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HomeMy WebLinkAbout2011-12-14 MinutesSpecial Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes December 14, 2011 Page l of 9 Lioneld Jordan Chairman Pete Reagan Position 2 Retired Sondra E. Smith Secretary Dennis Mullen Position 3 Retired Marion Doss Position 1 Retired Fayve eRon Wood Position 4 Retired ARKANSAS Special Firemen's Pension and Relief Fund Board of Trustees Meeting Agenda December 14, 2011 A special meeting of the Fayetteville Firemen's Pension and Relief Fund Board of Trustees was held at 9:30 a.m. on December 14, 2011 in Room 219 of the City Administration Building. Mayor Jordan called the meeting to order. PRESENT: Mayor Jordan, Marion Doss, Pete Reagan, Dennis Mullens, Ronnie Wood, City Clerk Sondra Smith, City Attorney Kit Williams, Garrison Financial, Press and Audience. New Business: Review Investment Management Agreement and Investment Policy Statement — Garrison Financial. Pete Reagan: Mayor I met, as the Board instructed, with two folks from Garrison Financial and was able to come to an agreement. You have that agreement in front of you for review. I also asked that Paul Becker and Kit Williams receive a copy of it. We have Kerry and Glenn from Garrison Financial with us if we need to ask them any questions. I would ask Kit for his comments on the contract. Kit Williams: I have a question for Garrison specifically about the fees. In paragraph two which says the client will pay the investment advisor as compensation for services under this agreement fees determined in accordance with Schedule B, Schedule B says 50 basis points, which is a half percent I think, of the market value of assets under management. Below that it says asset management fees are calculated based on the average market value over the billing cycle. Fees are calculated quarterly on an annual basis according to the schedule above and are paid quarterly in arrears. This one half percent I was not sure if that meant annually, quarterly or monthly. Glenn Atkins: The one half percent is an annual rate. Kit Williams: So every quarter it would be a quarter of the 50 basis points. Special Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes December 14, 2011 Page 2 of 9 Glenn Atkins: Correct. It would be paid in arrears after services have been rendered. We take the preceding four months market value and average that. Kit Williams: Okay. I thought that was what it meant but I was not absolutely sure reading that and I wanted to make sure for the record that we knew exactly what we were talking about. This is basically your standard investment contract that you submit for other funds that you manage? Glenn Atkins: It is. Kit Williams: On page five of nine there is a place for everyone to sign but Garrison. I thought you would probably want to add a signature block for yourself. I think we need a signature line for Garrison on page five. Glenn Atkins: You are correct. We will amend that and send it over. Kit Williams: The Investment Policy Statement appears to be primarily one of your standard investment policy summaries. I would note on page two that it says this investment policy summary is not a contract. This investment policy has not been reviewed by any legal counsel and the Advisor and Investor use it at their own discretion. I have reviewed it. I noticed at the end there is a place for everyone to sign even though it says it is not a contract. What concerns me though is, because it is your standard one and I know you put some limitations on the front end, when you look at page 5 of 8, it talks about diversification and permitted asset classes and permitted security types, many of the permitted asset classes the fund will be continue its ownership of but it can not purchase. Glenn Atkins: Correct. Kit Williams: That concerned me a little bit. I also felt like from a financial point of view that this fund now owns many individual stocks, stocks of individual companies plus it owns corporate bonds neither of which can it ever buy again unless somehow we got above $5 million. I think it is in the interest of this board to maintain those holdings. Once you sell one of those corporate bonds that is earning four or five percent interest you are not going to ever get that interest again. I drafted something that I would to probably be included either in the contract or in the policy that would say that Garrison Financial, LLC shall comply with the investment limitations of Arkansas law for this fund to specifically include all the various different statutes that we have talked about. Then I would say corporate bonds and stocks of individual companies currently held by the Firemen's Pension and Relief Fund shall not be sold without the express prior approval of the Fayetteville Firemen's Pension and Relief Fund Board of Trustees since State law prevents the reacquisition of these types of assets by the fund. It might be that you will only want to do that with the bonds. You might want to go ahead and authorize them to sell the individual stocks if you want to because you can buy no load mutual funds which means you are pretty much buying the market when you do that. Most no load mutual funds are like the S&P 500 type index funds? Special Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes December 14, 2011 Page 3 of 9 Glenn Atkins: There are index funds like that but there are also actively managed funds on the stock and the bond side. Kit Williams: They would still be characterized and meet the State requirement of no load. Glenn Atkins: Yes. If the asset mix was 60% stocks we could buy 60% in no load stock mutual funds and 40% in no load bond mutual funds. Kit Williams: I am more concerned with the corporate bonds that are drawing interest right now. They would never be able to get that good again. Pete Reagan: Is it Garrison's intent to liquidate the assets? Glenn Atkins: Our intent is to do whatever you all decide to do. There are merits and drawbacks to doing both ways. Pete Reagan: Our goal is to make as much money as we possibly can without a high level of risk. That is the reason that we are hiring you to do that. If they see fit and we can make money on the deal down road I would not recommend liquidation of assets all at once on January 1. I know that there is some that you intend to sell to get into your investment style. I agree with Kit that we should not liquidate all the assets, dump all our corporate bonds, and take losses and that type of thing. I think there is a time down the road when you will see that we will be able to turn a profit on it and then it will be profitable to sell. Glenn Atkins: This is going to be a very collaborative relationship with you guys. With all of our accounts we do not transition them from whatever they are on day one. We can do that but it is not typically our style. Given this situation we want it to be a collaborative relationship. We would like to have as much flexibility as we can to try to get you the best return that we can. We are not going to jump off January 1 and turn it into something that looks totally different than it is now. Kit Williams: My recommendation then would be in relation to the corporate bonds, which personally I think since they are drawing an interest rate that you can't get, now we should probably hold them to maturity. Even though you would be making a profit on them now because you can't get bonds that pay that interest you have a premium for them right now but once you cash them out then that interest that you have been earning is going to be over and you would be getting something at a lesser rate. On stocks since they can replace the stocks with mutual funds, this is why you would be hiring Garrison as your investment advisor, I think a lot of that could be left to their discretion, with the individual stocks, with the knowledge that they can't buy any more individual stocks. With the bonds unfortunately I don't think we are ever going to get back to the kind of percent interest that you are earning once you liquidate them in the current market. I would want to change this Investment Policy Statement which says it is not a contract to remove some of these asset classes on page 5. They can not have preferred stock, mortgages, and domestic bonds, stuff like that, individual stocks, which we can hold but we can not Special Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes December 14, 2011 Page 4 of 9 purchase any more. Probably just put in there that we can own the assets allowed by Arkansas law. Mayor Jordan: What you are saying is that we hang onto some of the corporate bonds because we are drawing a pretty good interest rate on them. You want to hang on to those but on the stocks then it is more at the discretion of Garrison. Pete Reagan: As long as they are no load mutual. We can hold individual stocks as long as they do not repurchase. Will your firm be available once a quarter to meet with us? Glenn Atkins: Absolutely. We added a clause on the first page of the Investment Policy that deals with some of the statutes that were referred to. We can certainly put that in the contract or add statutes to the extent that we need to. Kit Williams: I think that would be good for the contract to have. I can work with you to get the right language on that. I also want to make sure that you understand that I am not saying that there would never be a time not to sell a corporate bond. That would be something they should consult with you to do. There could be some unusual circumstance that would come out and they would want to sell and it would make a lot of sense. That would be very rare. Pete Reagan: I think that is going to tie their hands if they have to come to us for approval. We are hiring them to manage our money. If they see the need and it turns a profit then they should have the discretion to do that. Mayor Jordan: If you don't and something suddenly happens we have to try to pull a meeting together for you to give approval. Glenn Atkins: What we normally do when we get a portfolio like this we look at each individual security and make the determination if it makes sense to sell it or hold it. Kit's point is very valid in terms of where interest rates are now. It gets even to finer point than what you were referring to because you mentioned premiums on bonds. We can certainly get similar yield levels in the market today but it is likely that we could not get as a high of a coupon that you have right now without swapping A from B that looks very similar. To the extent that we can hold those higher coupons, the underlying yield will be the same but it would potentially generate more income for the fund. Kit Williams: I think one of the problems is I do not think we could buy new corporate bonds. We are stuck with government bonds at this point in time. Glenn Atkins: My understanding is that we could buy fixed income mutual funds as well. Kit Williams: I think you probably can. I will leave that up to your expertise on looking at the State law and determining what that is. You might want to talk to Paul Becker our Financial Advisor about that. Special Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes December 14, 2011 Page 5 of 9 Glenn Atkins: I did not see anything in the statutes that made a distinction between equity mutual funds and bond mutual funds. Kit Williams: You might be very well correct on that. That is why you are being hired because you are the experts on that. Glenn Atkins: Should we consult with you regarding that or Mr. Becker? Kit Williams: Mr. Becker but also use your own knowledge of the financial situation. I am a lawyer but I am not a financial advisor. I am sure you have much greater expertise in this than I do. Glenn Atkins: What we would normally do in a situation like this that requires mutual funds on the bond side is to try to find mutual funds that manage money very similar to the way we would if we could buy individual corporate bonds. Does that make sense? Kit Williams: Yes. Kerry Bradley: I think as far as the discretion goes, as far selling any of those corporate bonds. I would like to have the flexibility. It is rare that it happens but occasionally a CEO goes to jail. I don't think there are any bonds in your portfolio that might happen to but again we never know. Should there be something in the portfolio that there is a significant news event that could really impact the portfolio rather than try to get the group together to meet. We are certainly going to take direction from you. We certainly would not sell those bonds unless we could replace them with something better. Pete Reagan: I want you all to have that flexibility. Kit Williams: I think you understand the concern and interest of the Board. I don't think there needs to be anything that prohibits you from doing that if that is what the Board's desire is. Glenn Atkins: We take very seriously our responsibility to do what we think is in your best interest at a return. So there is not going to be a situation where we would take an action that we did not think was in your best interest. We take that fiduciary duty very seriously. It is a very serious issue. It is a big responsibility for us. Kit Williams: I would also recommend as part of that or part of a change in the Investment Policy Summary the language about following the Arkansas State law and investing only in the class of investments. Pete Reagan: This is just the contract Kit. Kit Williams: In their Investment Policy they said this is not a contract. So I would like that portion of Arkansas law to actually be included in the contract. I would add on that where it says the trustees of the City of Fayetteville Firemen's Pension Relief Investment portfolio are charged with the responsibility of investing the asset, I would say Garrison Financial, LLC as its Special Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes December 14, 2011 Page 6 of 9 investment manager. So both this Board and the manager need to follow the State law. That is the first page of the Investment Policy Statement. Sondra Smith: Does Garrison's signature need to be on page 8 of the Investment Policy Statement? Pete Reagan: I agree with that. A discussion followed on changes to the contract and Investment Policy Statement. Sondra Smith: Why don't we just run through the Investment Policy Statement so we will know the changes to it? We are mixing the two and I think people are getting confused. Investment Policy Statement: On page 2 Garrison Financial will be added and add State statute 24-11-805. We are going to remove the section on page 2 that says This IPS is not a contract. This investment policy has not been reviewed by any legal counsel and the Advisor and Investor use it at their own discretion. Instead of listing on page 5 the diversification, permitted asset classes, and permitted security types, insert as permitted by Arkansas law. On page 6 delete Prohibited Asset Classes and/or Security Type and add Garrison's signature to page 8. That is the Investment Policy Statement changes. Investment Management Agreement (contract): Add signature line on page 5 of 9. Pete Regan moved to adopt the Investment Management Agreement (contract) between Garrison Financial and this Pension fund with the addition of Garrison Financial signature line on page 5 of 9. Dennis Mullens seconded the motion. Upon roll call the motion passed unanimously. Ronnie Wood moved to adopt the Investment Policy Statement between Garrison Financial and this Pension fund as amended. Pete Reagan seconded the motion. Upon roll call the motion passed unanimously. Kit Williams: Why don't you get us a clean copy and we will get the Board to sign it. Sondra Smith: Our regular meeting is in January. Pete Reagan: Do we really need to meet in January? Sondra Smith: We have a letter from PRB that we need to answer. Pete Reagan: We also need to deal with our asset allocation in our Investment Policy. We left those numbers blank. I would like to hear from Garrison Financial regarding their thoughts on our asset allocation. Glenn Atkins: There are two ways to think about asset allocation. In your particular situation given the funding status of the plan one would be to be more heavily weighted in stocks because Special Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes December 14, 2011 Page 7 of 9 stocks would typically give you a higher return. The other approach would be to tilt it more towards bonds or fixed income to try to generate more income. Most pension plans and perpetual endowments in foundations are typically invested 60% in stocks and 40% in bonds. That is certainly a very prudent place to be. That is a very good asset allocation because it gives you some opportunity for growth in the stocks and some opportunity for income in the bonds. Within those two extremes I think it would be whatever the Board is comfortable with. Pete Reagan: I would like to see a 60/40 with a five percent variance. I think that worked out real well with our last investment advisor. 60 stocks and 40 fixed. Glenn Atkins: Would it be possible to have a slightly higher variance than that simply because the market moves. Typically what we suggest to clients is a 20% variance. I think in this case that may be too wide. I am also thinking that 5% is too low, maybe something in the 10% range. Pete Reagan: 10% is fine with me. With mutual funds there is a lot less risk on the variance side. Kerry Bradley: The policy you sent us you had a maximum equity exposure of 50% with a minimum equity exposure of 25%. It looks like there was a lot of variance. We see 3% to 4% moves in the market occasionally. We could see a day where there is a 5% variance. A 10% variance we are totally comfortable with. You currently have maximum cash and equivalence of 25%, minimum of 5%. Giving the funding status and the draws on the portfolio we certainly will keep three to four months liquid cash for your monthly draws. We tend to lump that into the fixed income portion of the portfolio, we certainly can break it out and have a 5% cash minimum if you would like to see that. I think a 60/40 given the funding status of the fund. I think that is best options that will hopefully provide you some stability and some growth to make this fund last as long as possible. It is a little higher than what you have now as far as the maximum but with rates so low and stocks so cheap we certainly recommend that. Pete Reagan: Are you okay with the 10% or would you recommend higher? Kerry Bradley: I think 10% is fine. Pete Reagan: It is a good staring point and if we see changes need to be made we can always make changes. Is that everything we need to look at on the Investment Policy? Kerry Bradley: I think if go with 60% equity and 40% fixed with a 10% variance we are totally comfortable to work within those guidelines. Pete Reagan moved to approve a 60% Equity and 40% Fixed Income with a 10% variance. Ronnie Wood seconded the motion. Upon roll call the motion passed unanimously. Kerry Bradley: Glenn spoke to Andrea here at the City about who can act as trustee on the account and it is our understanding that the Board can act as the trustee, there is no corporate trustee needed. Is that correct? Special Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes December 14, 2011 Page 8 of 9 Pete Reagan: As far as we know. Kit Williams: They are the trustees. They are the official decision makers. Kerry Bradley: We were going to move the account to Charles Schwab from Northern Trust. Northern Trust is charging you about $300 a month just to custody the account. There was a fee on the statement and we weren't exactly clear if it was trustee fees or custodial fees. If it is custodial fees Schwab is free. I think the fees on the plan will come down from in excess of $100,000, from looking at the statements, to just our fee because Schwab does not charge anything. If we were to liquidate the stocks, the commissions are very inexpensive. I think the fees on the management side and the investment side will go from in excess of $100,000 to around $25,000 per year. If you can act as trustee that depends on the paper work we need to fill out for you to move the account. Glenn Atkins: Based on some research that we have done in the last day or two from talking to Andrea and the prime manager, Northern Trust right now is only acting as custodian not as trustee. You have the ability to hire a custodian or a trustee. Our recommendation would be if you can act as your own trustee to remove those fees that you are paying now and move it to a custodial relationship at Schwab like you have at Northern Trust right now, which will be free compared to what it was at Northern Trust. Pete Reagan: I think we are the trustee anyway. Kit Williams: I think you are too. I think you have always been the trustee even though evidentially there was a secondary trustee of the funds. I think that makes a lot of sense. The custodian has the same duties to maintain our stuff and not steal it right? Glenn Atkins: Yes. Kit Williams: Which is basically all the trustee would be doing. I don't know of what other duty that a trustee would have. These individuals up here are the trustees. They decide on the benefits and investments. Glenn Atkins: Everything that I am seeing points to that. I think it would be a good thing to move it to Schwab and get rid of those fees. Kit Williams: Does the Board need to take any official action to do that? Glenn Atkins: It probably would not hurt. Kit Williams: Do they need to have a motion to appoint Schwab as a custodian? Glenn Atkins: Yes. Pete Reagan moved to move our official custodian from Northern Trust to Charles Schwab. Dennis Mullens seconded the motion. Upon roll call the motion passed unanimously. Special Firemen's Pension and Relief Fund Board of Trustees Meeting Minutes December 14, 2011 Page 9 of 9 Meeting adjourned at 10:15 a.m.