HomeMy WebLinkAbout1988-10-04 MinutesSPECIAL MEETING OF FIRE PENSION BOARD
A special meeting of the Fayetteville Fire Pension and Relief Board was held on
Tuesday, October 4, 1988 at 1:45 p.m. in Room 313 of City Hall, 113 West Mountain
Street.
PRESENT: Chairman Pennington, Ex -Officio Treasurer Linebaugh, Secretary
McWethy, and members Jackson and Bonaduce. Also present was
Accounting Supervisor Zelda Parson, and representing RNC were Tim
Ruley and Bob Nichols, as well as Merrill Lynch representatives
Curtis Williams and Richard Yada
ABSENT: Members Dill, Reagan and Springston
The purpose of the meeting was to meet with RNC representatives.
Bob Nichols introduced Tim Ruley who he said would be taking over for Jacques
Devore. Nichols went over the Pension Plan's portfolio.
Equity Account
Beginning with the Equity Account, Nichols said the portfolio contained 23
issues. He said the average asset size is a little less than 4%. He said this
is a growth portfolio and RNC is taking about 4% less risk than the market. He
said they hope to measure the volatility by using a "beta coefficient". He said
the beta coefficient of the Standard and Poors 500 index is 1.00, with this
portfolio being .96, tending to indicate it is about 4% less risky than the
market as a whole.
Nichols said the portfolio was 83% invested in common stocks, with 13% in bonds
and about 3.8% in cash and cash equivalents. He said RNC has been adding stocks
to the portfolio ever since the crash of October 19. He said RNC made a
conservative decision on October 19 to hold cash and not to invest at that point.
He said, clearly, had they invested, performance would have been better. He
said, because pension funds were involved, he felt they made the right decision.
He said portfolio value as of September 29 was $499,183.32. He said, through
8/31/88, the portfolio has outperformed the Standard and Poors 500 and has
outperformed the Dow.
Nichols said RNC has a policy that, when a stock is down 35%, they sell it, but
said after the crash they reviewed that policy and elected to hold about five
stocks - IBM, Digital Equipment, Texas Instruments, General Electric and Sears -
because they felt these stocks would come up and it wouldn't make sense to sell
them at depressed levels.
Fire Pension Board Minutes
October 4, 1988
Page 2
He said RNC believes interest rates will peak around 10%, if indeed they even get
there, that rates will resume their more historical position, at 2 1/2 to 3% over
inflation rate which right now is 5.1. He said it was about 4.1 if you take food
price increases out as a result of the drought. He said, if Bush gets elected,
he thinks there will be "an explosion in the stock market" because of promises
Bush has made regarding capital gains taxes.
Linebaugh asked Nichols what he was comparing the portfolio to when he said it
was 4% less volatile than the market. Nichols said he was comparing it to the
beta coefficient of the Standard and Poors 500, which he said was 1.00. Jackson
asked Nichols about the performance ratio. Nichols said the portfolio had not
performed as well as the S&P since inception, but has since January. He said, on
a time -weighted rate of return, the portfolio is off 4.3 and the S&P is up 7.2.
Income Account
Nichols reported the beta on the Income Account to be .55, 45% less volatile than
the market. He said RNC did not do a lot of restructuring on the income account
after the crash, but left it fully invested, because the dividend yield was so
high.
He said the income portfolio's yield was 7.9%, from dividends and interest. He
said only 18% of the portfolio was in common stock, 53% was in convertibles,
21.8% in bonds, 2.8% in preferred stocks, and 4% in cash and equivalents.
Nichols said this portfolio started with $1 million in December of 1985, and
added about $594,000 (net), with the value now at $1.905 million, for a $310,000
gain. He said the annualized rate of return since 1985 has been 27-29%, and has
outperformed the Shearson Lehman bond index and is within 10 basis points of
outperforming the Standard and Poors.
He said performance was up 27.9, Standard and Poors is up 28.1, and the Shearson
Lehman government corporate bond index is up 27.2. Nichols said, since the
beginning of the year and through 8/31/88, the portfolio is up 8.1, Shearson
Lehman index is up 4.3, and Standard and Poors is up 5.8.
Nichols said the yield on this portfolio saved it during the crash. He said the
yield of 7.9% on the portfolio compares to an average S&P dividend yield of about
3.1%
Nichols said it takes a full market cycle with equities in order to realize the
potential in the portfolio. He said we have the right stocks, but need to let
the portfolio develop itself.
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October 4, 1988
Page 3
Linebaugh asked how our portfolios did compared to RNC's overall performance.
Nichols said the income account was indicative of what the other income accounts
did, but said it depends on when the portfolio opened. He said our portfolio
performed about right in the middle of other equity portfolios which opened at
about the same time.
Linebaugh asked why there was such a difference between the S&P 500 performance
and the performance of our portfolio. Nichols said that was because our
portfolio can't perform as well as the S&P 500, because cash carries a zero beta.
He said, when the portfolio was restructured, he decided to re -invest up to the
50% level, but decided if they reached 35-50% cash, to hold it and not re -invest
those funds until he saw where the market was going. He said they chose to hold
that cash and, because cash has a zero beta, there was a point at which the
equity account probably had a beta coefficient that was 50% of the S&P 500. He
said that meant that, when the S&P 500 moved, this portfolio moved half as well.
He said, looking back, it was a bad decision, but based on information he had, he
could not conceive risking a retirement plan.
Nichols said he was not dissatisfied with the performance of the equity portfolio
since January 1 and, in a favorable environment, expects to out -perform the S&P
500. He said RNC has done that since January 1. He said he was very pleased
with the income portfolio.
Jackson told Nichols the Board had been discussing the adoption of a formal
investment policy. He asked if it wasn't reasonable for a policy like that to
mandate that investments perform against some standard scale such as the S&P 500.
Nichols said that was fine, as long as it was for a complete economic cycle. He
said there had to be room for decision-making which has long term effect.
Nichols said RNC manages money in four categories - an equity account, a balanced
account, a convertible securities account, and an income account. He said in the
last twelve years the average of all four of those categories have out -performed
every index.
Nichols encouraged the Board to let the equity portfolio go the full market
cycle. He said RNC had never had a market cycle when they didn't outperform the
S&P 500.
Bonaduce asked Nichols what his feelings were on taking bids for brokerage fees.
Nichols said RNC had no bias and received nothing from the brokerage commission.
He said last year they executed 11,000 trades per month, with 119 different seats
on the New York Stock Exchange. He said all brokerage firms are not the same.
He said some brokers without a seat on the Exchange can execute trades by
clearing them through someone else. He said those brokers don't have to maintain
the same net capital requirement that a member of the Exchange has to maintain.
He said if they make an error on an account, they don't have the insurance to
cover the transaction. He said the requirements are that broker-dealers have to
have the net capital, the errors and omissions insurance, and the fidelity bonds
Fire Pension Board Minutes
October 4, 1988
Page 4
to execute large institutional transactions. He said the lowest commission is
not necessarily the lowest net price.
Linebaugh told Nichols the Board was not considering using discount brokers, but
was considering using major firms, in the bidding process. Nichols said brokers
vary throughout firms. Linebaugh asked Nichols if there were major brokers in
Arkansas with whom he was not comfortable. Nichols said he would prefer that any
broker-dealer they use have a seat on the New York Stock Exchange, not just
access to a seat. He said it was important that the broker-dealer does the job
well and to the advantage of the Plan. He said there were a number of firms that
"have the coverage", naming Merrill Lynch, Smith Barney, Goldman Sachs and
Drexel. He said firms that did not "have the coverage" were Shearson and
Prudential Bache. He said some firms are not as institutionally oriented, citing
Edward E. Jones as an example. He said some firms, such as Prudential Bache and
Shearson, were primarily retail -oriented, dealing primarily with individuals and
smaller portfolios).
Linebaugh asked Nichols if he contacts a broker when it's time to sell a stock,
to solicit the broker's opinion. He asked if the broker does anything more than
just make the actual trade. Nichols said they don't talk to the brokers in that
way, but that an opinion is sometimes solicited from an analyst. He said RNC has
CPAs, traders and reconcilers who talk to brokers all the time.
Linebaugh asked, on a $4 million portfolio, what average percent of trade value
is paid by RNC to brokers. Nichols said he didn't know but would get that
information for Linebaugh.
There being no further questions, the meeting adjourned at 2:45 p.m.