HomeMy WebLinkAbout1997-04-17 MinutesMINUTES OF A POLICE PENSION BOARD MEETING
A meeting of the Police Pension Board was held on April 17, 1997,
at 1:00 p.m., in room 326 of the City Administration Building,
113 West Mountain, Fayetteville, Arkansas.
Present: Eldon Roberts, Dr. James Mashburn, Jerry Friend, City
Clerk/Treasurer Traci Paul
Absent: Mayor Fred Hanna, Hollis Spencer, Randy Bradley
CALL TO ORDER
Roberts called the meeting to order with four members present.
MINUTES
Roberts noted there were minutes of four different meetings to
approve. Regarding page two of the October 17, 1996, minutes, he
questioned there being $600,000 in the cash account. As the
Board hardly ever keeps that much money in the cash account, he
wondered if something else was meant.
Ben Mayes explained there were two or three CDs that had matured.
The excess was transferred to other accounts.
Mashburn, seconded by Friend, moved to approve the minutes of all
four meetings. The motion passed unanimously.
Mayes further explained that as it had been October, property tax
and the State insurance turnback had further contributed to the
cash build up.
INVESTMENT REPORTS
Longer Investments
Elaine Longer, Longer Investments, reviewed the portfolio of
reports she'd distributed to the Board. She stated she was only
able to give an update for Longer Investments and Madison as she
had not received statements from the others. She asked if the
statements were set up to be mailed directly from the brokers.
Mayes replied a letter had been sent asking them to mail the
statements directly to her.
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April 17, 1997
Longer reviewed reports updated through February 28, 1997. The
first report was the combined portfolio. Equities as a
percentage total are 43.7%, 44.3% if you add in the Vanguard
small capitalization stock .fund. Corporate bonds are 11% of
total. Government bonds are about 33%, with government agency
being about 5%. The overall portfolio market value closed
February 28, 1997, at $8.64 million.
Mashburn asked if Longer was finding any redundancy, where all
three are investing in the same thing.
Longer replied it is quite diversified.
Longer reviewed Longer Investments through February 28, 1997.
She had separated off 65% of the total into a stock fund. When
that fund is totally invested, we can assume we are probably
bumping up to the 50% maximum. She has bonds in this account, as
that is purchasing power. Further reviewing the reports, she
stated equities were up about 6.3%, about 5.25°% with bonds mixed
in.
Mashburn asked for Longer's overall investment philosophy.
Longer responded that in her newsletter for this quarter she
tried to lay out what she thought would happen. The main problem
is that interest rate pressure has turned up again. Part has
been absorbed. The recent Consumer Price Index caused a bit of a
rally this week. The problem is the Federal Reserve could care
less what the CPI is. The Federal Reserve is looking at the
precursors to inflation.
Mashburn asked if she was holding cash or moving money now.
Longer replied she has plenty of cash reserves. She started
lightening up in March, when the two year treasury was up to
6.25% yield again. She started raising cash reserves and did not
disturb the core equity portfolio. They will prune stocks that
haven't performed well or that performed better than expected.
We are sitting comfortably now and will not go lighter so as not
to go under what she is supposed to be in terms of the policy.
They are waiting and watching at this point. She feels there
will be a better buying opportunity.
Longer next reviewed the bond account. It is basically 16%
corporate and the rest is government bonds. We lose the Philip
Morris corporate bond in December of this year.
Friend asked what she is doing with the Philip Morris stock.
Longer replied it was sold in March.
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April 17, 1997
Continuing with the review of the bond account, Longer stated the
return on the bonds through February 28 was .39%. When updated
through March 31, it was right at zero year to date because bond
prices decline as interest rates go up. At this point in time,
the interest income has offset the price decline. We have lots
of opportunity in the bond fund to roll forward and capture
higher yields when the buying opportunity is there.
Longer next reviewed the Dean Witter Madison bond account.
Through February 28, their return was .39% Through March 31,
they were down .45%. That is just the price change that took
place in March when the interest rates went up. They have more
corporate bonds, about 32%.
Longer did not discuss the Dean Witter money market report.
Longer reviewed the Morgan Keegan bond fund. Through February
28, it was up about 1%. They have about a half million. She did
not have an update on this.
Longer next reviewed the Flippin stock fund with Morgan Keegan.
It is about $772,000. 80% of that is invested in stock. The
first two months they were up about 4.78% on equities and 3.68%
total with the bonds added in.
The NWQ account is about 90% invested in stocks, 10% cash
reserves. Between the two, you are at about 85% in the two stock
funds. When you add in the money market and the bond fund, you'd
be at the 75% level. The return is 5.8% in equities, 5.38% with
cash net total.
Friend asked if the expenses were prepaid on the NWQ account.
Longer replied it was paid in November but was billed again this
year. A credit came back of about $500.
Kim Cooper, Longer Investments, added it was netted out as the
fee. The fee was reduced.
Longer could not say what the rate being charged is because there
have not been enough months to know what the frequency is. Once
we get a half year, she can calculate what the rate is.
Roberts had concerns about all these rates. He wanted Longer to
get copies of the contracts so she would know how this is being
done. This is one of the things the Board had in mind for her to
report on, that the fees are in line with the contracts.
Mashburn suggested the other investors could clarify this in
their reports.
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April 17, 1997
Longer again stated she could report on the numbers but could not
determine the frequency at this time, so could not determine the
rate.
Roberts assured her it would not put her in an awkward position,
as the Board would have City Attorney Rose follow up on it. He
reiterated that he would like Longer to have copies of the
contracts.
Mayes stated that the investors had been directed by letter to
give Longer copies of the monthly statements and any other
information requested.
Mashburn complimented Longer on the clarity of the report with
its color coding. He suggested using a color for the report on
the total combined accounts, too.
Longer reviewed the reports as of March 31 and commented on the
newsletter. The newsletter profiles the interest rate
environment and the interaction between stocks and interest rates
and what steps she takes to position when the market enters into
a corrective mode. Market correction is the one time you have
good buying opportunity, if you act in advance and raise the
reserves. The earnings outlook is good. It is dependent on the
interest rates and what happens with the next Federal Reserve
meeting.
Dean Witter
Jim Wood, Dean Witter, announced that Dean Witter and Morgan
Stanley are merging, which should be completed May 15.
Statistically, it makes them the biggest firm in the world.
Board members were given copies of all Wood's material.
Wood began his report by commenting on a paragraph of the cover
letter regardingrate increases. He stated this portfolio has
short maturities, so while there might be a minor amount of short
term fluctuation in the value, you can hang on to them. We are
not speculating on interest rates in any way.
Wood next went over the quarterly report booklet. In the review
section, he called attention to the chart reflecting Greenspan's
interest rate decisions. This report shows performance is down
.37%, maturity is less than 5%, and the yield is high, the
highest quality out there. Regarding historical returns, he
would be surprised if 1997 comes in like 1994, the only negative
year.
Wood reviewed the outlook section of the report.
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April 17, 1997
Wood reviewed the appendix portion of
what the Board owns. Corporate bonds
the rest is treasury notes. The last
good environment.
the booklet which shows
are a lighter portfolio;
three months have been a
On the cost side, the Board paid a fee to Madison each quarter.
For the fourth quarter, it was $2,166
Mashburn asked if the quarter was October, November, and December
and if another charge was taken out for January, February and
March.
Wood replied the fourth quarter was October, November, and
December. He has not received another payment from Madison.
Madison notifies him in writing, which is the procedure. The fee
to the adviser is quarterly, about one half of one percent.
There is also a transaction cost whenever anything is done that
is rarely done. For the last 12 months, the transaction costs on
this have been about $1,400, not very much for $1.6 million. The
$1,400 is the amount of commissions paid to Dean Witter in the
last 12 months.
Roberts explained that
are paying Dean Witter
paying one of them and
he is being paid.
the Board has asked several times if they
and then Madison, too, or are they just
they divide the money. He asked Wood how
Wood replied it is not set up as a wrap account. The Board does
not want to wrap it, as there is not enough in there. With a
wrap account, you pay a fee every quarter regardless of what
happens. It does not make sense for this kind of account. The
way this one works is he will get a request in writing from
Madison about the last week of this month asking Dean Witter to
pay for the last three months. It will be based upon the account
value at the end of March. That is what Madison's fee is. When
Dean Witter gets anything, that is when they do a trade. There
might be one trade done every three months, not much.
Wood cautioned the Board that they need some depth in managing
the fund. Because of his company's size, there are lots of
people at Dean Witter who can back him up. This should be true
of all the key people involved. For now, the name of the new
company is Morgan Stanley Dean Witter Discover.
Roberts informed Wood that the Board would like Longer put on the
mailing list and that they would like Longer to receive a copy of
the contract the Board signed with Dean Witter.
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April 17, 1997
Wood stated he had a contract dated in 1990 that says it can be
terminated by either party at any time and the Board just pays
for the amount of time the money is managed, paid in advance
based on the previous quarter's values. If something happens
during that quarter and it is terminated or added to, it is
prorated.
Roberts complimented Wood on the clarity of his report and
presentation.
Wood stated he might at some point ask to bring in a firm that is
a short term fixed income manager. The Board might bump this up
by 1% without taking any more risk.
Mayes stated that Dean Witter's contract used to be a wrap fee,
when everything was with Dean Witter. Over time, the Board has
given a piece to Longer, so the contract with Dean Witter may
need to be looked at again.
Roberts stated the Board should see a copy of the contract.
He asked Paul to ask Longer to forward a copy when she gets it.
• Dick Wilson, of
of his firm and
included in the
•
Morgan Keegan
Flippin, Bruce & Porter, reviewed the background
its investment philosophy. This information is
report he provided the Board.
In response to a question from Mashburn, Wilson stated Flippin
likes stocks that pay dividends. They do not have a rule of
thumb regarding the percentage. Normally, when they buy a
company that is out of favor, its stock prices come down and
chances are they haven't cut the dividend. So usually on a
percentage basis, the dividend is fairly high when the stock is
bought. In the past three to four years, dividend yield on
stocks has not been great. Many companies have elected to buy in
shares, as opposed to paying out dividends. His company feels
this is a very favorable approach for stockholders as they get a
larger piece of the pie if there are fewer shares out there.
Mike Kirkland, Morgan Keegan, explained the performance numbers
report, copies of which were given to the Board.
Mashburn asked if there was a basic portfolio or if this report
was strictly what was invested for the police department.
Wilson replied they have the same stocks in all their portfolios.
It is the Board's own account. The stocks and bonds are owned
directly by the plan. The only thing that varies is when they
have the money to fund the account, they look at their list,
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April 17, 1997
roughly 40 stocks, and begin buying those stocks into the
portfolio, except those they are getting ready to sell. The
Board is buying this firm for its future ideas. They hold stocks
four or five years. In this period, the Board would see a full
cycle.
The Board was given copies of all the following material that
Kirkland reviewed.
Kirkland reviewed the December, 1996, statement of the bond
portfolio he is running for the Board. This is pulled out of
NWQ. The value as of Dec. 31, 1996, was $492,375.0. There is
very little cash as there is no reason to keep cash in this
account now. There is $1,984 cash.
Kirkland reviewed the March statement. At that time there was
about $7,000 in cash. Market value at the end of March was
$494,000.
Kirkland explained the presence of municipal bonds in the
portfolio. They are taxable municipal bonds. We got a great
rate on them. They are paying 7.65% with yield at maturity
almost 7% each. They mature in 2001 and are AAA rated.
Kirkland reported he was able to sell U.S. treasury notes at a
small profit. It had a current yield of about 5.5% and he bought
a two year CD yielding about 6.35%.
Kirkland next shared an article from Business Week regarding
their guru, Donald Ratajczak, and his view of the next few
months.
Kirkland reviewed the fourth quarter report on the two managers,
Flippin and NWQ. Flippin showed a market value at the end of the
year of $746,312. They were holding 25% in cash, but not now.
Total portfolio was down 1.7%, S&P down 2.0%. $50,000 was added
in cash. NWQ was valued $747,515 at the end of the year.
Overall portfolio for the month down 2.1%. NWQ had only 5.9% in
cash. It is pretty much fully invested all the time.
Kirkland stated he had looked at Longer's accounts and these two
and found seven stock overlaps. There is not much overlap.
Kirkland reviewed Flippin's 1997 first quarter report. The value
was $756,345. The overall portfolio was up 1.3%. For the latest
month it was down 2.3%. Overall market was down 4.1%. They had
20% in cash, which they will be spending in the next couple of
weeks.
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April 17, 1997
Kirkland reviewed NWQ ending March 31, 1997. Portfolio value was
$762,582. It was up 2%. Overall market was up 2.7%. The latest
month was down 3.3%; overall market was down 4.1%
Kirkland stated both of these managers are somewhat value
oriented. We need to let them do their thing for a while and see
how they do. Both are considered large cap value managers.
Kirkland reviewed the comparative performance analysis report.
This is the report the Board asked Longer for and paid for.
Morgan Keegan is doing this for free. They went to the trouble
of getting 39 statements from Longer Investments and Madison to
compile this information. He stated the overall number on page 1
does not include the bond account at Morgan Keegan nor the cash
account at Dean Witter.
Mashburn commented that next time the Board would like to see the
whole ball of wax.
Kirkland stated when you add the Morgan Keegan bond account to
that, it puts the fixed income portion up to $4.228 million,
almost 51% of the portfolio.
Regarding page two of the report, Kirkland explained the term
"time weighted." It is the performance of the manager. "Dollar
weighted" is the performance of the fund. The total fund for the
latest one year period ending March 31, 1997, not including the
bond part, is up 7.88%. Latest three years is up 7.48%.
Kirkland briefly reviewed the Longer, Madison, Flippin and NWQ
portions of the report and remaining charts.
Regarding fees, Kirkland stated Dean Witter's fee was 1.75%.
Currently Morgan Keegan's fee is 1.7%. That is all inclusive.
It is what they call a wrap fee. It is 1.7% per year and would
go down if they had more money under management. He noted he had
credited $671 back to the Flippin account as they'd charged too
much in the first management fee and $673 to NWQ.
In response to a question from Mayes, Kirkland stated the 1.7%
wrap fee was just for NWQ and Flippin. This is done quarterly in
advance.
Commenting on the minutes, Kirkland stated Madison is only being
paid one half of one percent. The commission Dean Witter gets
from Madison is just from the bonds they purchase or sell and is
not a lot above that one half of one percent.
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April 17, 1997
Kirkland reviewed a diversification reduces risk chart that
showed why there should be international exposure. Historically,
this has increased return and decreased volatility. He did not
think it was imprudent to have 5% of the portfolio in
international exposures. He recommended INVESCO, a large cap
value international manager.
Kirkland asked the Board to consider closing both Dean Witter
accounts. He had developed those accounts with the Board.
Morgan Keegan can consolidate the cash account into its cash
account with the same check writing privilege. Madison is an
account he'd brought to the Board and he would like to have it
back. It is a matter of consolidation and being able to get back
what he initially had. Nothing would change.
Kirkland stated the Board could save $17,600 in fees by moving
Longer's ladders portfolio to him and let him continue to ladder
that. There are numerous ways to add value on the laddering if
we brought that money over. We would not do anything with the
fixed income, just let it mature. The Board would save seventeen
to eighteen thousand dollars on fees for it to just sit there and
mature. Morgan Keegan has one of the best fixed income research
departments around. He thought they could add value without
charging an ongoing fee as they mature.
Kirkland asked the Board to consider three things: He would like
to have the Dean Witter business back; he would like the Board to
consider an international manager, INVESCO; he would like to move
Longer's bond account to him to reduce the fixed income fee and
add value by trying to find enhanced yield without charging an
ongoing management fee.
In response to a question from Mayes regarding Madison, Kirkland
was saying move it over as it is. They would call his bond desk
to do trades as opposed to calling Dean Witter's. As the Board's
consultant, he will continue to monitor all of them.
Roberts informed Kirkland that a letter had been sent instructing
him to place Longer on his mailing list to receive all the
information the Board does. He also requested that Kirkland send
Longer copies of any contracts the Board has signed regarding
fees and all other stipulations.
Kirkland asked when he could expect an answer to the three things
he'd asked the Board to consider.
Roberts replied the next scheduled meeting is in July. They
might discuss it at that time but may not take action.
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April 17, 1997
OLD BUSINESS
There was no old business.
NEW BUSINESS
Funeral Benefit - R.D. Arnold
Roberts announced that R. D. Arnold, retired Fayetteville police
officer currently drawing monthly benefits, passed away. He
asked Paul to be sure Arnold's widow received the $200 funeral
benefit and was informed who to contact to make any changes
regarding taxes.
Benefit Increase
Roberts asked Mayes to try to review the only information
received from Little Rock on the denying of the benefit increase
and if possible use the same method of evaluation to give the
Board a rough idea whether or not the Board could now grant
benefit increases.
Mayes responded that he had looked at this quickly when informed
the Board might be interested in this. The Board had an
• evaluation of assets of $7,187,000 at the end of 1995. This time
they will use $8,088,000. He cannot do all their calculations,
but if the actuarially computed liability were the same today as
it was then, the Board would have been at 80.3% and had to be at
a minimum of 86%. Based on this value, the Board would be at
90%, so would qualify. The unknown is what happened to the
actuarial evaluation.
•
Mashburn asked if they were liable to give an evaluation every
two years.
Roberts clarified that a benefit increase study is different from
an actuarial evaluation and they would have to pay for it.
Mayes stated the actuarial evaluation would be done at the end of
1997 and received in June or July of 1998. Regarding the benefit
increase, he thought they were real close. He reminded the Board
that every year, they are supposed to be 5% more actuarilly
sound, until they get to 2003 and 100%.
Minutes
Friend asked that the minutes read, "The Board heard a report
from Elaine Longer" and not have the actual report taped.
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April 17, 1997
Discussion ensued regarding the importance of having a taped
record of the meeting and having some details of the investment
reports written in the minutes.
ADJOURNMENT
Friend moved to adjourn. Mashburn seconded. The motion passed
unanimously.
The meeting was adjourned at 3:56 p.m.
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