HomeMy WebLinkAbout2011-12-08 MinutesBoard Members
Mayor Jordan
Chairman
Sondra F. Smith
Secretary
Marion Doss
Position 1/Retired
Pete Reagan
Position 2/Retired
Dennis Mullen
Position 3/Retired
Ronnie Wood
Position 4/Retired
Special Firemen's Pension and Relief Fund
Board of Trustees Meeting Minutes
December 8, 2011
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Special Firemen's Pension and Relief Fund
Board of Trustees Meeting Minutes
December 8, 2011
A special meeting of the Fayetteville Firemen's Pension and Relief Fund Board of Trustees was
held at 8:00 a.m. on December 8, 2011 in Room 326 of the City Administration Building.
Mayor Jordan called the meeting to order.
PRESENT: Mayor Jordan, Marion Doss, Dennis Mullens, Pete Reagan, Ronnie Wood,
Deputy City Clerk Lisa Branson, Andrea Rasco, Purchasing Agent, Garrison Financial
and Arvest Asset Management. (Note: Marion Doss arrived immediately following roll call.)
ABSENT: Sondra Smith
New Business:
RFQ 11-13, Financial Advisor Trustee Services Interviews with selected firms
Mayor Jordan turned the meeting over to Andrea Rasco, City of Fayetteville Purchasing Agent.
Garrison Financial Interview
Andrea Rasco, Purchasing Agent: Welcome and thank you for submitting your qualifications
to the City. We really appreciate. I know a lot of time goes into preparing those documents. I
appreciate you being flexible with scheduling this meeting. I would like everyone to introduce
themselves.
Those attending the meeting were:
Andrea Rasco, Purchasing Agent
Mayor Lioneld Jordan
Deputy City Clerk Lisa Branson
Dennis Mullens, retired
Ronnie Wood, retired
Pete Reagan, retired
Marion Doss, retired
Kerry Bradley, Garrison Financial
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December 8, 2011
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Glenn Atkins, Garrison Financial
James Bell, Garrison Financial
Andrea Rasco: We will take about 15 minutes and allow you to visit with us and then we will
allow 15 minutes for questions and answers.
Glenn Atkins, Garrison Financial: Thank you for having us. We would like to spend a couple
minutes and talk about our firm. We have about six or seven questions that you have asked us to
go through.
Garrison Financial is the largest pure SEC Registered Investment Advisor in the area. That is all
we do is manage money, we don't have a bank, we don't have an insurance company or sell
product to our customer. We are a fee only registered investment advisor. That is what we do
ten hours a day five days a week. We have had some past relationships with the City. I think
you will find our level of service to be above and beyond in terms of responsiveness in what the
board and staff needs.
Our investment philosophy is what we call total return. We are trying to generate capital gains
and income while at the same time minimizing risk and capital. We take a long term view of the
market, we don't try to time it, we do not trade a lot and we do our own fundamental company
research in house. I have been in this business almost 25 years doing research on companies
trying to pick good bonds. I do the fixed income for Garrison, Kerry Bradley is the President
and does the stock side of our portfolio and James Bell works primarily on the stocks. It is a
very intensive research driven process. We like to buy a company and hold onto it as long as the
theme works for the company.
Page 4 is a brief overview of our investment process. It starts with the economic outlook and
sector expectations both internationally and domestically. It is very research driven at the
individual company level. We research companies and the market, and try to find the very best
companies to buy mutual funds for our clients. We invest our own capital very similar as we do
for clients. When we put something in your portfolio it is not because we are going to earn a
commission on it, we think it is the best thing at that moment to be in your portfolio, whether it
be a stock, bond or mutual fund.
On page 5 we think the stock market is cheap and the bond market is expensive. If you compare
this current stock market to early 2000 the evaluations are much better than they were. We
expect the economy to continue to struggle along. We are not anticipating a second recession
right now. We think there will be slow growth over time to reduce the excesses and bring the
employment rate down.
On page 7 there is a chart of the price earnings ratio of the stock market since 1990. That is a
measure of the expensiveness of the market. As you can see that rate is the lowest it has been the
entire decade except the small spike down in 2008. We think stocks are cheap right now. In
terms of fixed income, what we are doing is keeping the quality of our investments very high and
the maturity of our investments relatively short. The longer you invest in bonds the more subject
you are to price risk as interest rates change. We think bonds are expensive and we are being
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December 8, 2011
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very conservative on the bond side keeping the quality high and the maturities fairly short. We
think interest rates will be stable out to 2013. The Fed has basically said that is what they are
going to do but we expect the volatility to continue. The next page shows the interest rate on the
ten year Treasury bond back to 1962. The lower the graph the more expensive bonds are. We
think it is a very critical time in the bond market and it is hard to see how that market can go
much higher. That is the reason we are being conservative in our investments and our quality
levels.
Same kind of snapshot on page 10 over the last 18 months or so, and this speaks to the volatility
of that market. You are seeing volatility in bonds just like we have in stocks.
Page 11, we put a chart in there because we thought it was a cool chart. Basically what it shows
is large company stocks, many of the names you would be familiar with typically from the S&P
500. If you had put a dollar in the stock market in 1926 you would have almost $3,000 at the
end of last year. That includes the great depression, the oil shock of the 1970's and the decade
and a half that we have endured lately. Clearly that is where you get the most growth and the
most bang for your buck, if you can stand the year to year volatility. We put that in there
because we thought it was some good information.
One of the questions that we were asked was our understanding of the state statutes related to
your type of investment. Obviously the critical one, I think that your are facing, which brings us
here today, is the under $5 million situation where apparently the Attorney General has ruled
when you fall below $5 million you have to invest in open ended mutual funds, which is fine for
us. We have been through all the state statutes that we can find and are very comfortable with
investing the portfolio like that with the under funded nature of the plan and the potential state
guarantee fund. Other statutes that apply are prudent man, diversification and us acting as
fiduciaries on your behalf and we take that responsibility very seriously. We have been through
those and we have had experience in the past in dealing with issues exactly like this.
The second question we were asked to address is our track record on asset preservation. This bar
graph represents a composite of all the money that we manage that is invested 60% in stocks and
40% in bonds and it has a portfolio size of about 150. This is not a cherry picking of one
account. This is a conglomeration of all of our accounts. It is our composite performance for all
of our clients that are invested very similarly to how you are back to 1999 or the first quarter of
2000.
Page 14 shows the exact same information but it breaks it out by various periods. I would draw
your attention to the far right hand number, the inception number, even given the bad market that
we have been in, we have almost doubled the value of the index. Our performance has been
almost double the value of the index before fees.
We were asked will we act as the market maker, will we trade securities in your account in our
own account and the answer is no. We do not own and are not affiliated with a market maker.
Any time we purchase a bond, stock, or mutual fund our obligation to you is to get the best price
and the best execution so there is no conflict of interest by us doing it with a related firm because
we do not have one.
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We were asked to touch on recommended portfolio changes. Here is the meat of the matter and I
think it depends on the future funding status of the portfolio and what the plans are there. If it
were under a fully funded status and they were over $5 million clearly an investment mix of 60%
stocks and 40% bonds would be very appropriate. I think that is similar to how you are now.
What that does is creates your own mutual fund and it takes a level of fees out because you do
not have our fees and then fees at the mutual fund level. It also meets all the other statutory
requirements. As I understand the situation that we are up against now is a mutual fund
situation, in an under funded status we have a couple of options that we can think about. If you
said to me I am going to need all this money in five years it might not be a good idea to put it all
in the stock market because of the risk. The flip side of that coin is that is the area that you are
going to have the most opportunity for the most gains to even come close to fixing the funding
issue. The other issue would be, if you don't want to be in the stock market because of the
volatility, then we would recommend that you be 100% in fixed income mutual funds. There is
this trade off to get the best returns over time, we would recommend that you be in the stock
market but given the volatility of it and the perhaps the income needs from this portfolio it might
make more sense to shift it back towards bonds. I really think there are a number of different
ways that we can go here depending upon what the funding status is going forward and what the
plans are for that.
Page 17 is a slide that we thought was interesting. Currently you are at $4.9 million, if you
assume an 8% return on stocks, which have historically given you about 10%, if you assume a
40% allocation to bonds at a 3% return, deposits of $631,000, expenses of $1.4 million we
estimate that the potential proration of the fund would begin in about 2015 and it might be
depleted by 2017 if we understand the math correctly. Flipping that around the other way if you
look at the bottom the annual returns on stock would need to be greater than 31% and for bonds
greater than 21 % for the fund to survive or if you put it all in equities the returns would need to
be above 25%. Those kinds of returns, although we have had them in the past they are not going
to be there I don't think year end and year out over the next five years. So we wanted to give
you a snapshot of some numbers that we ran and looked at these scenarios and analysis of where
you are.
The other question we were asked to address was policy on investment and research in
considerations. We do all of our own research in house. We pick the companies, the stocks,
bonds and mutual funds that go into our client's portfolios. We put them in there because we
think it is the best investment that we can find. We have no conflict of interest in terms of
trading with our own broker dealer. We simply put the investments in there because we think
they are the best thing for you portfolio.
We were asked to state whether we have any federal or state complaints against us. The answer
is no, never, none in the past and none pending.
We recommend that clients use Charles Schwab simply because it is free to them and there are
no custodial charges. There are if we trade individual stocks a commission of $8.95 per trade
that the portfolio would absorb. We do not get any part of that commission so we do not have an
incentive to trade. Historically we have used Northern Trust in the past so that is not a problem
for us. Our accounting systems will interface with them electronically. In glancing at the
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December 8, 2011
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October statement that was sent as apart of the RFP it looked like the fund paid around $3,300 in
commissions that month and around $300 in custodial fees. Commissions at Schwab, if we had
done the same amount of trading, would have been $367 a savings of almost 90%.
Thank you for allowing us to be here today.
Andrea Rasco: Does the board have any questions?
Pete Reagan: What would be your recommendation on our portfolio the balance of stocks
versus bonds in the no loads?
Glenn Atkins: I think it should be tilted as far towards stocks as you can possibly stand because
that is going to give you the most chance for growth but it is also going to give you the most risk.
Given the funding nature of the portfolio it would put us in the situation where if the market was
down 20% to 30% it would make it worse for the portfolio. Assuming a normal portfolio I think
60% stocks and 40% bonds would be entirely appropriate.
Kerry Bradley, Garrison Financial: Looking at the information that Andrea sent I think the
portfolios draws were about $800,000 a year. An $800,000 draw on a $5 million portfolio,
typically we like to try to generate enough income in the fixed income portion, with rates where
they are and the portfolio size that is not possible with this portfolio. There are some great
stocks out there that you can get earning 3 plus percent in dividends but you have that volatility.
Even the 3% is not going to come close to funding your income needs off this portfolio right now
depending on the funding status. Now if there is a plan to fund it or anything like that then
things could change.
Glenn Atkins: If it were fully funded a 60% stock and 40% bond allocation would be
completely appropriate and very similar to what others in your situation have done. It gives you
future growth hopefully on the stock side and some income generation from the bond side. I
think it really gets down to what other funding plans are there and how much relative risk we as
a team decide to take. We can make recommendations all day long but you should be
comfortable with it and be able to sleep at night. We will work as a team to figure out what that
appropriate level is.
Kerry Bradley: I think with a portfolio draw so large, we hate to go all equities because there
might be some external event that would happen that could really hurt the market in a 12 to 18
month time frame. When you are drawing that much on a portfolio that can spiral out of control
quickly. We think the stock market is cheap but we can not predict any external event.
Glenn Atkins: We think the risks are tilted in favor of stocks right now.
James Bell, Garrison Financial: Is there any plan on the table to make up any part of that short
fall or underfunded status at this point or are we just working with what we have?
Pete Reagan: Reality is here. Try to prolong it as long as possible.
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December 8, 2011
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James Bell: Given that scenario I think we would be comfortable recommending a 60/40 mix. I
think that probably gives you your best shot at some growth while also giving you some
principle protection on the fixed income side.
Glenn Atkins: Nobody is going to look back on you and second guess that. It is very typical
and very well within the prudent man sort of idea of being a prudent man.
Pete Reagan: How much do you have under management?
Kerry Bradley: $220 million
Andrea Rasco: What portion of that approximately are pension funds?
Glenn Atkins: We have about $105 million that we would classify as pension, governmental,
institutional, foundation, and endowment.
Kerry Bradley: As far as strictly pension money it is about 10% of that.
Glenn Atkins: We have had experience in years past managing money for the Municipal
League and the Ohio Bureau Workers Compensation, Enterprise Corporation of the Delta, which
is very similar in terms of quasi governmental entities. We have good experience interacting with
boards, staff and elected officials.
Kerry Bradley: A lot of our clients that we work for this is kind of their situation as well. We
have to provide for retirement for our clients. We are very comfortable and understand the needs
of such a portfolio. If they are not in pensions plans they are in IRA's for individuals that need
the exact type of management.
Glenn Atkins: One of the things that we do when we pick mutual funds for our clients on the
fixed income side we try to find mutual funds that manage money the way that we would if we
were picking the individual stocks and bonds that are researched based and focused on middle
America and large international industrial companies.
James Bell: I think given the situation that you are in, you are less than $5 million, you are
going to need to be in no load mutual funds and things like that. We are going to be very
sensitive. Glenn mentioned how much you were paying in commission and custody fees and
things like that. If you are getting up into the $40,000 to $50,000 a year range just in those kinds
of fees that is eating up principle that you can't afford to be giving up. We will be very sensitive
to the cost structure on the mutual funds, obviously no load and very low expensive ratio. Every
penny that we can keep in that portfolio is working for your benefit and not going elsewhere.
That would be our focus given those perimeters.
Glennn Atkins: The law says in your case it has to be open ended mutual funds too and there
are a million of those for us to choose from.
Kerry Bradley: There are very low cost options as well.
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Andrea Rasco: On number four can we touch a little bit more regarding what changes you
would immediately make if we turned over everything to you tomorrow. What is the first kind
of key things that you see as ideal for the switch over and changing things?
James Bell: The first thing that I would recommend is don't do anything at Northern Trust, if
you want to hire us then use Schwab. Let us do the reallocation because the commission
structure is so much. It will save you thousands of dollars. I think the first thing that we would
do on the equity side, given the constraints that we have I don't personally see any reason to go
half way about it, I think we would liquidate the equities that we are holding and roll those
directly into some very low cost mutual funds. You are still in the market. I think that is the
direction that we would go. Selling bonds there are some individual bonds in there and that is a
little more complicated than selling stock.
Glenn Atkins: We would sell the bonds as we could and then transition into a hand full of
mutual funds. We typically use mutual funds for very small clients. We would do an orderly
transition from individual fixed income securities into mutual funds that we follow and research
and that mange money similar to the way that we manage money if we were picking individual
bonds and stocks.
Pete Reagan: You recommend not using Northern Trust and going with Schwab?
Glenn Atkins: I would do it because it is free and the commissions are $8.95 per trade instead
of $500 or $300 per trade. You are talking about a substantial savings. The City has had
experience with Schwab in the past. They give us very good service and they can give you a
very good service. They allow us to give you very good service in terms of holding your assets.
Kerry Bradley: Given the nature of the portfolio draws and the size of it now certainly you are
on that cusp with $5 million but with the draws so heavy we would have to have a really strong
market to get us over that $5 million level where we would feel comfortable getting back into
stocks. If it happened we would probably come to you with a recommendation that you would
let us to pick the stock and bonds individually given the state laws and regulations.
Glenn Atkins: What are you all looking for in the ideal manager for your portfolio?
Pete Reagan: Someone that will drag this out as long as possible. We meet quarterly, normally
the month after the quarter ends, which would allow you and your firm to have a quarterly report
ready. We normally meet on Thursday at 3:00 p.m.
Glenn Atkins: You pick the day and time and we are here.
James Bell: We report quarterly so that would be in line with our normal operation as well.
You would have your quarterly report in hand before the meeting so we could meet and review
it.
Glenn Atkins: The other thing that hopefully sets us apart is we are the guys and gals that
actually manage the money. We are not going to take your money and farm it out to somebody
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Board of Trustees Meeting Minutes
December 8, 2011
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in Timbuktu. When you call one of us will answer the phone that is how accessible we are. That
is how seriously we take client service, if you have a question give us a shout. There may be
perhaps some public disclosure issues related to that we can work within the bounds of. Use us
as an information resource as we think about markets, client service and portfolio accounting.
Andrea Rasco: Does anyone have any questions?
Kerry Bradley: What actually happens if and when the fund is depleted? Is it just the millage
money that comes in that is paid out to the retirees?
Andrea Rasco: I don't think that question has been answered at this time.
Glenn Atkins: I researched some of the old Attorney General opinions and read the statutes
about underfunded plans and I hope you don't get there.
Andrea Rasco: We agree with you.
Pete Reagan: We are hoping the legislature has pity on us.
Glenn Atkins: Maybe that is one of your solutions.
Pete Reagan: Little Rock police were in the same predicament that we are in and their city
passed a one cent sales tax and dedicated part of that to the police pension fund because it was so
underfunded.
Glenn Atkins: Did that get it on the track to being funded?
Pete Reagan: It is a closed fund just like our fund is but it got it off the depressed pension fund
list of the Arkansas Pension Review Board.
Glenn Atkins: That's good.
Pete Reagan: There is a nice influx of money into that fund now to shore it up.
Glenn Atkins: That kind of inflow into this fund would certainly go a long way.
Pete Reagan: Oh sure.
Glenn Atkins: It might be enough to fully fund it.
Andrea Rasco: Any other questions for us?
Glenn Atkins: What kind of time frame are you on? Fairly quick from looking at the RFP?
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December 8, 2011
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Andrea Rasco: Yes. We will meet with the second firm in just a few minutes and then
immediately following that I think the board will discuss and hopefully vote today after the
second meeting.
Glenn Atkins: If you have any questions for us between now and then give me a call or send
me an email.
Andrea Rasco: Okay.
Glenn Atkins: We appreciate being here. Thanks for having us in. It was nice to meet each
and every one of you.
Andrea Rasco: If I can get you to sign the sign in sheet that would be great.
Dennis Mullens: Who actually is Garrison Financial? I know it is family owned.
James Bell: We were acquired in 2005 by the Garrison family out of Harrison. They owned
American Freightways. We had an investment management company here in town and they sold
American Freightways to Federal Express and had a big capital infusion there and were looking
to acquire a money manager to help the family manage their money. We had an existing
business here in Fayetteville and so they acquired us. We work with Garrison family and with
clients locally and across the country.
Pete Reagan: Thank you very much for coming in.
Glenn Atkins: Thanks for having us we appreciate the opportunity.
Andrea Rasco: It is okay to talk about the fees for the trading company that we use but we have
to be very careful about fees and things like that with them. We can not consider that when we
vote. Just keep that in mind.
Arvest Management Interview
Andrea Rasco, Purchasing Agent: I appreciate you for submitting a statement of qualifications
to us. I know it is a lot of time and hard work on your part so we appreciate your interest in the
project and submitting that information to us. I also want to thank you very much for
rescheduling for today. I know that made everyone's schedules a little hectic but we greatly
appreciate it.
Those attending the meeting were:
Andrea Rasco, Purchasing Agent
Mayor Lioneld Jordan
Deputy City Clerk Lisa Branson
Dennis Mullens, retired
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December 8, 2011
Page 10 of 20
Ronnie Wood, retired
Pete Reagan, retired
Marion Doss, retired
Barbara Still, Regional Investment Officer for Fayetteville Arvest
Brian Wood, Director of Investment Management Group, Arvest Asset Management
Tommy Karr, Senior Vice President and Trust Officer, Arvest of Fayetteville
Barbara Still: Thank you so much for giving us the opportunity to come out and speak with
you. We always like to work with the City. We all participate in this community and we want to
make be sure we work together and have the spirit of community that we like to have.
Let me tell you a little bit about Arvest. Arvest Asset Management is separate from the bank.
We manage about $6 billion of client assets. About $1.5 to $2 billion is managed by Brian's
group internally, which is the Investment Management Group, which I am a member of as well.
They manage portfolios for endowments, foundations, individuals, pensions, 401 -K's and people
like you who are more in the income phase of needing the funds. It is not all about growth it is
about income and keeping up with taxes and inflation. That is kind of Brian's group.
Tommy is the trust administrator who would be responsible for the day to day functioning of
questions.
Tommy Karr: I would work with your primary contact if we were to win your business and
take direction from you. We would provide regular statements to you. I would be your primary
contact for most questions.
Barbara Still: My job is to determine the asset allocation and the investments and then we
three, as a committee, sit down and talk about what needs to happen for the Fayetteville
Firemen's Pension.
Question # 1: Describe your understanding of State statutes relating to the Firemen's
Pension Fund.
Barbara Still: We manage a pension fund for a Firemen's group, the Rogers Firemen. We have
a real good understanding of it. We have processes and procedures in place to deal with changes
that come along. We understand our role is to an investment advisor and we determine the asset
allocation and provide that to you when it needs to change. We feel we have a good
understanding of the rules and regulations and a process in place to handle changes and things
that come along with that.
Brian Wood: To give you the background as far as how we manage, there is a caveat there
obviously; the money being right at $5 million any drop below that we understand by the statute
that it has to be managed in no load mutual funds. I think it is important to tell you how we
manage money in that most of our money is managed in pooled accounts and individually
managed. We manage money through mutual funds as well. We are going to give you the
returns that we have done in previous accounts based on our pool account investments knowing
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Page 11 of 20
quite simply that if it is below the $5 million we could not invest it that way. I think it is
important to give you that information because it shows you what expertise we have in the field.
The next page shows the performance from the fixed income and equity money management our
performance over the time horizons. One thing about our team that is going to be different than
most money managers out there is our team of money managers have been in place for almost 20
years combined, the two money managers of the fixed income and equity, the lead money
managers. Our fixed income money manager has celebrated his 25th year with us. All this return
information has been under his watch as well as our equity money manger that has been with us
19 years. All the return is what they have done. There has not been a break as far as
management is concerned. We are not showing you outside funds this is exactly what they have
provided. We have performance that beats the benchmarks for the long term numbers, which are
probably the most important to you in those categories. We wanted to give you some blended
portfolio asset allocation so you see a 30% equity and 70% bonds, a 50% equity 50% bonds and
a 70% equity and 30% bonds. So, there are some asset allocation levels that you can see and
how those would have performed over those time periods as well.
On the next page one of the things that we like to point out is that our performance based on a
risk adjusted basis is very good. The upside downside capture and the risk adjusted return versus
the standard deviation, this is risk versus return, the standard deviation is less than the market but
we have a higher return, so less volatility with a higher return. Same thing on the top of the page
if you are looking from left to right from the middle, the center is 100% downside risk, in other
words it is equal to what the market does on the downside when the market goes down.
Anything that would be to the left of that center means that you go down less than the market
when the market goes down. That is the best place to be. You want to be on that side. The other
thing you look at is, are you above or below the line as far as upside capture. How much of the
market do you capture when the market goes up. As you can see we are even with the market.
We typically do not go down as much when the market goes down but we typically capture
almost the exact amount of return for the market when the market is going higher. I think that is
important to point out there, same thing on the fixed income side, a higher level of performance
on the standard deviation with less risk, less standard deviation, and the same amount of return.
Question # 3 and # 4: If you were managing this fund would you invest where your firm is
the market maker? If so under what circumstances? What holdings would you
immediately recommend be changed based on the current investments and actuarial
report?
Brian Wood: Arvest Asset Management is not a market maker so that is something we would
not have an issue with. We do not make a market in any securities.
We would have to liquidate based on where the funds are and the information that we have here.
We would have to liquidate and go to mutual funds. In the next couple slides we show an asset
allocation as well as what those funds would be that we would actually use for that. I will point
out to you here that would be something that we would want to talk about as far as the asset
allocation. Typically what we have in accounts would be a 60/40 asset allocation. 60% equity
and 40% fixed income. When we consider how the fund has declined in value over time, it may
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Page 12 of 20
be better to be more fixed income in the allocation, because if you are pulling more money out it
would make more sense to have a higher level of fixed income. Typically when we are in a
60/40 asset allocation it is where the money is expected to grow and not have as much money
pulled out. In this case it may make more sense to have a higher level of fixed income than that.
Mayor Jordan: What would be your recommendation if you can't do 60/40 are you talking
about 50/50?
Brian Wood: It would be more on the 50/50 or 40/60. It would be somewhat of a flip of that,
would be the asset allocation that we would recommend. If the plan was to increase the amount
of money that is in this plan, to increase the level of funding, that is the way we would manage
that. We would have a lower asset allocation to equity. There is more volatility on the equity
side and if you are pulling money out, we always talk about dollar cost averaging into your
401 K, it is a good thing if the markets go down and you are buying, it is a bad thing if we refer to
it the other way. It is a dollar loss averaging. If you are pulling money out and the market is
down it hurts you worse. It is the opposite of the dollar cost averaging that occurs. In that case
you want a lower level of equity in the portfolio.
The next couple of pages show what funds we would be investing in. We use institutional share
classes so they we will have the lowest internal cost in those funds that we would be invested in
across the board. So your internal costs are very low. The next page shows the fixed income,
most of those are Vanguard funds; those will have very low internal expense ratios, typically
somewhere between 10 and 13 basis points. That will keep the cost down low internally for the
expenses related to those. If there are no questions, I will go on to question # 5.
Question # 5: What is your firm's corporate policy on investment research and investment
considerations?
Brian Wood: When we talk about our philosophy, as far as managing money, we do our own
internal research. We do not rely on external information for our research. It is a disciplined
long term approach. Obviously you can not look at the current quarter or the quarter before that.
It is important to have a long term approach in our investment style. We always tell everyone
that everything you need to learn about investments you can learn from your mom. Mom always
said do not put all your eggs in one basket. It is important to have a diversified portfolio. We
think today even more so just because of the extreme amount volatility.
Question # 6: Do you have any complaints filed against you at either the Federal or State
level. Question # 7: If given the opportunity who would you recommend for custodial
services, your firm, another provider, or the current provider.
Brian Wood: There are no complaints pending against us. Arvest Asset Management would
recommend M&I Bank because that is where all our current investments are at. It will cost more
if it is somewhere else. That is who we are use to trading through and that is where all of our
current assets are at.
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Page 13 of 20
Andrea Rasco: Is there a fee associated with using M&I in addition to what fees you guys
would have?
Brian Wood: Brian shook his head no.
Barbara Still: The last statement that you shared with us in the RFQ, the balance was $4.9 and
some change. What are our thoughts once it hits over the $5 million. The Dustin McDaniel
letter stated then you can do investment management at any way. What would you say that we
would do there?
Brian Wood: If we are close or barely above $5 million we probably would still want to stay
with the mutual funds. We would not want to get in a situation where we would have to switch
back and forth. Let's say we have a couple of really good years in the market and the funds grew
back into $6 or $7 million, and we are well above that level, then we could potentially switch
over to investing in individual stocks and bonds, because that is lower cost. Obviously there are
some internal costs associated with funds that raise the overall expense and we want to keep
expenses low. That is one of the most important things in providing good performance is trying
to keep cost at a minimum.
Barbara Still: I think too once we hit that $5 million mark we have the ability to look at our
common trust funds, which the return numbers you see in the report. We could switch into that
and retain those even if it dropped a little bit below. The way I understand the letter is that once
you own it you can keep it and just manage the allocation.
Pete Reagan: Right.
Brian Wood: That's a good point. We could also look at the common funds potentially.
Barbara Still: Those are even cheaper than the mutual funds because there is no internal
operating expense. The whole goal is to, we know that this is a stressed fund, so we need to cut
those expenses as much as we can but the letter says we have to invest in mutual funds. Those
have internal operating expenses. There are no loads but they still have to make some money to
keep the lights on. We want to keep that in mind. We want to be conscientious of the situation
as it is for the pension fund. We do understand that and want to do our part to help you with that
as much as we can.
Pete Reagan: There is no additional cost to use M&I as the custodian but there is a built in fee.
Barbara Still: You pay Arvest and then out of that fee we are going to take care of the cost.
Brian Wood: We take care of the cost associated with that. Some of the cost that we want to
bring up as far as additional fees because you want to have full disclosure on this.
Andrea Rasco: We can talk about the custodian that holds that assets but as far as individual
firm fees we can not discuss that.
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Page 14 of 20
Barbara Still: We read the actuarial report, but we would want to sit down with the board
members, because we put this together based on what we have and what we typically do for
pensions in asset allocation. We would want a little more input from you guys to understand a
little bit more of the situation, so we can put together the allocation and then we go from there.
Pete Reagan: Would you be willing to draw up an investment policy?
Barbara Still: Absolutely. We understand that is our responsibility.
Tommy Karr: Typically that is more of a collaborative effort. When we meet with a client it
is collaborative. We want to sit down and have some conversations. Obviously you are looking
for input from us for guidance as an investment advisor but we also need to understand the risk
tolerance of this board and take that into consideration.
Barbara Still: And a little bit of history too. That helps.
Marion Doss: Have you researched the state laws that affect this when it goes under $5 million.
It is important that we stay in compliance with state law.
Barbara Still: Absolutely. That is something that Tommy is very good at.
Tommy Karr: We looked at it from the standpoint of the investment management process. We
understand that this board, with oversight from State Board, is responsible for the majority of the
workings of the pension fund and making those decisions. We focused our time and effort on
making sure we had a good understanding of the investment process that the statutes address.
Andrea Rasco: What percentage of your portfolio involves directly with government pension
funds? I know you have Rogers, but in the scope of your portfolio how big is that?
Brian Wood: Pensions and governmental agencies are two separate things. I do not know the
break out on that but we do manage other monies for other cities as well as for Rogers.
Andrea Rasco: How long have you had Rogers?
Barbara Still: Since 1983.
Tommy Karr: It is actually the Police, they did have the Fire too but the Rogers Fire ended up
possibility rolling into the State.
Barbara Still: We have had it for almost 30 years and it has done well.
Andrea Rasco: Does anyone have any questions?
Barbara Still: We would want to sit down, if we were awarded, and understand the history so
we could make some decisions with you.
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Page 15 of 20
Andrea Rasco: We plan to move fairly quickly. You are our last interview and then
immediately following this we will get together and discuss the two firms we are looking at and
hopefully make a decision today.
Barbara Still: Great.
Tommy Karr: We welcome the opportunity to work with you.
Lisa Branson: Trish wanted me to let you know that she talked to Tina at Longer Investments
and they will continue to work with you as long as Northern Trust is the custodian until you
decide on a firm.
City Attorney Kit Williams: You certainly never need to go into executive session that is an
option that sometimes is allowed but never required. It is really only allowed to consider
personnel matters, this is more like a contract as opposed to an employee. If you had an
employee then you could go into executive session to consider the status of the employee. This
is a corporation and you are hiring them as a contractual part so I do not think that works. I
would have your meeting and not worry about that. Discuss it and make your decisions. That is
what I recommend. You can not make a mistake by leaving it open.
Mayor Jordan: What do you all want to do? I will give you my perspective off the top of my
head. I think the first group if you want to be a little more aggressive with your stock portfolio,
The Garrison folks recommended the 60/40 split. That is a little more risky and these folks will
do a 40/60 or a 50/50 or they will probably go with a 60/40 but that will be entirely up to you all.
Andrea Rasco: I think both of them are really good firms. If you told either one of them that
you wanted to be more conservative I think they will make it that way, if you tell them you want
a little bit more risk and a chance for a little bit better return, I think they will do that too.
Marion Doss: I think that Arvest, being a bigger company might be a little more able to adjust
more to different things. They are here and they are big. Garrison sounded good.
Dennis Mullens: He was very good.
Mayor Jordan: They gave us some pretty good service here at the City when they were here.
Andrea Rasco: The evaluation form I sent I out I took the four firms and put it down to two.
Each criteria is weighted. The first one to consider is 30% and it talks about the specialized
experience and technical competence of the firms with respect to what they are going to be
doing. The second item to consider is capacity and capability of the firm to perform the work in
question including services within fine limitations that is 25%. The third criteria is past
performance such as workability to meet schedules and deadlines. You can go with the pension
funds direct experience with either firm and if that is not available then it is just their past
experience in general with their references. The final criteria is their proximity and familiarity
with the area in which the project is located. Both are right here in Fayetteville. There is not
much to weight in difference between the two firms on that.
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When you are going through the thought process in your head of which firm best serves the
Firemen's Pension fund, the top three criteria especially are what you need to consider weighing
your vote on.
Ronnie Wood: I think both of the firms made it really hard for me. I think they are both really
good firms. I was impressed with both of them. I probably will go along with Marion, Arvest is
bigger and they are here.
Andrea Rasco: So maybe their capacity is a little greater.
Ronnie Wood: Yes.
Dennis Mullens: Possibility. With the other one you are not going to get lost in the shuffle.
They are trying to build theirs. They are not in the same league as Arvest. I liked it.
Andrea Rasco: Garrison had about $220 million in portfolio and Arvest had about $6 billion.
Marion Doss: We liked Elaine but when the policy changed she was pretty quick to drop us. I
wonder about a smaller firm. Arvest since they are big they are versatile enough to get things
changed. I think they are more versed in that respect. They can suit your needs.
Pete Reagan: In Longer Investments defense with what you just said, when we hired her in
2002 she told us when she buys the stocks she buys it for everyone of her clients. The reason
that she advised us that she could no longer be our investment advisor was because of this AG
opinion.
Marion Doss: I am not saying anything against her. I think she did a great job for us and I am
not complaining a bit about that. A smaller firm may not be as versatile when things change.
Dennis Mullens: We know where the pension fund stands and I think the fact that they sounded
more impressive. They still have their hands tied.
Andrea Rasco: The fees they were talking about between Charles Schwab and M&I.
Essentially you all can go with whoever you want to go with. Keep that in mind. They were
both free.
Pete Reagan: Actually they are not free they are figured into the cost.
Andrea Rasco: There is no additional cost on top.
Pete Reagan: We all know that anytime anyone handles your money there is a fee for whoever
handles it for whatever they do. That is a given.
Marion Doss: They can't do it for free.
Pete Reagan: It boils down to me to what the fee structure is going to be.
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Andrea Rasco: Right. In comparing them we can not evaluate that by state law. You can vote
on which firm you think would best serve the pension fund based on this criteria and this voting
form and then we take that top firm and you can negotiate with them. If you are comfortable
with their fees enter into a contract with them. If for some reason you are not able to reach a
contract with them because of their fees or whatever then you can throw them out and go to the
second one. By state law regulations, you are not able to say, what are your fees and compare
them and evaluate them when you are ranking them first and second.
Pete Reagan: Who changed that law?
Andrea Rasco: It changed in 2009 I believe. I do not know who changed it. The City went out
last year for investments and we could not consider fees either.
A discussion followed on the state law.
Pete Reagan: If we pick a firm today and we are not happy with their fee structure, can we put
them on hold and go to the second one and see what their fee structure is?
Andrea Rasco: No. You have to accept them or reject them. If you reject them you can't
consider them any longer. Once you pass up one you can not go back to them. You have to
select them based on their experience, capacity, capability and past performance, their
qualifications.
Dennis Mullens: That does not affect you being able to negotiate.
Andrea Rasco: Not at all. As soon as you pick the first firm you can enter into negotiations for
price and get something that you are happy with and comfortable with.
Dennis Mullens: In a lot of ways bigger is better but in a lot of ways it is not. Do you not think
Arvest is tied to something to negotiate? I really think you can work with a smaller one a little
bit.
Andrea Rasco: It makes it hard. The documents state it is a RFQ which is a request for
qualifications which means you can not talk about price. An RFP is a request for proposal and
you can consider price. That is the triggering difference between which solicitation is used when
you go out.
A discussion continued on the state law.
Andrea Rasco: I think you should take a few minutes and look at each one and compare them
and give each firm points. I think with these firms being so close it really helps you to arrive at
where the breaking point is with who you want first and who you want second.
Dennis Mullens: I am stuck on that one because I like the spill. It looks to me like they would
be more readily available for anything at the drop of a hat, Garrison.
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Andrea Rasco: I think the City has experience with both of them. I think they are both really
good firms.
Marion Doss: Arvest is easy to deal with too if you need something from them.
Dennis Mullens: They are not going to be as aggressive right. That is the way I understood it.
Pete Reagan: They will be as aggressive as we want them to be. We went with a 50/50 and we
have had a balanced account since 2002 but there have been times when we had stocks at almost
60%. It is right in that same range. We are not stretching anything.
Andrea Rasco: They are just advising you. They can advise 50/50 or 60/40 or whatever and if
you say no we want to get more conservative or less they do whatever.
Ronnie Wood: Both of them have said they will come in and see what we want.
Marion Doss: So when we get ready to vote do we make a motion?
Mayor Jordan: I guess however we want to do it. Here is the thing with me and I will be
honest with you. It is your retirement and I want you to be happy with whoever gets picked here.
Mayor's come and go, but you all are in here for the long haul. I don't think you could go wrong
with either one of these firms to be honest with you. Garrison to me seemed a little more
aggressive and that is more my flavor. It is all in how you regard stuff.
Pete Reagan: Longer Investment uses Schwab as their trading house but they do not use them
as the custodian because she did not want them at the same place. That was her option.
Mayor Jordan: I am more familiar with Schwab than I am with the other one. They are pretty
easy to work with.
Andrea Rasco: Do you have any questions for the firms? We can call them back if you have a
deciding factor. We can reschedule and meet again if you need more time to think about it. It is
important to get it done within the short future because there is a lot of transition that needs to
take place before December 31.
Pete Reagan: If we pick a top firm here today do we as a board sit down with them and go over
the fee structure or how does that work?
Andrea Rasco: We would probably have to get Kit's opinion on that. I think the board can do
it as a whole or the board can appoint one of you to do that.
Ronnie Wood: I am really struggling with this. It is so close. I would not mind having a day
or two.
Mayor Jordan: We told them we would make a decision today.
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Andrea Rasco: I can call and let them know that we will get back to them Monday.
Marion Doss: I would just as soon make a decision today since we told them we would.
Pete Reagan: I am like Ron, I am real close.
Andrea Rasco: If it is that close I would recommend that we appoint one of you to meet with
me and we can call references and see if that helps out any. Honestly with both these firms I
think the references are going to check out and be absolutely wonderful for every single one of
them. I do not mind to do that at all.
Ronnie Rood: I do not need that personally. It is just so close. I don't think there will be that
much difference.
Dennis Mullens: I have my mind made up.
Pete Reagan: Why don't you make a motion then?
Dennis Mullens: I don't think some of you guys are quite ready.
Andrea Rasco: Do you need a few more days to look through their statements of qualifications,
that they submitted, and go back through their interview documents?
Pete Reagan: I fully understand all the documents. The only problem I have is I want to know
what it is going to cost us and evidently we can not find that out.
Mayor Jordan: Unless you pick somebody.
Marion Doss moved to select Arvest. The motion died for lack of a second.
Dennis Mullens moved to select Garrison. Pete Reagan seconded the motion. Upon roll
call the motion passed 4-1. Sondra Smith was absent. Marion Doss voted no.
Garrison Financial was selected as the Financial Advisor.
Andrea Rasco: Now the board needs to decide if you collectively as a group want to negotiate
with Garrison or if you want to appoint a board member to work with those negotiations. Even if
you appoint someone that person could come back to a board meeting and discuss what the fees
are.
Pete Reagan: I will be glad to be involved in the process. I think it needs to be done fairly
quickly.
Andrea Rasco: We can take the current contract with Longer and review it to see if you want to
keep everything in that contract or if you want to change it. If you want to change anything now
is the time to put that in there before we send it to Garrison for their review and feed back.
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Pete Reagan: I think they will have their own investment policy. We should get theirs and
compare the two of them. I would get the contract done first. The investment policy is part of
that whatever it ends up being.
Ronnie Wood: It is up to them to furnish the contract?
Andrea Rasco: Not necessarily. We do it both ways, most of the time we like to use our own
contract because we like the language in ours a little bit better.
Ronnie Wood moved to appoint Pete Reagan as the point of contact. Dennis Mullens
seconded the motion. Upon roll call the motion passed 5-0. Sondra Smith was absent.
Andrea Rasco: Do you want to start with the existing contract or do you want me to contact
Garrison and try to get a contract to look at or do you want to start with the one you have with
Longer and modify it?
Pete Reagan: I think it would be good for us to look at theirs and see what they offer and
compare it to the one we currently have.
Ronnie Wood: Since you look at these contracts a lot are you comfortable with the one that we
have now.
Andrea Rasco: It is so different from our city contract because of the nature of the pension. I
have not reviewed it in great detail.
Mayor Jordan: Once you get both contracts you can see what they are charging.
Andrea Rasco: I recommend the board enter into a contract next week if at all possible.
Especially if you can't work out fees that you are happy with or can't agree on a contract then
you have to start all over with Arvest.
Pete Reagan: When I meet with them and bring back a number, I am bringing that number back
to this board and if they are not happy with it then we move on.
Andrea Rasco: The number and the finalized contract.
Meeting adjourned at 9:40 a.m.
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