ended, equiva-
lent to 1:5% of. GDP, by that measurement the smallest
deficit since 1974. Excluding interest payments, the- -
U.S. will run a "primary", budget surplus equal to 1.7%
'of GDP for fiscal 1996. By that measure fiscal policy .
has. never been more restrictive. -,
THE PRODUCTIVITY DILEMMA
oncerns linger because of one central reality: the •
unemployment rate is low and falling, arid -
the same time wages are rising. For example, ..
hourly earnings rose at an annual rate of 4.4% in the
three month's to August, compared to only 2.5% in the
- three prior months. Of course, theoffset to rising
wages is higher productivity. Here, according to recent-
ly -revised statistics, the trends have not been so hot.
Labour
,Annual
O 1960-73
WHAT REVOLTJTION.?
woductivity" in the business
average % increase
,. 01973-95
'
sector
• -
.10
France
Japan"
4i
•1
..
..
Itaw .1
1
-
t
Britain
.
Gemianyt
f.
_
Canada
•.
•
- - - Output per worker
' United States
1West Germany prior to 1991
r S 1973-94 S1973-93
-
Sources: OECD aid Economist
This is the point at which the debate really gets inter-
esting as various factions argue. They argue with per-
fect legitimacy that: "...conventionaheconomic statistics,
designed for the industrial age„are out of their depth in
the information age"; only 25% of our economy is
industrially -based, and it is virtually impossible to
measure the productivity of the bulk of the remainder
which is service -based (see graph, below); the govern-
ment doesn't spend enough resources collecting and
producing accurate economic statistics; if it did the
more accurate statistics would show that inflation is
actually a lot lower and therefore productivity a lot
higher than has been thought; and, that likelihood, cou-
pled with the fact that the growth of employee benefits
has been sharply curtailed, means that we don't have
to worry about higher wages causing higher inflation.
Actually, that seems to be true so far since despite high-
er wages the inflation rate for August was virtually
zero.
As an example of the productivity measurement prob-
lem, we note from a recent Economist article: "In many
services it is hard even to define the unit of output,
partly because higher output often comes in the form
of quality improvements. In areas such as finance,
health care and education, government statisticians
typically assume that output rises in line with the num-
ber of hours worked. The bizarre effect is that mea-
sured productivity growth is zero by definition.
Likewise, telecommunications output is measured in
minutes of calls, leaving out the'huge increase in inforc
mation transmitted via faxes or faster modems. Or sup-
pose a road haulage firm introduces a computer system
which helps drivers to pick the quickest route, and thus
provides a, better service for its customers. If mileage
drops as a consequence, the official statistics will show
a fall in real output." -
"A study by Leonard Nakamura, an economist at the
Federal Reserve Bank of Philadelphia, estimates that
America's inflation rate has been overstated by an
average of two to three percentage points a year since
1974, mainly because new products or product
improvements have been neglected... Mr. Nakamura
estimates that the mismeasurement of inflation has
been 1.7 percentage points a year higher since 1974
than in the previous 15 years The greater understate-
ment of growth that this implies would be almost
enough to explain all of the apparent slowdown in
America's productivity growth in the past two •
decades.”
SUMMARY AND CONCLUSION
We continue to believe that a fully invested
position is warranted. Inflation is running
at the lowest level in 30 years and, with the
economy's growth rate starting to slow, we do not
expect prices to get out of hand. We estimate that
recent cyclical strength may eventually result in some
acceleration in the reported rate, but not beyond a 3.5%
annual figure. With bond market participants apparent-
ly unwilling to discount an inflation rate below 3%,
however, not only does the expected future inflation
rate appear to be largely embedded in the long
Treasury bond yield, but bonds in general continue to
offer a substantial real return.
Stocks generally remain attractive as well The corol-
lary to higher-than-expected growth rates has. been
greater -than -expected corporate profits. While the
momentum of earnings gains peaked about a year ago,
the year-to-year change in the 12 -month moving aver-
age of S&P 500 operating earnings per share was +12%
through the second quarter, with second quarter earn-
ings alone some 10% higher than in the same quarter of
1995. In fact, the year-to-year rate of change in quarter-
ly operating earnings has actually re -accelerated from a
low in the fourth quarter of last year, and we expect
positive comparisons to continue.
George F. Wilkins, Jr., CFA, CMT
Senior Vice President & Chairman
Asset Allocation Committee
Volume XVI, No. 3, October 1, 1996
KEYSTONE
INVESTMENTS
200 Berkeley Street
Boston, Massachusetts 02116-5034
1-800-633-4200
tIn PRINTED ON RECYCLED PAPER.
•
FROM FARM TO FINANCE
U.S. employment by sector
70 of total
Services
80
60
40
Indus try
gaculture
20
0
1820 40 60 eD
1900
20
40
60 80 95
Sources: US. Dept. of Commerce, OECD and Economist
As an example of the productivity measurement prob-
lem, we note from a recent Economist article: "In many
services it is hard even to define the unit of output,
partly because higher output often comes in the form
of quality improvements. In areas such as finance,
health care and education, government statisticians
typically assume that output rises in line with the num-
ber of hours worked. The bizarre effect is that mea-
sured productivity growth is zero by definition.
Likewise, telecommunications output is measured in
minutes of calls, leaving out the'huge increase in inforc
mation transmitted via faxes or faster modems. Or sup-
pose a road haulage firm introduces a computer system
which helps drivers to pick the quickest route, and thus
provides a, better service for its customers. If mileage
drops as a consequence, the official statistics will show
a fall in real output." -
"A study by Leonard Nakamura, an economist at the
Federal Reserve Bank of Philadelphia, estimates that
America's inflation rate has been overstated by an
average of two to three percentage points a year since
1974, mainly because new products or product
improvements have been neglected... Mr. Nakamura
estimates that the mismeasurement of inflation has
been 1.7 percentage points a year higher since 1974
than in the previous 15 years The greater understate-
ment of growth that this implies would be almost
enough to explain all of the apparent slowdown in
America's productivity growth in the past two •
decades.”
SUMMARY AND CONCLUSION
We continue to believe that a fully invested
position is warranted. Inflation is running
at the lowest level in 30 years and, with the
economy's growth rate starting to slow, we do not
expect prices to get out of hand. We estimate that
recent cyclical strength may eventually result in some
acceleration in the reported rate, but not beyond a 3.5%
annual figure. With bond market participants apparent-
ly unwilling to discount an inflation rate below 3%,
however, not only does the expected future inflation
rate appear to be largely embedded in the long
Treasury bond yield, but bonds in general continue to
offer a substantial real return.
Stocks generally remain attractive as well The corol-
lary to higher-than-expected growth rates has. been
greater -than -expected corporate profits. While the
momentum of earnings gains peaked about a year ago,
the year-to-year change in the 12 -month moving aver-
age of S&P 500 operating earnings per share was +12%
through the second quarter, with second quarter earn-
ings alone some 10% higher than in the same quarter of
1995. In fact, the year-to-year rate of change in quarter-
ly operating earnings has actually re -accelerated from a
low in the fourth quarter of last year, and we expect
positive comparisons to continue.
George F. Wilkins, Jr., CFA, CMT
Senior Vice President & Chairman
Asset Allocation Committee
Volume XVI, No. 3, October 1, 1996
KEYSTONE
INVESTMENTS
200 Berkeley Street
Boston, Massachusetts 02116-5034
1-800-633-4200
tIn PRINTED ON RECYCLED PAPER.
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