HomeMy WebLinkAbout2004-10-28 MinutesFiremen's Pension & Relief Fund Board of Trustees
Meeting Minutes
October 28, 2004
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Firemen's Pension and Relief Fund
Meeting Minutes
October 28, 2004
A meeting of the Fayetteville Firemen's Pension and Relief Fund was held at 11:00 a.m.
on October 28, 2004 in Room 326 of the City Administration Building.
PRESENT: Robert Johnson, Danny Farrar, City Clerk Sondra Smith, City Attorney Kit
Williams, Elaine Longer and Kim Cooper with Longer Investments.
ABSENT: Mayor Coody, Pete Reagan, Marion Doss and Ronnie Wood
No business was transacted due to lack of a quorum.
Longer Investments gave the investment report as follows:
Elaine Longer, Longer Investments: Your first report is the Portfolio Appraisal as of
September 30, 2004.
We have you at your maximum level of equity exposure that is allowed in the policy which is
about 50%. Your range is 25% to 50%; you have seen this at the low end of that range. We
really think that with the 10 year treasury back down to 4%. Earnings have grown 20% this year.
The markets have done nothing, because we have been dealing with the political risk,
geopolitical risk, rising oil prices and terrorism fears. Basically all the market averages, the S&P
is up about 1% year to date as of yesterday but that is after a 250 point rally in the past two days.
Two days ago we where down on the S&P, down on the NASDAQ by about 6% and down on
the DOW by about 7.5%. It has been sort of a mucky muck year after a big year last year. But
underneath all of that earnings have improved by 20% and so the price earnings multiple, the
valuation on stocks relative to the 10 year treasury, has really improved a lot this year. We
started the year at 4% on the ten year, we have been up to almost 5% and we are back to 4%.
The interest rates haven't really changed much on the long end of the curve, earnings have
improved, the stock market stayed the same so the relative valuation there is now favoring the
stock side of the equation.
Page 5 shows your current Market Value is back to about $10 million. The interest and
dividends which is just the income component of your portfolio is about $324,000 or 3.5%. Now
that is the current income that is not the performance of the portfolio. That is just what comes in,
in terms of dividend payments and interest payments, regardless of what the stock market does.
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Meeting Minutes
October 28, 2004
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In reviewing the minutes of the meeting that we have missed this is sometimes quoted as
performance, but that is not the performance, that is just income cash flow.
Page 6 shows that we have about $295,000 in realized gains year to date. I think now that is up
closer to about $320,000. Net Income which is the interest and dividends is about $164,000.
Page 7 is just the review of your bonds. You can see that all of your bonds have the high credit
quality ratings, A or better. General Motors which we had sold when it slipped to about a BBB+
has now been down graded to junk debt status. So, I am glad that we are out of the General
Motors bond. That is the one that we hung on to and we thought that BBB+ is still two steps
from junk, but we sold it and now General Motors is junk.
Page 10 you will see the summary of the bond part of the portfolio, your weighed average yield
to maturity is 5% and your weighed average maturity in years is 8 years. That compares to the
current yield on the treasury which is 4% in a ten year. So you have a shorter maturity and a
much higher yield than the average treasury. However, we do have a lot of flexibility in the
portfolio if interest do go up as we head into the new year, face a new administration or even an
existing administration, we still have about 20% of the bond portfolio maturing within the next
three years. So you still have some flexibility in the short end of the bond portfolio, we can use
that as cash if we get another opportunity to increase yields. When the rates went up in July we
extended maturities, we bought the 5.25% treasury due in 2029, we paid 98 cents on the dollar
for it and it is currently priced at $1.05. That's what we call a total return trade. When the
interest rates spike up like that we are extending maturities and capturing that higher yield, but as
interest rates pull back we get the capital appreciation on the bond as well. That is why our
return history on fixed income is higher than just the income yield on the bond. We do some
things like that when we have those opportunities. We are kind of an opportunistic bond
investor.
Page 11 shows your largest holdings. Johnson & Johnson, MeadWestvaco which is a midcap
paper and forest products company, Kerr McGee Corp., Union Pacific Corp., and Walgreen
Company. Your largest one only represents 3.6% of equity exposure and by policy we can go to
5%. You are well diversified in your equity portfolio.
Page 12 is your industry weighting. I wanted to point out we are not at all structured right now
like the Standard and Poor's 500 in that we are more over weight in the cyclical industries, the
capital goods industries and energy. Although we had trimmed the sales about two weeks ago in
energy a little bit, we are still fairly over weight. We are under weight in consumer, under
weight in financial, in particular insurance stocks, and then we are about market weight in
technology. We have no pharmaceutical exposure. We own Abbott Labs and Johnson &
Johnson but both of those companies have a lot of other things going on besides just the strict
prescription pharmaceuticals so there is not as much exposure to what's going on in the
pharmaceutical as when you are in an Abbott or Johnson & Johnson.
Page 14, your energy stocks are listed here. We had Apache as well as Anadarko which are both
in the gas production area, we sold Apache to book those profits and we retained the Anadarko.
Then we had about a 33% to 35% appreciation in Schlumberger and we took those profits. We
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Meeting Minutes
October 28, 2004
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don't have any tax consequences to taking profits in this account. We had reached a level of
18% of equity exposure in energy and we turned it back to 14% that is still a double weighting
relative to the S&P 500.
Yesterday was an interesting day in the energy market, we spiked up to a contract high of 55.55
on the near by oil contract and then it started selling off and it actually closed now to about 270 a
barrel and over $3.00 off the high of the day. It was real interesting. Then today we are down
about 70 cents a barrel again. So it could be that, that 55 level that we have been to several times
will be resistance now at this point. A lot of the energy stocks sold off pretty heavily yesterday,
people taking profits and moving to the areas that haven't worked so far this year. Energy has
been the best performer.
Page 17 you can see the contributions that have come in year to date are about $477,000 and
distributions have been $1,815,000.
Page 18 is your return history. Year to date your Equities are up 0.6%, that doesn't sound very
good but it has taken a lot to hold it together this year with other market averages through
September 30th down any where from 1% to 6%, so we have been able hold our own. I think a
lot of this has to do with the fact that the out performance in energy sort of offset the other areas
that were doing poorly. Fixed Income has delivered 2.7%. The Real Estate Investment Trust
11.4%, so your Total Return Year to Date is 2.6%. Looking at Inception to Date your annualized
return in Stocks is 10.1% your Total Return has been about 22.7%. On the Total Portfolio your
Annualized Return is a 6.6%. The Equity Return of 10.1% annualized compares to S&P cash of
8.9%, S&P with compounded dividends of 10.8% and the DOW with compounded dividends of
8.7%. You are still out performing most of the market averages in the equity side. If you look at
the Asset Reconciliation you can see your beginning value, the contributions that have come in,
deposits, distributions inception to date and then the components of return. You can see that the
net income plus the change in accrued income has been about $500,000, the stock market gains
have been about $840,000. Your Net Investment Return has been about $1.35 million.
We have prepared an economic and market review, I have already mentioned some of it. I didn't
do a third quarter newsletter; I attended a conference in Chicago that was given by Northern
Trust. I go to this every year and it's really a wonderful sort of a mid year review going into the
fourth quarter and what the next year should look like. They have their chief economist,
portfolio strategist and political analysis, so it is a really good information gathering session. I
will be writing a newsletter after the election. Basically it's just what we have been talking about
the fact that the market has gone no where, interest rates are still where they were at the start of
the year; the main variable that's changed is the price of oil at $55.00 a barrel not $51.00. The
dollar has really remained relatively stable until about a week or so ago it broke a little bit below
this trading band; it still hasn't violated these lows.
The positives going into the end of the year are low bond yields, declining inflation expectations,
4% GDB growth is anticipated for the third quarter. At this time we have put Bush's rise in the
polls and now it is a dead heat. That's not a political statement the market just does better when
an incumbent is reelected because of less uncertainties. Continued earnings growth and
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Meeting Minutes
October 28, 2004
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evaluation improvement and of course the biggest risk that everybody worries about hat manages
money is the oil prices, Iraq, terrorists attack and the political turmoil.
The first time the S&P 500 crossed 1,100 was back in 1998, so if you think about it, we are at
1,100 on the S&P, the first time we where there was in 1998. If you bought in 1998 you've
basically done nothing. We are just back to where we were before the market spiked up in 1999
and fell in 2000, 2001, 2002 and recovered in 2003, so here we are back at 1998 prices.
However if you look at a comparison the 10 year treasury back then was 5.47%, we are at 4%
now. Fed funds rates which is short money was priced at 5.5%, we are at 1.75%. Nominal GDP
is almost 50% higher, corporate profits are almost 50% higher. The S&P 500 operating earnings
were $46 dollars back then we are at $66 for this year and $72 for next. So you can see that a lot
has improved in terms of profits, valuation, oil was $16 dollars a barrel and now it is $50.
The trading range that we have been in since the start of the year, you can see that this is just a
really well defined channel. There has been a horse racing that goes on in the stock market the
hedge funds make up about 50% of the trading now on the exchanges and there are bets placed
above this level should we break out and below this level should we break down. Whichever
way we break out of this trading range, and we will eventually break out of it, it will be fairly
traumatic. I think with the improvement in the fundamentals and the relative valuation we are
looking at the fact that we think it will break this way. I have some things in the portfolio like
the spiders, the S&P 500 proxy that with one trade I can change allocation pretty quickly,
without having to disrupt the industry allocation on the portfolio. I really think that given the
fundamentals that we have outlined a lot of improvement has taken place under the market
surface this year.
The last part of this just basically goes into large cap versus mid cap, small cap. The mid cap
and small cap stocks have out performed the large blue chip DOW Industrial, S&P 500 type
companies for the last five years. Typically that out performance cycle runs four to five years.
There are a lot of reasons to think that the large cap companies will out perform small mid caps
going into the new year. The dividend increases that we have seen, the fact that dividend payout
ratios are at an all time low and can go higher. Then we have companies that are multinational in
scope do better in a declining dollar environment, they are more competitive overseas, so we are
really positioned with large cap companies as you can see in your portfolio. We think that is the
place where there will be out performance next year.
Kit Williams: Large cap that is the standard S&P, right?
Elaine Longer: Yes, those are the companies that are above, actually mid cap would probably
in some people's estimation extend all the way up to companies that are $15 billion in market
cap. Large cap companies are above $15 billion.
The final page shows our over weights, under weights, equal weights and the fact that the equity
risk premium which is the relationship of stock market valuation relative to the ten year treasury
is at the most attractive that it has been at since 1980. In 1980 we didn't have $55 a barrel, we
didn't have the terrorist and we didn't have Iraq going on, so there are no doubt major macro
problems that the market is struggling with and that has suppressed valuation. At some point I
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Meeting Minutes
October 28, 2004
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think price follows value and there appears to be more value on the stock side of the equation
then bonds at this point in time.