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HomeMy WebLinkAbout1997-07-17 Minutes• MINUTES OF A POLICE PENSION BOARD MEETING A meeting of the Police Pension Board was held on July 17, 1997, at 1:00 p.m., in room 326 of the City Administration Building, 113 West Mountain, Fayetteville, Arkansas. PRESENT: Mayor Fred Hanna, Randy Bradley, Hollis Spencer, Eldon Roberts, Jerry Friend, and Deputy City Clerk Jane Heth. ABSENT: Dr. James Mashburn CALL TO ORDER • Mayor Hanna called the meeting to order with four members present. MINUTES Friend, seconded by Roberts, moved to approve the minutes. The motion passed unanimously. OLD BUSINESS Mike Kirkland's Requests • Roberts noted the three requests made by Mike Kirkland could be found on page 9 of the • minutes. Bradley read these requests from the minutes: Kirkland 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. Friend, seconded by Roberts, moved to vote no on all three requests. The motion passed unanimously. NEW BUSINESS As Elaine Longer was not yet present, it was decided to move forward with New Business. Funereal Benefit Roberts stated he believed this benefit has been paid for Earl Lorch. It needs to be formalized. Roberts, seconded by Bradley, moved that the death benefit of $200 for Earl Lorch be appropriated. The motion passed unanimously. 1 July 17, 1997 Appointment of Active Board Member Roberts reported there was a letter attached to the agenda stating a meeting with the Police Department had been held and nine of the thirteen members eligible to vote were there. At that meeting, following parliamentary procedures, he was reelected for two years. Bradley, seconded by Friend, moved that the nomination by the active members be accepted. The motion passed unanimously. Appointment of Retired Board Member Mayor Hanna asked if there were any nominations other than that of Randy Bradley, which was made by the retired members. Friend, seconded by Roberts, moved to accept Randy Bradley. The motion passed unanimously. Appointment of the Physician Board Member It was discussed that Dr. Mashburn was the only one who had applied. Mayor Hanna asked for a motion. Roberts, seconded by Bradley, moved to nominate Dr. Mashburn. The motion passed unanimously. Benefit Increase Bradley stated he would like to put in for another increase of the retired benefits of 5% and if that doesn't work to try for 3%. Ben Mayes, Administrative Services Director, stated some people have passed away and there are new retirements. The actuarial side of the calculations would have to be redone. A formal request would have to be made. Roberts reminded the Board of the stipulations in the last request, that spouses and those drawing over 100% were to be excluded. Bradley, seconded by Spencer, moved to word the request for a increase in benefits just like last time. The motion passed unanimously. 2 July 17, 1997 Longer to Oversee Reports Friend stated that at the last meeting he was disturbed and frustrated over the financial reports. Since then, he visited with Elaine Longer and asked her if there was another person, independent like her, who the Board could look at She did recommend someone. Technically, the others are overseeing where we have our money invested, people like Longer. Yet the Board has so much confidence m her that they have asked her to oversee the overseers. Friend moved to look into talking to an independent person, getting rid of the overseers who are not doing anything for the Board. Roberts stated Longer had said Dean Witter and Morgan Keegan would say their expertise was needed to find managers. He pointed out the Board had found Longer on its own. These people are salesmen benefiting from a captive audience. We have not accomplished what we meant to do when we put Longer in charge of overseeing all this. We have to listen to all these people again, and it is time consuming. Friend added that Longer had said she could do this but it might look bad to some people, which was why she recommended someone else. • Bradley asked if Friend was proposing to cut Dean Witter, Morgan Keegan, and Longer and go to this person, or just the portion'not with Longer. • Friend agreed it would be just the portion not with Longer. The Madison account has done well. Longer had said there was no reason to lose it, just move it and put it back in Madison on our own. She has also explained how she makes money on buying and selling. Roberts stated it makes sense to save money and not pay fees for something the Board can do itself. These long meetings with different salesmen coming in can be avoided. Roberts seconded the motion. Bradley asked just exactly who would be cut out. Roberts replied it would be Dean Witter and Mike Kirkland. He explained again that the Board is just paying them to find someone to manage the money, and he feels the Board can find those people on its own or with Longer's help. By consensus, this was left open for further discussion. 3 • INVESTMENT REPORTS July 17, 1997 Longer Investments Longer distributed a color -coded portfolio. She first reviewed just what Longer Investments manages As of June 30; the combined account, stocks as a percent of total portfolio managed by Longer, is at 52.4% The guidelines are to be somewhere between 40%-65%. With everybody included, it is around 45% With the international fund and the small cap fund, we are at about 54% equity. The income yield on the total managed by Longer is about 3.8% on market value and about 4.4% on book value, just dividend and interest income. Longer reported the stock account still has some bonds in it. After receiving the asset allocation guidelines and reviewing the policy, they put as much into this fund as would be required If we went to 65% equity, this part would be completely invested in equity. There is still some purchasing power. We still have about 14% sitting in treasuries that can be used to go into stocks if wanted. Longer reported on largest holdings. Longer reported on portfolio parameters. The price/earnings multiple on the overall portfolio is about 29 times trailing earning and the earning per share growth rate is about 15%-16%, so the price/earnings multiple on next year's earnings would be about 22 times earning. The return on equity is about 19.5% on the total portfolio. Debt to capital ratio is 16.9%, a very good debt number. Expected return is 15.9%. Regarding market capitalization, the portfolio is well diversified between large cap stocks and the small cap, about 48% large stock and about 51% small and mid cap stocks - Longer reported on income and yield. Yield on book value of fixed income securities alone is 6.8%. Total portfolio income is 4 4%. We still have a fairly conservative bond structure with an average maturity of four years and average duration of 2.9%, meaning not much volatility. Longer did not review the income and expenses report, which was included in the handout. Longer reported on an updated performance history on the assets managed by her. Cumulative return from account inception is now averaging an annual 13.9% on stocks, bond return has been about 7.6%. The total portfolio, with fees and expenses, is 9.5%. Fixed income bonds are up about 2.4%, through June 30. Interest rates have dropped in July. Total of bonds and stocks is about 10.8%. Longer included a performance history by asset class to see where the numbers come from. She explained her accounting system has the capability of measuring returns by asset category. They are set up in compliance with the SEC and the Association of Investment Managers and Research. 4 • July 17, 1997 Longer next reviewed the Dean Witter Madison account, the bond portfolio. The value of the portfolio is about $1.7 million The total bond portfolio is up about 2.62%. In answer to a question from Friend, Longer explained the only expense picked up in these reports is the management fee charged to the account. Commissions charged on transactions would not be seen because those commissions are netted out in the bond trade and don't come across as commissions. Longer next reviewed the Dean Witter cash. account. It is about 2.5% year to date, so money market is running about a 5% return. Longer next reviewed the Morgan Keegan bond account. The year to date retum is about 3.4%. The bond part of the portfolio has done about 2.9%. A 5.5% interest payment was received in the first quarter from interest earned on cash assets not invested in December. Longer next reviewed the Morgan Keegan stock portfolio of Flippin Bruce & Porter. Market value is about $834,000. The return through June 30 was about 14.4%; total with cash balance added m is about 11.9%. Longer next reviewed the Morgan Keegan stock portfolio of NWQ. Market value is at $884,000. The equity part was up 20% and the total was up about 18.5% • with the cash and reserves added in Kim Cooper, Longer Investments, explained the cost discrepancies report. This was included because if you compare the numbers on the report furnished by Longer with the statement received from Morgan Keegan, the costs are different. The cost on the Longer report is based on the transactions sent to them by Morgan Keegan that shows each lot of stock, date, and cost. Those numbers are not comparing to the numbers on the statement sent by Morgan Keegan There is not much difference, and they are both lower and higher. Both numbers are from Morgan Keegan. • Longer stated this does not affect market value or performance. It is not a big problem, but it needed to be reported for audit purposes. Cooper stated the list of bonds was handwritten, the other two stock accounts were a printout. Longer stated the number that comes across on the statement as historical cost on their statement does not match, but her numbers match with what they were given. Some could have been bought in more than one lot and so the total book value Longer shows, taking the numbers they were given and the confirmation, does not match the total book value shown on the statement. They had checked and re -posted every discrepancy. She does not know where the numbers on the statement come from. 5 • • July 17, 1997 Longer reported on the total portfolio combined. It is now worth $9.19 million. Total equity performance is about 20%. Fixed income bonds were about 2.43% All together, the total was about 9.33% for the first half of the year Longer stated the management fees report listed fee agreements and year-to-date management fees for Madison, Morgan Keegan, and Longer Investments. This report answers the fee question and this will be reported again at the end of the year. Longer explained she'd included information on the system she uses for performance reporting She uses the Axys system, the highest standard in the industry. It complies with SEC standards and regulations and with the Association of Investment Management and Research standards. It is time weighted and asset class weighted reporting. It is specific and standardized. A Longer Investments newsletter ,was included in the packet. Friend asked Longer about page nine of the minutes, where Mike Kirkland made his three requests. He asked what Kirkland meant by reducing the fixed income fee. Longer did not feel Kirkland had adequately described what her company does. It is not just a laddered portfolio of treasury bonds. They do not do a lot of aggressive trading but do manage the yield curve. Roberts informed Longer that the Board had acted to deny all three of Kirkland's requests. Roberts also explained to Longer that there was a motion open for discussion to do away with Dean Witter and Morgan Keegan and go with a money manager like her. He asked for her opinion on the pros and cons of this Longer responded that the Board is already hiring another money manager. The difference is there is no middle man between Longer Investments and the Board. There is direct communication to the manager. Roberts asked Longer to discuss the money manger she had recommended earlier and what her feelings would be about taking the entire portfolio and managing it. Longer responded that if she had another portfolio manager to back her up, she would come for the whole thing. She has just hired a portfolio manager, but he is not up to speed yet and she would not want all the Board's eggs to be in one basket. She would not be comfortable with this at this point. However, if she has backup in the future, she would be. She offered to work up a recommendation. She explained her regard for the gentleman in Baton Rouge. • Roberts asked Longer if she felt the Board was not as smart to pay someone to go out and find a money manager as they would be to find someone themselves. 6 • • • July 17, 1997 Longer replied she would rather deal directly with the manager, as would all her clients. Whether or not the Board would save money would depend. She always does the combined total expense and has beaten a wrap fee every year. The Board would have to see what another manager would charge. The bottom line is who makes you money and what kind of service you want. Bradley asked Longer when she might be ready to take the entire portfolio. Longer replied she thought she would need about a year. She agreed moving the portfolio somewhere else for a year would not be wise as they would incur transaction costs and the new manager would sell off all that was not his idea. It is a process every new manager would go through. In answer to a question from Friend, Longer stated she saw no red or yellow flags in the bond portfolio with Madison. She counseled not moving it On the equity side, she suggested the question should be posed as to why that one portfolio with Flippin was only up 14% for the first half when the market was up 20%. She could not comment on the stock portfolio as she had not analyzed it. Friend asked if it would be okay to say that every meeting day, Longer would come and do the report on all the accounts and not have any other reports. Longer agreed the Board did not need other reports, except possibly for a year-end review. Mayes informed Longer that the Board is thinking about asking for a State actuarial evaluation again to raise benefits. He asked her if, since this is a nontaxable entity and they don't get credit for unrealized gain, the Board wanted to realize gain, would that cost a lot and what would she recommend. Longer stated the total unrealized gains on the stock part of the portfolio is $900,000. Of that, the Longer Investment stock portfolio is about $650,000. She offered to bring a report of unrealized gain by security to the next meeting. It could be there are a few stocks that hold the biggest part of the $600,000 unrealized gain which wouldn't cost much to sell and then buy back. Mayes asked when the Board wants to make its request to the State. Roberts stated he assumed it would be in a timely manner. Longer stated the report could be done now. Roberts stated the Board needs to find out what numbers the State would be using before a cost benefit report is done. 7 • • July 17, 1997 It was decided Roberts would call Cathyrn Hinshaw and ask if the Board were to apply for benefit increase today, how far back the State would go to find the figure to study it. Roberts stated there is a way to use market value as opposed to cost value, if it will help. Mayes thought you had to be over $10 million to do that. Mayor Hanna informed the Board he would soon need to leave the meeting. Friend withdrew his motion regarding another independent manager. • • Friend asked what if the Board moved to advise the others, except Longer, to not hire any other money managers and the Board will hear only Longer's reports and go home. Roberts stated they can't hire anyone without coming to the Board. He stated he did not know how these others got on the agenda, but today they could be cut off and told they aren't needed until called for. Mayes stated he would talk with Traci Paul, City Clerk, about how they get on the agenda to be sure it doesn't happen again. NEW BUSINESS—CONTINUED Minutes & Meeting Notices Spencer stated he would like to see copies of the minutes sent to all the retired pension members and also notices of the next meeting. It was suggested this could be done with the pension checks. Mayor Hanna turned the meeting over to Roberts and left at 2:40 p.m. INVESTMENT REPORTS --CONTINUED After discussion, it was decided to listen to the managers who were present but to limit them to 10 minutes. They would also be informed that the decision had been made not to hire any money managers and told not to come back until called. Dean Witter When Jim Woods, Dean Witter, entered, he was informed his remarks would be limited to 10 minutes and the Board was not interested in new investors at this time. • Woods introduced Tim Ellis of Investek from Jackson, Mississippi, and Bert Cupit, an institutional broker from Woods' office. 8 • • July 17, 1997 Woods stated there were errors in the minutes. The Board is not paying 1.75%. Madison gets 50 basis points and the commissions generated have been one-tenth of one percent. Friend noted that the Board has the actual figures and this is not a problem. Woods also mentioned that the guideline set by the Board for fixed income is not being met by Madison. Tim. Ellis, Investek, passed out material and explained who they are and their style of fixed income management and long term performance They are conservative and deal strictly in high grade securities. They are an intermediate term core manager and make decisions based on relative value on a bond -by -bond basis. Their track record is consistent. He felt they could improve the quality of the Board's portfolio over time. Roberts reiterated that the Board is hearing the same thing from Elaine Longer that these managers have to report. Because of this, there would be no need for these managers to attend meetings unless called. Morgan Keegan Roberts informed Mike Kirkland, of Morgan Keegan, that he had ten minutes to speak and that in the future he must talk to Traci Paul, City Clerk, who will then check with the Board before he is allowed on the agenda. Roberts explained this is because the Board is getting the same information from Elaine Longer. • Kirkland passed out several reports and stated he was looking for a correction in the fall. Value may be more important than growth later in the year. Kirkland asked if the Board had made any decision on his three requests. Roberts responded that all three requests had been denied. Kirkland reviewed the Flippin report. It is up about 10% for the first half of the year. Flippin is such a value manager, we did not get in until late in the year. They had about $185,000 in cash, still, at the end of January. From inception, they are up 14%, from the 1st of December. Numbers from the past are excellent. From June 30, 1996, to June 30, 1997, they are up 30%; but because of the lag of where we came in, we are only up about 14%. Roberts confirmed this explained the question brought up by Longer. Kirkland next reviewed NWQ. It is up 18.5% because they put the money to work immediately. They only had 7% cash at the end of January. r • • July 17, 1997 There was discussion regarding why Kirkland would still like to have the Madison account. Longer is doing okay, but the Board is still paying her the on-going fee when it wouldn't be paying that if he were just laddering maturities. Longer's expertise appears to be the equity side. He reiterated the rationale for international exposure: intemational markets have outperformed our market. Historically, they have reduced risk and increased return. There is a $100,000 bond maturing at the end of this month and Longer has $150,000 maturing at the end of the year that could be added to the pot. He noted lnvesco's one year return was 16 8% and three-year average was 14% and five year average was 13%. This would be done for diversification purposes. Roberts asked if the Board had to go with these companies whose investor expertise is overseas stuff because the other mangers can't or won't. Kirkland explained the others won't because it is not in their philosophy. OTHER BUSINESS Roberts asked if there was other business for the Board Mayes asked if the Board wanted him to hold off sending the letter regarding the benefit • increase until the Board finds out what numbers the State uses. If the State uses the most recent numbers, he asked if the Board would want to meet again to talk about it. He suggested instructing Longer to use her own good judgement. • Roberts stated the numbers the Board has are not the numbers they have in Little Rock. The State will go back to the last number they have. Mayes stated the State does have the December 31, 1996, audited numbers, which was over $8 million. Friend remarked if the State uses the same numbers, it would do no good to reapply. Mayes thought they would use the year-end, audited figures. Friend thought if the State uses the 1997 year-end numbers, and the Board waits until January, and before December they sold the five or six things, they would look a lot better. Mayes suggested asking Longer what the current cost or fee would be. ADJOURNMENT Fnend, seconded by Bradley, moved to adjourn. The motion passed unanimously. The meeting adjourned at 3:15 p.m. 10