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HomeMy WebLinkAbout1996-07-25 Minutes• • A meeting 1:30 p.m. Mountain, PRESENT: ABSENT: • f 5 MINUTES OF A POLICE PENSION BOARD MEETING of the Police Pension Board was held on July 25, 1996 at in room 326 of the City Administration Building, 113 West Fayetteville, Arkansas. Mayor Fred Hanna, Eldon Roberts, Jerry Friend, Dr. James Mashburn, Randy Bradley, and City Clerk/Treasurer Traci Paul Hollis Spencer CALL TO ORDER The meeting was called to order by Mayor Hanna. MINUTES Mashburn moved to accept the minutes of the April 18 regular meeting and the minutes of the June 12 special meeting. Roberts seconded. The motion passed unanimously. OLD BUSINESS Report on the Proposed Benefit Increase The Board reviewed a letter from Cathyrn Hinshaw which was distributed with the agenda. The letter explained the reasons for the denial of the benefit increase requested by the Board in February 1996. Roberts stated the request for an increase to 53% of salary was not that far off. The Board discussed briefly the Police Pension Plan as compared to the Fire Pension Plan. It was determined that the Fire Pension Plan has always had more money than the Police Pension Plan. NEW BUSINESS Internal Revenue Service Tax Deposit Requirements In answer to a question from Bradley regarding a memo that was sent to the Board, Administrative Services Director Ben Mayes stated the Board made payments quarterly in the past. Now the Board is required to make a monthly wire transfer. The transfer must be made through a financial institution. In response to concerns about the Fire and Police Pensions operating under a single Federal identification number, Mayes explained the records kept by the City are clear. 1 • • • INVESTMENT REPORTS July 25, 1996 Longer Investments Elaine Longer, Longer Investments, distributed the portfolio appraisal and other reports. Elaine Longer reviewed action taken in the portfolio during the first six months of the year. She stated she started ducking around the end of May. In the first quarter, the interest rate environment turned more hostile. Individual stocks started deterierating in the first part of June. The earnings release season is not as strong as prior quarters have been. She explained she is being conservative and is happy to be earning 6.25% for now. Longer stated things are looking good this month because the market caught up to where we are. The market is down 6.5% month -to -date and as of yesterday's close the Russell 2000 and the NASDAQ were down about 12% month to date. Longer discussed the status of the market. Longer stated in the combined portfolio,stocks as a total percent are about 33%. The portfolio value is right at $4 million. The yield on the total portfolio is 5% on market value and 5.4% on book value. We have been able to take advantage of what we have in the interest rate environment to increase the income yield on the portfolio. Longer stated in the stock portfolio, 50% of the portfolio is invested in stocks and the rest is in treasuries. We have flexibility to increase allocation to the equity market. The bond portfolio has a high income yeild at about 6.8% on market value. Longer stated the blue chip names are still included in the largest holdings. Friend asked if Philip Morris would be affected by the lawsuits against ciggarett companies. Longer stated it did affect Philip Morris in the first quarter. They sold the stock off. Longer explained that the stock went down during some class action litigation in Florida. Then an appeals court disallowed class action status and the stock came back up. The class action status was a big scare factor. 2 • • July 25, 1996' • Longer stated nothing much has changed in the portfolio parameters except the percent of equity exposure. Last time small cap. stocks represented 27% of equities. They are down to 8%. The blue chip stocks are now 69% of equities. They were 40% before. Realized gains through June 30 are $124,603. Longer stated this is one of those years you just struggle to keep everything from going negative. Equities are up about 2%. Fixed income, which is a bond portfolio, is at -0.9. The treasury index is down 1.8% year-to-date through June 30. The average annual returns are 10.6% in equities and 8.1% compounded annually overall. Longer stated fixed income securities have a 6.8% yield on book value. Total portfolio is about 5.4%. Weighted average maurity is right at 4 years. Fixed income secureities maturing in three years or less make up 34.2% of the portfolio. The weighted average duration is 3.2. Mashburn pointed out that the report is through June 30. Mashburn expressed concern about the status of the portfolio after the first three weeks of July. - Longer explained she looked at the portfolio yesterday. She stated we are holding constant. The market averages are coming back to where we are year-to-date. The stock portfolio which is 50% stocks and 50% bonds is down about 2%. The whole account is off less that 1%. The Board briefly discussed the status of several stocks managed by Longer. Presentation by Jim Wood, Dean Witter Jim Wood, Dean Witter, thanked the Board for using Dean Witter. Wood reminded the Board that Dean Witter is one of the most consistantly profitable and conservative firms. Wood gave an economic overview from TCW. Wood stated inflation is one of the most important things that affects investment performance. Inflation is running about 3%. The long bond is about 7% so you have a real rate of return with 30 year governments minus inflation. Wood stated TCW sees good oportunities in U.S. based companies in the export business. Our economy is growing at around 2.5% but the export business is growing at around 10%. The technology area is another area of great opportunity. 3 • • • July 25, 1996 Wood stated everything the Board has with Dean Witter is conservatively managed. In the past when there has been some uncertainty and the market was down, the account has gone up after the uncertain period was over. Wood reminded the Board that 60% of their portfolio with Dean Witter is in TCW. Wood reviewed the Industrties Matrix as of May 31, 1996 and a list of the largest holdings as of June 30, 1996. Wood stated the other 40% of the portfolio is the fixed income account. At the end of June, this account was worth $1,891,774. For the quarter, it was up 2.4%, year-to-date it is up 4.9%. This time it was 63.8% stocks, 30.5% bonds, and 5.7% cash. Mayor Hanna asked what the Board's total holdings in Dean Witter were. Bradley stated as of June 30, TCW is worth $1,891,000. Bradley asked about an ajustment for the last few weeks. Wood stated it is probably about 2.5% less than the $1,891,000. Wood discussed the status of the account with Madison. He stated the market value of this account as of June 30 was $1,661,939. Madison's number one goal is capital preservation. On June 30, $461,000 of the account was in corporate bonds. The amount in treasury notes was $914,000. The Board has put $1,040,000 in Madision and it is worth $1,661,000. For the first six months of the year, this account is down .71%. Wood stated the average annual rate of return should be around 7.5% to 8.5% since they have been managing the account. Administrative Services Director Ben Mayes stated we diversify between stocks and bonds and treasury notes. Mayes asked if the fund needs diversification between money managers. Wood stated you do need diversification between money mangers. From a trust committee point of view, it is wise to diversify. Mayor Hanna stated Mike Kirkland has requested that we continue to let him manage the Board's money at his new firm. The Board will need to make the decision. In answer to a question from Bradley, Wood stated he has been with Dean Witter since April of 1990. Wood left the meeting. 4 • • July 25, 1996 Mayor Hanna stated Dean Witter has about $3,835,000 and Elaine Longer has about $3,998,000. We gave Elaine about $150,000 a few months ago. Mashburn stated the Board needs to have a manager that can attend the meetings and explain things. Mashburn pointed out that Wood's report style was similar to Mike's report style. Mayor Hanna stated Dean Witter uses Madison and TCW to do all the managing. Elaine Longer does all the managing herself. Dean Witter just reports on how Madision and TCW are doing. Mashburn expressed his appreciation for Elaine Longer's presentations. Mayor Hanna stated the Board could have the tendancy to give all the money to Elaine Longer. She can explain it but she is not infallible either. It might not be a good idea to put all of the Board's eggs in one basket. Presentation by Mike Kirkland, Morgan Keegan Mike Kirkland thanked the Board for allowing him to present his case. Kirkland introduced Bob Glenn, President of Morgan Assett Management. He is the head of the money management division at Morgan Keegan. Kikland stated he and Mr. Glenn wanted to give the Board a chance to see what Morgan Keegan has to offer. Bob Glenn stated Morgan Keegan is a regional brokerage firm. It was started in Memphis, Tennessee and has been in business for 27 years . It is one of the most well capitalized regional brokerage firms in the south. Morgan Keegan has grown its business very carefully. There was a market for a firm specializing on firms in the south. The intent of Morgan Keegan is to be the preiminate firm in the Southern United States. There are 36 offices in 13 states in the south. The two offices in Arkansas are in Little Rock and Rogers. Morgan Keegan consultants are chosen with care. Mogan Keegan is about service. In discussing the Investment Management Consulting Services Group at Morgan Keegan, Glenn stated a consultant would review your current investment policy and put together a historical review of the total fund performance. The historical review would be used in quarterly presentations. Glenn stated there is lots of experience represented in the staff of Morgan Keegan. 5 • • • July 25, 1996 Kirkland stated there is an item in the investment policy that we would want to review. It is the paragraph that talks about U.S. firms being affiliated with companies in South Africa. If it is still enforced by Arkansas law than it should be left in the policy. If not, it would need to be reviewed. Glenn stated we will review your investment policy over the next few weeks. If Morgan Keegan is retained to continue to work with you, at the next meeting we would review the policy and make recommendations as to potential changes. Glenn reviewed a chart showing what various assett mixes have provided in the past. Glenn stated this type of analysis is done for Morgan Keegan clients. Glenn stated Morgan Keegan does not sell investment management. We do not sell managers. Consultants are not compensated by any of the managers. Our data base was created by going through and screening managers that were out there and available and who we felt represented the characterists Morgan Keegan desires. We have an analyst whos job it is to go out and visit managers in their shop. Glenn stated we have identified NWQ as a firm that the Board might want to consider to manage some of your assetts. Kirkland explained he has been familiar with NWQ for over 10 years. Kirkland stated they have been around since 1982. They are involved with a list of companies that the Board should be familiar with. This management company has large cap stocks and has a great track record. It is achieving goals that I think the Board would like to achieve. A large cap manager's balance is going to be in the 600 - 40o range. • Glenn stated NWQ is a value manager. A value manager looks for slow steady growers. They typically pay a dividend. They look at the economy and general economic conditions. Glenn stated data is available from Morgan Keegan on lots of different managers. Glenn reviewed charts showing that NWQ's performance has been better than TCW's over the past three years. A five year comparison was also discussed. Glenn explained that one of the services available to the Board would be a comprehensive performance review on the Police Pension Fund. Glenn stated in general, our mission is to work with your group on investement matters relating to your fund. Glenn reviewed several charts and reports as an example of the tupes of reports 6 July 25, 1996 that would be available to the Board. Kirkland stated the three accounts are still at Dean Witter. If the Board choses to continue the relationship, the cash account would stay just the same. The Madision account would also stay the same. TCW is the account in question. If we are retained, we would provide the types of reports to you that you have seen today and we would look at the investment policy. In answer to a question from Roberts, Kirkland stated we could show a comparision of all the managers the Board is using on one graph. The Board could direct the other manager to provide us with a monthly statement it could be documented as a service to the Board. Roberts stated the fees remain the same. Kirkland stated yes. There is no chance of them going up. Mayes asked how would a transfer from TCW to NWQ be handled. Kirkland stated the first thing would be to tell TCW and Dean Witter to cease trading. We would set up accounts with Morgan Keegan. The Board would sign transfer forms. The accounts would come over to Morgan Keegan just as they are. TCW money would come into the NWQ account and the transaction would begin. There are no taxes, commissions, or fees involved in transactions. In answer to a question from Roberts, Kirkland stated in the perferred manager program, MWQ's minimum investment is $100,000. Mike Kirkland and Bob Glenn left the meeting. Mayor asked if the Board wanted some time to think about its options. Roberts stated yes. Mashburn stated he would like to get more information on MWQ. Friend expressed his feelings that enough information was given. Mayor Hanna suggested Mashburn contact Mike directly and tell him what he wants. Bradley expressed his desire to make more money. He asked if the Board should consider investing money differently than what is currently being done. Roberts stated it would be good to revisit the investment guidlines because they are old. 7 July 25, 1996 Mayes stated they were discussed in 1990 or 1991. The percentages wer not changed at that time. The Board discussed the need to increase the amount of money in the Police Pension fund and briefly discussed some changes that could be made to achieve an increase. Mayes reminded the Board that the investment policy states that cash can be from 10% to 25% of the fund, fixed income can be from 15% to 75%, and equities can be between 20% and 40%. Mayes stated we capped the equity at 40 because we were trying to make sure we got at least a 6% increase. Equities are currently at 29%. Fixed Income is at 56%. The Board might consider bumping equity up to 50%. In response to a concern of the Board, Mayes stated he would check with the City Attorney on the South Africa question. Mayor Hanna asked if .the Board wanted to wait until the next meeting to take action. In answer to a question from Friend, Paul stated the next meeting will be the third Thursday in October. Friend suggested the Board have a special meeting after the insurance turnback check comes in. Mashburn suggested that each member review the investment policy before the next meeting. Paul asked if the reports submitted by Mike through Morgan Keegan were easier for the Board to understand. Paul stated she understood them better. The Board agreed that they were better than reports given to the Board in the past. The meeting adjourned at 4:05 p.m.