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HomeMy WebLinkAbout2004-07-29 MinutesFire Pension Minutes July 29, 2004 Page I of 5 Firemen's Pension and Relief Fund Meeting Minutes July 29, 2004 A meeting of the Fayetteville Firemen's Pension and Relief Fund Board of Trustees was held at 11:00 a.m. on July 29, 2004 in Room 326 of the City Administration Building. Present: Pete Reagan, Robert Johnson, Marion Doss, Ronnie Wood, Mayor Coody, City Clerk Sondra Smith, City Attorney Kit Williams, Denise Grizzle, and Kim Cooper of Longer Investments. The meeting was called to order by Mayor Coody. Approval of the June 24, 2004 Minutes: Pete Reagan moved to approve the minutes. Marion Doss seconded the motion. The motion passed 6-0. Danny Farrar was absent. Approval of the August Pension List: Pete Reagan: There are not any changes are there Sondra? Sondra Smith: I don't think so. Marion Doss moved to approve the August 2004 Pension List. Pete Reagan seconded the motion. The motion passed 6-0. Danny Farrar was absent. Longer Investments: Kim Cooper, Longer Investments: Elaine is out of town today she was disappointed that she was not going to be able to be here since we only see you every three months. Page I of your report shows your portfolio appraisals as of June 3oth. Your equity percent listed at the bottom of the page was 50.7%, that's right at the top end of your investment policy of 25 to 50 percent stocks. We use 40 as a base for equities and then we will go plus or minus 10% around that base of 40. Page 2 lists some of your fixed income investments; I wanted to point out the equity funds under Japan Webs that is an Asian Fund based in Japan. We sold that during July, we took a profit on it just because there has been a profit slow down in China and that slow down can affect Japan also, the whole Asian Region. We went ahead and took the profits on that and sold that position. Under the fixed funds you will see the iShares for the Lehman 20+ Year T -Bond Fund that is a closed end fund that holds maturities of 20 or more years in US Treasury. We put about 3% of your portfolio into that to give you a way to extend your maturities as we saw interest rates creeping up a little bit. What we're looking for in that is a profit on the bond trade. As we see interest rates go back down, we have a target of about 4 1/8th when we see the ten year up 4 1/8th Fire Pension Minutes July 29, 2004 Page 2 of 5 we will probably sell out of that fund for you. For right now you are earning 5.3% on it and you've already got 11/2% capital appreciation so you are making money on it and you are earning income on it. This also lists your corporate bonds, your government bonds and government agencies. Page 5 shows the bottom line, your total account value is $10,067,570. Your annual income is $319,386. That is annual income, dividends and interest on your bonds. The 3.4% is the income yield on the portfolio, that 3.4% compares to a five year treasury, so you are earning in your portfolio 50% stock (growth) and 50% bonds the same income that you could earn on a five year treasury. Along with the interest income you also have a component for growth. Pete Reagan: This whole time the DOW has done what? Kim Cooper: The DOW through the end of the second quarter was flat. The S&P was up about 2%. Pete Reagan: So while everything in that market is flat we are making 3.4%. Kim Cooper: That's just your income yield, if stocks go down or bonds go down, then you have fluctuation in market price, but you have that protection of a yield of 3.4%. The next page is just a summary of realized gains and income through June 30"'. Your realized gains were $234,716 that is because earlier in the year we took profits on some stock positions that we had considered extended so you have some substantial gains in there for the first part of the year. Your net income which is your interest and dividends is $197,131. The next report that's titled Fixed Income Holdings, we have that in there basically to show you what the credit ratings on your bonds are, especially on your corporate bonds. If you will look in the columns that are titled S&P and Moody's, those are the credit ratings on those bonds. You can see that your corporate bonds are all very high quality. We constantly monitor those credit ratings to make sure that they are accurate and that they continue to stay within your investment policy guidelines. That just continues on and lists the rest of your fixed income holdings. Page 10 has a lot of information on it, if you will look over in the right hand column where it says Weighted Averages; your average yield to maturity on just the bonds in your account is 4.9%. Your average maturity is 7.2 years. Right now on just your bonds only you are earning 4.9%, that's higher than you could be earning in that 10 year treasury, it's much higher than a five year treasury. Again, you have a very high quality fixed income portfolio. The bottom half of the page in that chart where it says Distribution by Maturity the first two lines in there are the one to three years and the three to five years, of your total bonds holdings, 55% are held in those two categories, so 55% of your bonds will mature in less than five years. We consider that as liquidity, almost like cash if we see a chance to extend your maturities we can sell those shorter term maturities and extend maturities, lock in some higher yields for you. You also want to think about that treasury fund that I talked about before that's about 7% of your bond holdings and that will be the over the 20 year portion of the bond portfolio. That's not listed in there because it is considered a fund. Fire Pension Minutes July 29, 2004 Page 3 of 5 The next page shows the largest holdings in your portfolio as of June 30th. It's kind of a moving target, as of June 30th your largest holdings were Johnson & Johnson, Walgreen, Pfizer, Coca- Cola and Cephalon which is a drug company. Since June 30th we have sold out of Cephalon so you don't own that one any more. The next report is the Model Portfolio report and Elaine had lots of good things she wanted me to point out to you on this report. What the report does it shows you where in the different sectors of the S&P 500 your account is in relation to where the S&P 500. Page 13 under the consumer non-cyclical segment, those are the consumer type products like, Coke, Estee Lauder and the retail companies, Walmart, Walgreens. Right now we are under weight in comparison to the S&P 500, we are at about 10%, and the S&P is 18.5%. The reason we are and have been underweighted is because we see things that the consumer is going to be spending money on that will make the spending probably slow down from what we have seen in the past. The higher gas price, the refinancing, that has put a lot of money in people's pockets, has virtually stopped. The third quarter is the anniversary of when the tax cut went into effect last year which gave people that rebate check and more income in their pay checks so there's tougher comparisons from last year to this year. People are not going to have that extra boost in cash so we think the consumer side is where we need to back off and be a little underweight on the market. On the next page Cyclical Industries we are overweight in those right now; those are the capital goods, the chemicals, mining, forestry and industries. Right now we are at about 16% versus the S&P which is 5%. The reason we are over weight in there is because we think that capital spending by corporations is going to be strong at this point in the economic recovery. Earnings have been very positive for these kinds of companies so we are staying overweight there. In energy we are overweight there as well, the energy stocks have very good yield, they are inflation protection, we use them as a portfolio stabilizer, if something happens over seas, something goes boom, then energy prices go up. It is a good way to offer you some protection to some of the things that are going on in the world by owning those energy stocks. You will see under financial services, right below that, as of June 30th you had owned Morgan Stanley, your purchase prices had been 51.86, I just want to use this as an example of how we work around what we consider non core positions. Elaine bought it, when we purchased it, it was at a really good point, it had very strong technical support in the market and we had a very low downside risk. We thought we could buy it at that 51.86 but if it went below 50, we didn't want to own it any more. It had sold off of its highs and we just felt it was a real good entry point so we bought the stock knowing that we would sell it if it hit 50, unfortunately it did hit 50, we sold out of it right away, it's just our sell discipline in order to protect your down side. We will do that in those non core positions, we just feel we need to protect your positions and respect any stops. If we are buying something and see a level that we don't want to hold it below even if we have only held it for a few weeks, we will sell it. On the other side of that we will do that on the upside too, we had bought Phelps Dodge for you and within a week it had appreciated 11% and we went ahead and sold it, the stock came back down to the price that we bought it at but we took those profits. Your account doesn't have to pay taxes so your might as well take the profits when we see that kind of a jump in such a short period of time. The next page is medical supplies and pharmaceuticals, if you will look at health care in general we are overweight 18% versus 12% on S&P but in the medical supplies we're much more overweight than we are in the pharmaceuticals. The medical supplies are the parts and pieces, as Elaine refers to it; it's the things like knee replacements and heart valves, all the replacement Fire Pension Minutes July 29, 2004 Page 4 of 5 parts that your body needs as we get older. We feel that is where the growth is and the opportunity is, rather than in pharmaceuticals. With the sale of Cephalon you are actually only at about 3.8% in pharmaceuticals so you are about half of what the S&P is in that side. We think that we what to be equal weighted or underweight to the S&P at this point just because if Kerry were elected we don't know what would happen to pharmaceutical companies. There is just some uncertainly out there. The last page the only other thing that I wanted to point out on this report is the technology side, we are underweight in technology and we have been since the beginning if the year. The NASDAQ which is comprised of a lot of technology companies is down 8% year to date or was down 8% through June. We just feel that being defensive has helped you and kept us from getting the brunt of that 8% even though you do have some technology companies', being underweight has helped soften that. I went over a lot of things do you have any questions about any of the holdings or any of the sectors that you own? On page 17 is your contributions and withdraws, this has been since inception of the account, your withdraws have been $1,635,000. The next report is your performance summary this kind of hits on what you had asked about before, Pete. Last year in 2003 your stocks were up 29 Yz%, your total account was up 13.3%. Through June 30, right now your equities in your account, that's just your stocks through June 30 they were up 4.2% and that compares to the S&P which was up 2% and the DOW that was flat. Your equity mutual funds were up 5.9% that's the Asian fund that I had mentioned that we have now sold out of. Your total account is up 1.9% year to date. That shows a cumulative return then of 27.2% on equity since your account opened and 14.1% total. The annualized numbers are 13.7% on your stocks that compares to the returns of the indices of about 11% on the S&P 500 cash basis, about 11.7% on the DOW, your total return, the annualized return since inception has been 7.3% and that compares to the 6% actuarial assumption that you have so we are still well above that 6% number that we strive for. The table at the bottom shows your reconciliation since your account opened, your beginning value, if you will took at your deposits and withdraws, they net out to about 1.138 million and your total investment return since that time has been 1.3 million so the income and appreciation on your account has kept up with the distribution level. Pete Reagan: Could you explain the difference between your cumulative return and your annualized return. Kim Cooper: The cumulative return is the total return, that is the return for all three of those time periods up above, the annualized return is like an average annual return, so that would be an average one year return, taking into account those three periods. Just to let kind of let you know what is going on since we cut these reports off as of June 30th, we are right now in the middle of earnings season, second quarter earnings are coming out. We had said in our newsletter that we expected strong earnings and we basically have seen earnings that are in line with expectations but there have been a lot of real high profile companies that have missed their earning expectations. They have either reported in tine with their earnings and said we are going to have the second half a little bit slower than we expected or they have reported slightly below what expectations were. Those were big companies like Pfizer, Coke, IBM, very Fire Pension Minutes July 29, 2004 Page 5 of 5 highly diversified companies, even though they have been down, earnings overall have been as expected. Still stocks are down quite a bit for the month of July. The S&P is now down 4% this month the Russell 200 which is a small cap index is down 8 'h% and the NASDAQ is down 9.3% so all of the stock markets are down in July. We just had a real defensive posture. This month we have bought three exchange traded funds as an asset allocation tool without having to go in and buy individual stocks; we can go in and buy those for you. We bought those in July when the market was down about 8% on the NASDAQ thinking that was a good technical point to go in, we were right at the 200 day moving average which is a good technical support and again we thought that it was a good entry point. We bought those indices, had about a 1% stop below that and again we were stopped out. We felt that the chance for potential upside overrided that 1% risk, we did have a sell on those and had about a 1% loss but it came against those substantial gains that you have already this year. We wanted to point that out so you would know how we can go into the market very quickly without having to say I want to buy this stock and that stock and have the individual stock risk. We can go in very quickly by using those exchange traded funds. Right now with those sales that we have done, your portfolio is about 5% cash, as of June 30`" you were at real low levels of cash. Does anyone have any questions? Pete Reagan: You did a very good job. This is the middle of an election year I would like to hear your forecast on what you think the market will do. Kim Cooper: Well Elaine's pat answer on that is the market doesn't like uncertainty and it doesn't like change. What we have seen from past elections is that when an incumbent is not reelected then the market doesn't do as well as it does if an incumbent is reelected. That's just what we have seen in the past. Pete Reagan: You are looking at flat or negative gains then in the market through the end of the year? Kim Cooper: What we are thinking is that the return on the market will probably track earnings growth, we are not going to see the returns that we saw through last year but earnings growth and price evaluation should stay about the same. Pete Reagan: Thank you very much we appreciate your good work. Kim Cooper: Thank you. We appreciate all of you. Other: Kit Williams: I still have not heard anything from Ashland; they don't want our money evidently. Meeting Adjourned at 11:30 AM.