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Home My WebLink About1997-09-22 - Agendas - FinalFAYE1`TEVILLE THE CITY OF FAYETTEVILLE, ARKANSAS TRACI PAUL, CITY CLERK • TO: Firemen's Pension Board Members FROM: Traci Paul, City Clerk/Treasurer TV' DATE: September 22, 1997 SUBJECT: Firemen's Pension Board Meeting The next Firemen's Pension Board meeting is Thursday, September 25, 1997, 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 August 28 meeting, and the pension list for October, 1997. Attachments 113 WEST MOUNTAIN 72101 501 575.8323 AGENDA FIREMEN'S PENSION AND RELIEF BOARD September 25, 1997 11:00 a.m. City Hall Room 326 1. Approval of the minutes of August 28, 2. Approval of Pension List for October, 3 Investment Report, Merrill Lynch 4 Old Business A. Insurance Turnback Funds 5 New Business 6. Adjournment 1997. 1997. 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 28, 1997, at 11:00 a.m., in room 326, of the City Administration Building, 113 W. Mountain, Fayetteville,Arkansas. PRESENT: Mayor Fred Hanna, Ron Wood, Darrell Judy, Bill Morris and City Clerk/Treasurer Traci Paul ABSENT: Pete Reagan and Marion Doss CALL TO ORDER Mayor Hanna called the meeting to order. MINUTES Wood, seconded by Judy, moved to approve the minutes of the July 31, 1997 meeting. The motion passed unanimously. PENSION LIST Paul reported there were no changes in the pension list. Wood, seconded by Morris, made a motion to approve the pension list for September, 1997. The motion passed unanimously. INVESTMENT REPORT The Board bnefly reviewed and discussed the Portfolio Performance Report dated December 31, 1996 through August 27, 1997. NEW BUSINESS State Insurance Tumback Funds Mayor Hanna reported that the City received State Insurance Tumback funds The Board has approximately $140,000 available for Investment. Judy, seconded by Wood, made a motion to wait until the next meeting to invest the funds. The motion passed unanimously. 1 OLD BUSINESS August 28, 1997 Letter to PRB - Interest on Insurance Turnback Paul reported that she mailed a letter and a copy of the July 31 minutes to the Pension Review Board as requested by the Board at the last meeting. Paul stated she informed PRB of the Board's intention to not pursue the lost interest on the tumback check NEW FIRE PENSION BOARD MEMBER Darrell Judy introduced and welcomed the new retired Board member, Bill Morris. Morris stated he was glad to serve on the Board. There being no further business, the meeting adjourned at 11:13 a.m. FIREMEN'S RELIEF AND PENSION FUND OCTOBER 1997 ,TRACI PAUL, TREASURER • THE FOLLOWING ARE THE OBLIGATIONS OF THE FIREMEN'S RELIEF FUND FOR THE MONTH OF OCTOBER 1997. YOU ARE HEREBY INSTRUCTED TO ISSUE CHECKS TO THE PAYEES, IN THE AMOUNTS SHOWN, AND FOR THE PURPOSE SO STATED. EMP# NAME 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, ELIENE 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 GROSS FED. TAX 1,191.06 100.00 55.00 55.00 1,641.57 180.00 1$83.66 1,088.98 287.68 55.00 75.00 1,182.35 55.00 55.00 377 50 55.00 707.84 1,171.39 100.00 55.00 55.00 1,525.81 1,088.98 1,008.97 100.00 1,131.00 130.00 55.00 41750 55.00 1,088.98 570.91 570.92 50.00 1,902.69 175.00 1,078.16 29.35 1,159.11 100.00 55.00 30.00 886.19 80.00 863.01 125.00 55.00 55.00 70.00 80.00 1,448.31 1,646.01 160.00 1,255.55 65.81 1,556.57 200.00 55.00 55.00 923.01 1,007.92 20.00 692.50 42.50 390 00 1,626.02 126.02 609.88 50.00 590.36 50.00 80.00 80.00 ST. TAX NET 1,091.06 55.00 55 00 1,461.57 1,383.66 50.00 751.30 55.00 75.00 1,182.35 55.00 55.00 377.50 55.00 707.84 10.00 1,061.39 55.00 55.00 1,525.81 1,088.98 10.00 898.97 1,001.00 55.00 417.50 55.00 1,088.98 570.91 10.00 510.92 20.00 1,707.69 1,048.81 1,059.11 25.00 806.19 738.01 55.00 55.00 70.00 80.00 1,448.31 1,486.01 1,189.74 1,326.57 55.00 55.00 923.01 987.92 650.00 390.00 50.00 1,450.00 9 88 550.00 540.36 80.00 80.00 i 30.00 f, ter" 28 WATTS, DONALD 400.00 r 59 WATTS, WAYNE 1,191.51 52 WRIGHT, RANDALL 1,128.98 • DROP EMPLOYEES JOHNSON, ROBERT MILLER, KENNETH WARFORD, THOMAS BONADUCE, MICHAEL 96.17 150 00 400.00 1,095.34 978.98 37,713.20 2,447 53 189.88 35,075.79 2,042.47 2,129.57 1,659.70 1,975.38 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 SUPPLIES. 44. Qt SECRETARY CHAIRMAN AN ACKNOWLEDGEMENT • STATE OF ARKANSAS ) COUNTY OF WASHINGTON) )SS SWORN TO AND SUBSCRIBED BEFORE ME THIS?6 DAY OF SePf• , 1997. NOT PUBLIC Rye MY COMMISSION EXPIRES: 3- /-o? epos- 01111111% OS' „NE'tuH �P ......., ' C��Ry y. �°(J 80%. ;: t ��''a�4' CSO U ICO'',;,��0� • FAYETTEVILLE FIRE DEPT PENSION AND RELIEF FUND PORTFOLIO PERFORMANCE 12/31/96 TO 8/31/97 NM CAPITAL MANAGEMENT INCOME ACCOUNT KEYSTONE ASSET MGNT 3 -MONTHS TREASURY BILLS DJIA W/DIV REINVESTED S & P 500 W/DIV REINVEST LONG TERM TREASURY BONDS HIGH GRADE CORP BONDS CPI L� NM CAPITAL (time wtd} INCOME ACCOUNT KEYSTONE ASSET MGNT JANUARY 1996 Dow United Kingdom Japan Hong Kong MAY 1996 Dow United Kingdom Japan Hong Kong SEPT 1996 Dow United Kingdom Japan Hong Kong D STQi6t rio.a y/4T - s/f.7 20,000. as 000. 12/31/96 $3,987,776 4,518,042 1,201,845 original inv. $75,000 75,000 75,000 75,000 $75,000 75,000 75,000 75,000 $75,000 75,000 75,000 75,000 8/31/97 $4,658,113 - 4,669,734 1,429,307 /0,7s,it,‘ 12/31/95 12/31/96 8/31/97 + 5.46 +35.53 +34.94 +27.63 +23.51 + 2.67 +15.68 +15.61 + 5.31 +29.49 +22.98 - 1.21 + 1.61 + 3.32 +11.37 + 4.25 +17.91 6/30/97 $ 103,535 79,814 53,796 79,497 $ 95,835 91,534 57,154 84,703 $ 94,212 84,081 59,205 82,025 } + 3.56 +19.65 +22.82 + 5.09 + 5.67 + 1.20 +17.10 + 4.45 +19.73 8/31/97 $ 107,335 81,409 43,549 70,804 $ 97,072 94,253 42,441 75,708 $ 96,279 88,722 48,969 74,680 9/z 3 VW/ 74u `1.731, o416 /, 503 StS /0,9v3,Yob ••H 9 � i ••• YL i••e.• Sahara i TANZAN. IRAN Itre[lA) REP �s! a• It A.1 Rx)tis.:. 9 . , Ca..,.gcan ,C.a :T j% ', b�+" i41` '\ PRIVATE PORTFOLIO .G OUP U.S. EQUITY INVESTMENT MANAGEMENT PROPOSAL FAYETTEVILLE FIREFIGHTERS PENSION RELIEF FUND Presented By: MERRILL LYNCH, PIERCE, FENNER & SMITH, INC. Curtis Williams, CFI Assistant Vice President Senior Financial Consultant Richard Yada Assistant Vice President Senior Financial Consultant MERRILL LYNCH ASSET MANAGEMENT'S PRIVATE PORTFOLIO GROUP' Patricia S. Fox Vice President -Marketing - September 1997 1. MERRILL LYNCH ASSET MANAGEMENT PRIVATE PORTFOLIO G TABLE OF CONTENTS OUP • Preface Tab I Overview Of Our Organization • Tab II - U.S. Equity Management Approach Tab III - U.S. Equity Sector Allocation Strategy Tab IV _ U.S. Domestic Performance Results Tab V Client Service Program Tab VI U.S. Domestic Fee Schedules • • F t or 1 1 1 1 l 1 1 MERRILL LYNCH ASSET MANAGEMENT PRIVATE PORTFOLIO G OUP PREFACE TO U.S. EQUITY MANAGEMENT PROPOSAL Merrill Lynch Asset Management's Private Portfolio Group is pleased to present a proposal U for the management of your assets primarily in the .S. equity markets. This proposal highlights Merrill Lynch Asset Management's Private Portfolio Group's value approach to investing in the U.S. markets and our ability to consistently provide services at the highest standard. • Our U.S. equity. investment philosophy and disciplines investment process are described in detail. We have.provided a sample U.S. equity sector allocation strategy to give you an indication of the type of asset allocation and security selectionithat might be applied to a fully discretionary U.S. equity portfolio in today's marketplace. However, every U.S. equity portfolio 'managed by Merrill Lynch Asset Management's Private Portfolio Group is - customized to meet the specific investment guidelines pre- established with our clients. We welcome the opportunity to develop with you those guidelines appropriate for your U.S. equity portfolio.. • • t • MERRILL LYNCH ASSET MANAGEMENT PRIVATE PORTFOLIO GR INTRODUCTION TO OUR ORGANIZATION OUP A TRADITION OF TRUST In the highly competitive arena of investment management, governments, corporations, endowments, foundations and individuals around the world have sought out and entrusted their assets to Merrill Lynch's stewardship. Their trust has made Merrill Lynch & Co., Inc. one of the largest and most respected financial services institutions in the world. Today's Merrill Lynch & Co., Inc. draws on a rich hAritage, woven together to create a world leader renowned for pioneering new concepts in financial services. The roots of Merrill Lynch & Co., Inc. can be traced back to 1885, representing over a century of commitment to our clients, our employees and our business. , As the independently managed, multi -national asset management unit of Merrill Lynch & Co., Inc., Merrill Lynch Asset Management was founded almost two decades ago, in 1976, and is headquartered in Princeton, New Jersey. - Currently responsible for the active management of both mutual funds and separate investment accounts, as of December 31, 1996, Merrill Lynch Asset Management's assets under management exceeded S234 billion. - Merrill Lynch Asset Managements Private Portfolio Group manages approximately $14.7 billion in separate investment portfolios. MERRILL LYNCH ASSET MANAGEMENT PRIVATE PORTFOLIO GR INVESTMENT NETWORK OUP One of the key determinants in our investment approach has been our access to Merrill Lynch Asset Management's world-class network of investmentprofessionals. To more effectively and efficiently service our clients in the United States, Merrill Lynch Asset Management's Private Portfolio Group has located portfolio management teams in Princeton (New Jersey), Dallas (Texas), Jacksonville, Boca Raton, Naples, St. Petersburg, Palm Beath, (Florida) Northbrook (Illinois) and Los Angeles (California). The advantage Merrill Lynch Asset Management's Private Portfolio Group brings to the investment process is our ability to integrate this network of resources into effective strategy formulation.. 2285) PRIVATE PORTFOLIO G LOCATIONS OF AFFILIATED ASSET MANAGEMENT ENTITIES AAt /OD 1❑ ❑ ❑ ❑❑ TA WO ■❑❑❑ ■000a 000 rrarri t Toronto rt 7 t . 1 f. ce n Psi. urich e�eva )11 ■ �o❑ 0% as ❑o■� ■ ■ ■ ■ - Z nor _1 r7f7- _ EffIrrn ��-4.14a\fl aaaas--s.Wrr/s/ri/ r A Private Portfolio Group Headquarters • Locations of Affiliates Participating in Research Network • MERRILL LYNCH ASSET MANAGEMENT PRIVATE PORTFOLIO G OUP Merrill LynchAsset Management's Private Portfolio Group has carefully built an org anization that focuses on: • Attracting and retaining experienced managemen talent. t • Matching a global perspective with market expertise. • Helping our clients recognize and achieve their investment objectives. An illustration of the global presence of Merrill Lynch & Co., Inc. is found on the next page emphasizing not only the world-class distribution network of the firm but also the strategic location of Merrill Lynch Asset Management's Private Portfolio Group's management and research offices. - At Merrill Lynch Asset Management's Private Portfolio Group, we approach the market as long-term investors, not speculators. Our primary objectives are to seek to: • Provide consistent returns over time: Protect and preserve principal in negative markets. • Generate high total rates of return. " • Achieve competitive relative and absolute performance. To accomplish these objectives, Merrill Lynch Asset Management's Private Portfolio Group has adopted, refined and adhered to an investment strategy based on value investing --a timeless philosophy that provides flexibility to manage in diverse markets. .1. 1 1 ti 1 MERRILL LYNCH ASSET MANAGEMENT PRIVATE PORTFOLIO GROUP U.S. EQUITY INVESTMENT PHILOSOPHY At Merrill Lynch Asset Management's Private Portfolio Group we are value -oriented equity managers and place great emphasis on equities that can be considered undervalued within the. marketplace. Selected issues usually, sell at a discount from the average price -book value ratio or price-earnings ratio In addition, we believe that such issues seem capable of recovering from some temporary out -of -favor condition. In many cases, the dividend return is high, either absolutely or relative to the market. Merrill Lynch Asset Management's Private Portfolio Group's portfolio management efforts are designed to seek to fulfill the specific investment objectives of our individual and institutional clients. Within each client's risk tolerance, we endeavor to buy historically or relatively undervalued assets and sell them when they appear tote overvalued. U.S. INVESTMENT PROCESS Merrill Lynch Asset Management's Private Portfolio Group formulates investment policy by analyzing the macro -economic condition as well as security valuations relative to each other and historical experience. We seek to identify the various economic, social, and political trends, both positive and negative, that are likely to emerge in the foreseeable future that may have an influence on investments. Merrill Lynch Asset Management's Private Portfolio Group's investment professionals receive research input from Merrill Lynch & Co., Inc. and other major worldwide investment firms as well as from more regionally specialized firms. Careful study of these resources is the first important step in the process of developing our overall investment strategy. Merrill Lynch Asset Management's Private Portfolio Group's clients benefit from our access to a wide diversity of research. 1 1 1 1 1 1 1 M 1 1 1 1 1 1 MERRILL LYNCH ASSET MANAGEMENT PRIVATE PORTFOLIO GROUP U.S. EQUITY DECISION MAKING PROCESS Merrill Lynch Asset. Management's Private Portfolio Group's Investment Strategy Committee consists of portfolio managers and research professionals. The Investment Strategy Committee meets formally twice a week or more often as the situation merits. Policy determination is centralized with the Investment Strategy Committee so that portfolio managers in all locations operate with a consistent set of guidelines defined by the Investment Strategy Committee. Each portfolio manager will position a portfolio in accordance with the client's investment objectives. All Merrill Lynch Asset Management's Private Portfolio Group's investment professionals are responsible for developing actionable ideas on individual equities as well as providing an ongoing review of existing holdings. Any stock idea may be introduced • by a professional from any of our offices after that person has investigated the investment merits of the security. That process includes: • Our quantitative value screen using a total of 11 criteria. • Fundamental analysis. • A formal; written proposal regarding the stock idea is distributed to all Investment Strategy Committee members prior to the meeting at which time the idea will be discussed in detail. The Investment Strategy Committee then makes a decision as to whether or not the stock will be added to Merrill Lynch Asset Management's Private Portfolio Group's Investment List and if it will be restricted to specific types of portfolios or made available to all portfolio managers. An illustration of the dynamics of our equity investment decision-making process is found on the next page. 0 0 a "0 ua 27416-8 • • • PRIVATE PORTFOLIO GROUP EQUITY/BALANCED INVESTMENT DECISION PROCESS MLAM'S Worldwide Investment Network Internal and External Research .r rDOWN.4.4 c Politic i l `Analysis Investment Strategy Committee Senior Investment Strategist Asset Allocation Sector Weightings Maintaining Investment List d Selection of� Individual Securities 4 Investment Guidelines • i 1 1. 1 1 1 1 1 1 1 1/4 1 MERRILL LYNCH ASSET MANAGEMENT PRIVATE PORTFOLIO GROUP •INDIVIDUAL SECURITY SELECTION PROCESS Investment choices are based on the belief that the pricing mechanism of the securities markets lacks total efficiency and has a tendency to inflate prices of securities in favorable market climates and•unduly depress securities prices during unfavorable climates. Merrill Lynch Asset Management's Private Portfolio Group seeks to identify those sectors and securities that tend to be less efficiently priced and to overweight the -portfolio positions accordingly. Merrill Lynch Asset Management's Private Portfolio Group's value -oriented approach focuses on two variables --Reinvestment. Rate and Price -to -Book Value. There are seven additional screens employed to further refine the process. Merrill Lynch Asset Managements Private Portfolio Group's quantitative value screen can be found in this section. A total of five criteria (points) must be met for a stock to be eligible for addition on the Investment • List, but meeting the minimum requirement does not assure acceptance by the Investment Strategy Committee. Any holding whose score recedes to two or less is closely scrutinized to justify its retention on the Investment List. • • 1 1. 1. 1 1 1 • MERRILL LYNCH ASSET MANAGEMENT • PRIVATE PORTFOLIO GROUP QUANTITATIVE VALUE SCREEN The criteria and relative weights used are: • 5 -year Reinvestment Rate divided by Current P/E is greater than 1 for U.S. securities, greater than the respective market(s) for international equities • Current Reinvestment Rate divided by Current P/E is greater than 1 for U.S. securities, greater than the respective market(s) for international equities • Current Reinvestment Rate is greater than market reinvestment rate • Current P/E is less than the respective market P/E • P/E based on next year's estimate is less than - comparable market P/E MEM 1 Point 1 Point 1 Point 1 Point 1 Point • Return on Equity is greater than the respective market = 1 Point • Current Yield is greater than the respective market = 1 Point • 5 -year EPS growth is greater than 10% - _ - 1 Point • Total Debt is less than 40% 1 Point • Price/Cash Flow Ratio is less than market Price/Cash Flow Ratio = 1 Point • Price -to -Book Value Ratio is less than 1.20 for U.S. securities, -less than the respective market Price - to -Book Value Ratio for international equities 3 Points 1 1 1 1 1 .1 1 1 tMERR ILL LYNCH ASSET MANAGEMENT - PRIVATE PORTFOLIO GROUP U.S. DOMESTIC EQUITY SECTOR ALLOCATION STRATEGY A sample Equity Sector Allocation Strategy that could be applied to new monies is illustrated on the following page to give you an indication of the broad diversification we seek to achieve in fully discretionary portfolios across seven major industry sectors including the following: • Basic Industry • Capital Spending • Consumer Cyclical • Consumer Staple • Credit Sensitive • Energy • International • It is important to note that a portfolio allocation is an important and dynamic process traditionally active of balancing and -re -balancing of portfolio allocations to reflect our investment thinking. To better understand our allocation (and re -allocation) process, please refer to Section II as well as to most recent Investment Policy Commentary included in this proposal. Changes in our sector and asset allocation strategies are highlighted in our monthly Investment Policy Commentary. The sector allocation graphic found on the next page compares Merrill Lynch Asset Management's Pnvate Portfolio Group's sector weightings to the Standard & Pooi s 500 Stock Index weightings. Actual portfolio weightings may vary depending on specific client guidelines, policy requirements and market conditions. The rationale behind our most current sector weightings can be found in our latest Investment Policy Commentary. 1 .1 '. 1 1 19730A 3/97 30% 25% 20% 15% 10% 5% 0% MLAM S&P 500 MERRILL LYNCH ASSET MANAGEMENT PRIVATE PORTFOLIO GROUP U.S. DOMESTIC SECTOR ALLOCATION STRATEGY Basic Industry Consumer Cyclical Consumer Staple Credit Sensitive Energy 21.5% 22.9% S&P 500 1 MLAM 1 MERRILL LYNCH ASSET MANAGEMENT PRIVATE PORTFOLIO GROUP 800 SCUDDERS MILL ROAD PLAINSBORO, NEW JERSEY 08536 609 282-2000 MAILING ADDRESS BOE 9011 PRINCETON, NEW JERSEY 08543-9011 August, 1997 +vim"uw`% ;STMENT POLICY )frIMENTARY ;ictal, the art govern at is in taking as muc b money as ossib )- from ohe class of citizens to give to he other .% l r ANCOIS MARIE AROUET) 1694 - 1778 SOME GENERAL OBSERVATIONS The Federal fiscal deficit for the first nine months is only $10.8 billion. As a result, the annual deficit for the fiscal year ending in September could be approximately $30 billion, which compares with $107 billion in fiscal 1996. This beneficial circumstance is the result of strong revenue growth emanating from a powerful economy against the background of restrained government spending. Looking ahead, the Federal budget could be in balance by fiscal 1998. The recent agreement to balance the budget by the year 2002 is actually moderately stimulative to the economy through modest tax curs and spending increases which occur in the first year of the agreement. The spending cuts, such as in Medicare, tend to occur in the later years. We were disappointed in the budget agreement because it did not lower marginal tax rates or simplify the tax structure for the general population. Additionally, it did not reform the entitlement programs and actually added to them. Recently there has been some turbulence in Asian financial markets triggered by currency problems. Specifically, the Thai baht was devalued because of current account problems relating to a combination of events concerning real estate speculation, financial leverage, weakening exports, and a strong U. S. dollar. Other Asian currencies such as those of Malaysia, the Philippines, Singapore, and Indonesia have also come under attack from currency speculators with adverse consequences for the financial markets. The particular circumstances of each country are different and the central bankers are aware of the necessity of maintaining monetary stability. Nevertheless, the recent strength of the U.S. dollar has caused some fundamental problems for those currencies tied closely to it, and a modest degree of devaluation will help the countries involved. The presence of currency speculators however, makes the process of adjustment difficult, and the inherent instability of financial markets becomes predominant. The additional risk inherent in foreign investing emanating from currency fluctuation is currently the most pronounced since the Mexican devaluation of 1994. Our view is that most Asian countries have significant foreign reserves, and from a global perspective healthy economic outlooks. The investment risks are country -specific and involve only a few countries. At present Thailand is getting loans from the Internacional Monetary Fund in return for specific reforms. Over the past year the Deutsche mark has fallen almost 20% against the dollar. While Germany at present has a number of significant economic problems such as high unemployment, a large fiscal deficit, and sluggish growth, which might explain its weak currency vis a vis the U.S. dollar, there is little doubt that the primary reason for the currency's weakness lies in the potential exchange for a weak euro in 1999. This of course explains the weakness of all the European currencies in relation to the U.S. dollar. Europe's inability to create jobs rests with its economic model which stresses high taxation, pervasive regulation, and bureaucratic as opposed to entrepreneurial solutions to economic problems. The Germans however, have always maintained a vigilant attitude with regard to inflation perhaps because twice in this century their currency has become worthless. It is doubtful if the other countries of Europe could maintain the same disciplines that have been historically associated with the policies of the Bundesbank. The euro is a creation of Chancellor Kohl, and not the German people, and it is doubtful in our opinion that it will go forward. Under the Maastrict Treaty the euro can be postponed until the year 2002 if the German government acts before the end of 1997. If the euro is indeed postponed, the convergence of the various financial instruments, which has occurred over recent months will unwind. THE U.S. ECONOMY The U.S. economy grew at a 2.2% rate during the second quarter as measured by real gross domestic product. The first quarter was revised down to 4.9% from 5.9%. Nominal growth was slow at 3.6%, which compared to 7.4% during the first quarter. The primary reason for the slowdown was weak consumption (65% of the economy) which grew only 0.8% versus 5.3% during the first quarter. Capital spending remained strong however, with non-residential fixed investment rising 15.1% and producers durable equipment (technology) spending up 20.4%. Residential fixed investment advanced 5.6%. Exports of goods and services increased 14.1%, which compared to 9.9% in the first quarter. The trade deficit however, increased because of even stronger import growth of 21.8%. Federal government spending increased by 8.4%, primarily because of an upsurge in defense spending, which advanced by 10.3% after declines in the past two quarters. State and local spending was more restrained growing only 1.3%, which compared to 2.7% during the first quarter. Overall, the government sector increased by 3.8%. Inflation news was excellent with the implicit price deflator rising by only 1.4% compared to 2.496 in the first quarter. Inventory growth had little impact on the economy with non-farm inventories growing by $60.7 billion, which compared to growth of $58.3 billion during the first quarter. Inventory to sales ratios are at historically low levels in the $8.0 trillion U.S. economy. Our expectation is that the economy will grow at about a 2.596 rate over the next 18 months. Looking ahead, it will be important for financial markets if the economy accelerates from current levels and brings about a higher rate of inflation or conversely if the current slowdown results in a recession. At present the financial markets require steady growth in the 2.5-3.0% range with inflation preferably at 2.5% or under. As long as corporate managements remain vigilant in controlling costs and creating new products corporate profits can grow at 7-10% rates under such a scenario. Free global trade is also essential to maintain conditions which are necessary for global prosperity. Any tendencies toward protectionism via 2 santions, tariffs or competitive devaluations will represent a step away from prosperity. At present it is our belief that most countries are continuing to deregulate and embrace free market principles. THE U.S. BOND MARKET Since April when long-term Treasury bonds yielded about 7.15%, bonds have been in an uptrend and now yield approximately 6.30%. During this time -frame the combination of low inflation reports, good Federal budgetary news, declining concerns regarding the possibility of a Federal Reserve interest rate increase, and a declining supply of bonds have helped propel the bond market upward. The bond bears leaning heavily on Phillip's Curve theory and resultant inflation have been kept at bay. Looking ahead however, the budget agreement did not address entitlement reform, which could become a problem for the Federal government budget when the baby -boomers age. On a near-term basis, some bond analysts may renew the Phillip's Curve worries if the economy picks up after Labor Day and either commodity prices or labor costs increase. The recent employment cost index for the second quarter advanced 0.8% with wage and salary costs up 0.8% and benefits rising by 0.6%. For the twelve month period ending June 1997, the employment cost index rose 2.8% with wages and salaries advancing 3.2% and benefits by 2.0%. The data was in line with consensus views. We remain optimistic with regard to the outlook for bonds. We believe that yields on long-term Treasury bonds can fall to the 6.00% level during the 1997-8 period. We do think however, that bonds are primarily income vehicles at current levels and should be viewed in a trading range context of 6.00-7.2596 over the next 18 months. At present, we believe it is appropriate to invest 35.0% of a balanced account in bonds with a duration of 5.2 years. Our inflation forecast of 2.5% over the next 18 months provides a real yield of 3.8%, which provides good value in a historical context. THE U.S. STOCK MARKET During July the stock market continued its advance rising approximately 7.8% as measured by the Standard and Poors 500 Stock Index (S&P 500). While the stock market has broadened out into some of the mid- sized and smaller capitalization issues, the leadership has remained with the large -capitalization blue-chip companies, which are represented in the major indices. For the year-to-date through July, the stock market has advanced by about 28.0% as measured by the S&P 500. This remarkable performance follows two good years in 1995 and 1996 when the S&P 500 increased by 34.1% and 20.3% respectively excluding dividends. What is the investor to conclude regarding the exceptional stock market gains since the end of 1994? There are two primary schools of thought regarding the behavior of the stock market. One school (the pessimists) believe chat investors are in the midst, if not the end, of a major financial speculation not unlike what happened in the United States in the late 1920s and early 1970s and in Japan in the late 1980s. All of these periods ended in stock market crashes followed by severe economic hardship. The pessimists cite excessive valuations and the wide media attention given to the daily fluctuations of the stock market to an audience of about 75 million U.S. investors. The other school (the optimists) believe in a new paradigm, which includes a structurally healthy economy with low unemployment, intelligent monetary policy, which has reduced inflation to 2.0%, a technological revolution, which has lowered business costs, and a world that has embraced capitalism after the fall of communism. The optimists can justify the high valuations based on 3 low inflation, strong earnings trends, and the belief in a long economic cycle combined with low interest rates. One can add that the past periods of financial speculation in the U.S. and Japan were accompanied by known structural economic weaknesses at the time, which were ignored by investors. With the possible exception of the widespread use of derivatives for trading purposes, it would not appear that there are significant problems in the U.S. economy or the financial markets today. While we tend to side with the optimists, we recognize that the stocks of a number of the top -tier companies are becoming over -valued, perhaps because of momentum investing and the popularity of indexing. Therefore, we believe that a policy of portfolio rotation into more reasonably valued stocks is appropriate. This is a constant effort performed by our fund managers with the help of our research analysts. Secondly, in our balanced accounts we have significant exposure to bonds. We are also maintaining our 10.0% cash reserve in both balanced and all -equity accounts. Finally, when appropriate we will make sector changes by industry, or move money into international markets if they appear under -valued in relation to the U.S. At present our mix of investments in a balanced account is 55% stocks, 35% bonds, and 10% cash. In all -equity accounts, our mix is 90% stocks and 10% cash. INTERNATIONAL COMMENTARY July has been a very strong month for many international equity markets. Bond indices for the major country markets are also ahead in local currencies but to a more modest degree. For dollar -based investors, gains have been somewhat muted due to dollar appreciation. International equities on average are still posting good gains in dollar terms. International bond averages however, are off modestly on the same basis. In equities, these recent gains add to the already substantial gains posted in the first half of the year. European and Latin America markets are ahead 30%-40% on average for the year-to-date in local currencies. On a similar basis, bond averages are ahead 4%-5% but returns are negative for dollar- based investors. For many equity markets, the returns this year are quite remarkable and have, we believe, more to do with massive global liquidity flows than with economic fundamentals. Investor preference has been for equities over the past several years rather than for hard assets and bond alternatives. Low inflation in many countries has brought nominal interest rates down to levels investors believe to be unattractive, while tight fiscal policies, particularly in Europe, have kept global growth at sub par levels for much of this decade. At today's valuation levels it is difficult to justify increased equity holdings. However, the current economic environment could lead to lower inflation and further declines in interest rates. This would drive financial markets higher unless investors became concerned about the level of corporate earnings possible in such an environment. As we noted above, international markets on average are showing excellent gains year-to-date. Latin American and European equities have shown particular strength while performance in Asian markets is more mixed depending on country circumstances. Within Europe, equities in the Netherlands, Germany, and Switzerland are showing the greatest gains of 45% or more. The British market, up 18%, is looked on as a laggard index. In most years, an equity return of 1896 would be considered quite acceptable. We believe the driving forces behind equity markets in Continental Europe are low interest rates and ongoing liquidity flows. Investors are showing a strong preference for equities as current returns on fixed- income investments are significantly below the fixed rates established in past decades. Moreover, global 4 1 1 1 1 1 q 1 1 1 1 1 liquidity is currently so strong that investors are ignoring established valuation parameters and are rerating stocks above their economic potential. As we expect modest growth at best for Continental Europe, we do not look for higher interest rates for some time to come. Such a scenario could support equity markets throughout the summer. Japanese equities continue to trade in a narrow range, particularly versus other major markets. On a year-to- date basis, equities are ahead approximately 5% in local currencies and about 3% for dollar -based investors. Given the strong liquidity trends mentioned above, investors should question their perception of the Japanese market, particularly since support for that market has primarily come from international investors rather than domestic managers. We believe international investors view the Japanese market as a trading vehicle in which they must participate because of pressures for relative performance gains. Economic fundamentals are quite secondary for such investors. We believe domestic managers are more concerned about Japan's economic problems and view other financial markets as more attractive. In past commentaries, we have commented on our concerns with regard to the Japanese equity market. Little has changed to alleviate these worries. Current turmoil in Asian currency markets adds to these concerns. Japan is a very active trading partner with other Asian economies and will lose competitive position as these currencies devalue. Japanese banks, already significantly weakened by bad debt levels, are also major lenders to these economies. We believe these concerns will keep the Japanese equity market in its current trading range, which has existed for quite some time. Equities in the emerging markets that we follow continue to present a mixed picture with regard to current investment returns and also from an economic perspective. Investment returns in Asia continue to have a broad spectrum with Thailand down 20% year-to-date while equities in India are up over 30%. Markets in Asia are reacting to country -specific economic policies and also to the currency turmoil that has engulfed the region in recent weeks. Over the past decade, Asian economic growth has been extremely strong. But now because of industrial over -capacity, expanding trade deficits, and modest economic activity in some countries, growth in Asia has been muted to some degree. As fiscal and monetary policies in some Asian countries have not kept pace with this slowdown, speculators have moved against currencies they consider vulnerable. Countries with sound fiscal policies should withstand this turmoil. However, devaluations continue to make the world a more competitive place and earnings estimates could be subject to ongoing revisions. Currency devaluations in Asia cannot be viewed in isolation in a world where global trade has become such a significant factor. In recent weeks, equities in Latin America have been impacted by the Asian devaluations. Investors are concerned that Latin American currencies could also be subject to a speculative assault by traders. Brazil in particular is subject to these concerns. However, Brazil has very sizeable foreign reserves and a government strongly committed to its currency. Also, the economies of Latin America are continuing to enjoy accelerated production levels and improving employment levels. There has been some profit-taking in these equity markets. However, with regard to relative valuations these markets remain attractive. As we stated earlier, international bond markets are ahead 496-5% on average in local currencies for the year- to-date. Such returns in a world where inflation is subdued are quite normal. Given our positive view with regard to inflation, we would expect little change in these markets in coming months. Also, our view that international economies will only show modest growth this year suggests interest rates will generally remain 5 stable in coming months. Further declines in inflationary pressures could make bond indices more attractive to investors. Governments in Europe have been quite passive in their response to the competitive devaluations now taking place in Continental Europe. For the countries involved, the devaluations can bring about a short-term improvement in a country's trade position. However, we do not believe such policies will improve global growth prospects. Rather, in a world economy as competitive as today's, such policies could, we believe, lead to less growth and perhaps deflation as countries seek market share gains rather than focusing on creating new employment opportunities and improving productivity levels. We realize that economic theory suggests that devaluations lead to inflationary pressures. However, because of industrial over -capacity on a global scale in many industries and a global work force with an enormous disparity in financial incentives, we believe that competitive devaluations will not lead to an improved economic climate on a global basis. 6 1 1 ji 1 MERRILL LYNCH ASSET MANAGEMENT rERFORMANCE DATA PRIVATE PORTFOLIO GROUP Il MLAM-PPG performance figures are total return and net of all management fees and commissions and assume reinvestment of dividends, merest and capital gains. Ill indices measure total return which includes, where applicable, reinvestnent of dividends, interest, and capita! gains before deduction of axes. Indices are unmanaged and do not involve management fees or conmuissions. LAM -PPG Domestic Composites Year Ended 12/31 L_ 4alanced' 'quit? tctive Core Fixed Income' Li ited Maturity Fixed Income' 11 eipal Bond` p ISocially Responsible Equity" Jocially Responsible Balanced' 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 Annualized - Total Return' 13.3 14.9 11.7 13.2 22.9 (1.7) 10.6 7.1 19.9 3.2 20.4 11.1 4.3 16.5 24.4 12.0 15.1 24.3 20.5 27.6 (0.2) 11.0 6.9 21.9 (2.2) 27.3 15.1 (0.9) 20.1 29.8 9.2 22.9 22.3 2.5 18.3 (4.3) 10.9 7.9 17.5 8.9 13.4 7.2 5.5 15.9 26.9 14.4 6.0 29.5 3.9 14.3 (2.0) 7.8 6.8 13.7 9.3 11.8 6.9 5.3 13.4 4.0 14.9 (4.7) 10.7 8.5 12.0 8.1 10.6 8.3 20.1 27.8 (1.3) 9.8 10.1 19.7 (3.6) 27.4 12.2 12.3 21.1 (1.9) 10.3 8.2 18.7 2.6 20.1 9.7 8.2 7.9 13.1 11.0 1 Domestic Comparative Indices I.S. Treasury Bills' alomon Bros. Broad' I. ehman Bros. Govt/Corp Index" tandard & Poor's 500" Balanced Index" errill Lynch Corp & Govt -5 Years) Index" 1.Lehman Bros. Muni Bond Index" ehman Bros. Intermediate IT ovt/Corp Bond Index" 1 5.5 6.2 4.3 3.3 3.9 6.4 8.5 8.9 6.8 6.4 6.7 8.4 11.0 9.2 12.7 3.6 18.5 (2.9) 9.9 7.6 16.0 9.1 14.4 8.0 2.6 15.5 22.3 14.9 8.3 31.5 2.9 19.2 (3.5) 11.0 7.6 16.1 8.3 14.2 7.6 2.3 15.6 21.3 15.0 8.0 31.1 23.0 37.5 1.3 10.1 7.6 30.4 (3.1) 31.6 16.6 5.3 18.6 31.7 6.3 22.6 21.5 13.3 28.0 (0.8) 10.0 7.6 23.2 3.0 23.0 12.3 4.0 17.1 27.0 10.6 15.5 26.5 4.6 13.0 (0.6) 7.1 6.9 13.0 9.7 11.6 6.4 5.0 4.4 17.5 (5.2) 12.3 8.8 12.1 7.3 10.8 10.2 4.0 15.3 (1.9) 8.8 7.2 14.6 9.2 12.7 6.7 7.2 11.7 11.5 16.8 14.3 7.6 8.5 8.4 • * Annualized total return expresses that compounded rate of total return which would have been earned in each of the pears from 1982 through 1996 (or shorter period as shown for the Limited Maturity Fixed Income, Municipal Bond. and both Socially Responsible Composites) if each year's rate of total return were identical. performance is not a guarantee of future results. The above information represents the performance of composites which do not necessarily represent the mance that any private account (or composite of such accounts) investing in the same securities nary have had during the period. To the extent an individual's hunt size is less than the average of the accounts in any composite shown, that individual's expenses may exceed those of the composite accounts. For a more complete description of the criteria used for the inclusion of the accounts and of the methodology used to calculate Equity, Active Core Fixed Income and Balanced performance returns. (not including annualized total returns) see the Deloitte & Touche examination, which is available upon request. See Footnotes on reverse side for a description of composites and indices. 1. 1 MERRILL LYNCH ASSET MANAGEMENT PRIVATE PORTFOLIO GROUP CLIENT SERVICE PROGRAM FOR U.S. EQUITY ACCOUNTS Merrill Lynch. Asset Management's Private Portfolio Group is dedicated to seeking to provide superior service to our: clients. We believe our separate account management approach, not only permits us to focus directly upon individual client objectives, but allows us maximum flexibility in both servicing individual client needs and adapting our program to meet the changing requirements of the client. This structured client communication program, complemented by more frequent informal contacts between the client and portfolio manager, is evidence of our commitment to individualized account management. The client's ability to contact the portfolio manager, who actually decides which investments are bought and sold, is a further demonstration of our belief in a personalized service for investors, all of whom have different objectives, expectations and concepts of risk. • On-going Portfolio Supervision: Our client's. portfolio manager is responsible for assessing investments held on a regular basis. Price, performance relative to the stock market averages, the security's reaction to corporate developments, volume of shares traded, changes in corporate dividend policies, and revisions in company eamings prospects, currency reactions to political and economic developments are only a few of the factors that must be noted and interpreted each day The results of these efforts may be a sell decision, a buy decision or a decision to stand firm. • Monthly Investment Policy Commentary: This document is mailed directly to the client and financial consultant. It is designed to inform the reader of our changing views of the capital markets. We attempt to correlate evolving domestic and international developments to emerging investment trends and explain how we intend to invest in light of these opportunities. • Quarterly Portfolio Review- In addition to informal telephone communication from time -to -time, the portfolio manager also prepares on a quarterly basis a written document in which we describe what actions we have taken. In this way, we formally communicate the investment process and the plan by which we hope to achieve previously established investment goals.