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HomeMy WebLinkAbout2011-10-20 MinutesSondrd Jordan Chairmana e e;lile Sondra E. Smith Treasurer Eldon Roberts Secretary/Retired Position I ARKANSAS Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 20, 2011 Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 20, 2011 Page 1 of 11 Jerry Friend Retired Position 2 Tim Helder Retired Position 3 Melvin Stanley Retired Position 4 Frank Johnson Retired Position 5 A meeting of the Fayetteville Policemen's Pension and Relief Fund Board of Trustees was held at 3:00 PM on October 20, 2011 in Room 326 of the City Administration Building. Eldon Roberts called the meeting to order. Present: Jerry Friend, Frank Johnson, Eldon Roberts, Tim Helder, Melvin Stanley, Kit Williams, City Attorney, Paul Becker, Finance and Internal Services Director, Lisa Branson, Deputy City Clerk, Elaine Longer and Kim Cooper, Longer Investments. Sondra Smith was absent Mayor Jordan was absent during roll call. Approval of the Minutes: Approval of the July 21, 2011 meeting minutes Jerry Friend moved to approve the July 21, 2011 Policemen's Pension and Relief Fund Board of Trustees meeting minutes. Frank Johnson seconded the motion. Upon roll call the motion passed 5-0. Mayor Jordan was absent during the vote. Sondra Smith was absent. Approval of the Pension List: Re -Approval of the October 2011 Pension List (Adrian Cooper Deceased) Eldon Roberts: Adrian Cooper, a retired police officer, died September 13, 2011. He does not have a spouse. He will be deleted from the pension list. His retirement check was sent for September but there will not be another one sent since he does not have a spouse. Lisa Branson: The $200 death benefit check has not been sent to the estate because we have not received a death certificate. Eldon Roberts: We have a standing policy that we go ahead and mail the check regardless of the day of the month he died. Social Security breaks it one way or the other. The $200 check that we send for burial expenses or to the estate has not been sent. We are having problems Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 20, 2011 Page 2 of 11 receiving a death certificate from someone in the family. I assume that check will not be sent until such time that the death certificate is received. Lisa Branson: Correct. Eldon Roberts: That would be proper. Eldon Roberts moved to re -approve the October 2011 Pension List. Tim Helder seconded the motion. Upon roll call the motion passed 6-0. Sondra Smith was absent. Approval of the November and December, 2011 Pension Lists and the January 2012 Pension List Eldon Roberts: I assume they are the same with Adrian Coopers name deleted. Lisa Branson: Correct. Eldon Roberts moved to approve the November and December, 2011 Pension List and the January 2012 Pension List. Jerry Friend seconded the motion. Upon roll call the motion passed 6-0. Sondra Smith was absent. Unfinished Business: Review, Approve and Sian Longer Investment Policy Kit Williams: I'm going to suggest to the Fire Pension Board that they change their policy based upon the fact that they are getting close, if they have not hit below $5,000,000, in their fund. When you get below $5,000,000 in your fund you can hold the investments that you already have, stocks and whatever you have, and you can sell them, but if you ever sell them you cannot buy anymore stocks and bonds. You are limited to no load mutual funds, cash, and government bonds, which obviously are less volatile so that's a plus. The downside is they usually do not collect as much money for you. You don't earn as much as you do sometimes in the stock market, even though recently it's not been going in the right direction. This is applicable to them because they are at or below $5,000,000. You all are not yet. Eldon Roberts: In the minutes as of September 30th it was $7,800,000. Mayor Jordan: I wanted you all to be aware of this because this is the Attorney General's opinion. Kit Williams: It was written from questions asked by our own Fire Pension Board. Mayor Jordan: He says if it drops below $5,000,000 you don't have to liquidate it but you can't do anymore trading with it. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 20, 2011 Page 3 of 11 Kit Williams: That's what Elaine does in order to get the best possible results for you all. Tim Helder: That's just until it goes back up over $5,000,000 again and then you can begin the process again. Kit Williams: How are you going to get it up above $5,000,000? Tim Helder: I'm just asking. Kit Williams: If you got it back up over $5,000,000 yes, you could have everything again. Tim Helder: I see what you are saying if they have that ability. Eldon Roberts: While they are out there close I could see it but when you get to $2,000,000 it would be hard to get it back to $5,000,000. Kit Williams: There is not a whole bunch of additional new revenue going into it. She has a request for a new investment policy. Elaine Longer: We have a copy of that. Kit Williams: It's in the agenda. Paul Becker: That's the one we looked at before and we asked her to make a couple changes. I reviewed it and it looks like the changes that you requested are incorporated. Elaine Longer: Did you have a chance to review it? Paul Becker: I looked at it. What I had brought up and I believe the suggestions everybody had were incorporated. Elaine Longer: All that we need to do is have it voted on and eventually signed. Kit Williams: Have you all had a chance to look at the recommended new investment policy? Eldon Roberts: Paul looked at it. Paul Becker: The new one is in your packet. I took the changes Elaine had made, reviewed them and compared them to my notes and it appears to me that everything we discussed is incorporated in there. Eldon Roberts: Has Elaine been notified of the Attorney General Opinion? Kit Williams: I just gave her that. It just came out yesterday. Eldon Roberts: Elaine do you want to change anything in this before we sign it today? Are you still comfortable with the one that Paul looked over? Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 20, 2011 Page 4 of 11 Kit Williams: That opinion would not change what she can do for this fund. Elaine Longer: It will change what we can do for Fire because you can't go into the ring with one hand tied behind your back. Paul Becker: The two basic changes that we talked about is the last one did not have the objectives in here and this does have objectives incorporated. We talked about adding that Elaine has the authorization to go over the investment amount percentages and she will notify you. Elaine Longer: It is the same thing we are doing now where we notify if we go over the equity allocation by 10% but it just covers us until we get to the next meeting. Eldon Roberts: Then we would have a motion like we have done in the past. Frank Johnson: Kit this is not good. Not that the market is doing that well anyway. Kit Williams: It guarantees that there will not be sufficient income gains from the amount of money they have left, unless we go into a giant inflation where they can get some good interest. I would agree with you Frank that it is not good news for the Fire Pension. Paul Becker: The intent of it is once your assets get down to a certain level the legislator, I would assume when they passed that, said you are going to have to start looking at security a little more. The problem is once you go into more secure assets, which as Kit is saying is going to get you less of a return, if you are not where you are it's going to lock you in to the situation like Fire is going to be in. You are not going to be able to generate enough returns unless something happens and it turns around goes over $5,000,000. Eldon Roberts: What is their total portfolio right now? Paul Becker: They are very close. Elaine Longer: Slightly under $5,000,000. Paul Becker: I thought it was about $4,800,000 last time we looked. Frank Johnson: It's kind of a paradox in a way for them. There is the possibility that their portfolio could take opportunities of some future gains. Kit Williams: It still can as long as they don't sell what they have. They can hold the stock but if they ever sell it then they have to convert it to cash or government bonds. The City has money in reserve and we have to have it invested in the most conservative ways possible. Mayor Jordan: I'm in TIAA-CREF at the University and that is not doing as well. The TIAA is a lot safer. If I wanted to transfer all of my CREF into TIAA that's sort of what you have to do isn't it? You can't get out there and do a lot of stuff on the stock market. When you get older and closer to retirement then you go to safer, is that what this is like? Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 20, 2011 Page 5 of 11 Elaine Longer: The TIAA is a whole different thing. What this would do is basically every time I sold something I would be restricted on the reinvestment and that is an impossible situation for a money manager. Because you can't have responsibility for something you don't have control over. In a situation like this I would have my hands tied behind my back if I would still be responsible. Eldon Roberts: You are being dictated to on how you can invest money. Elaine Longer: I would have fiduciary responsibility, as a money manager on a public pension fund, but I wouldn't have the ability to do what I think is best for them. It's an impossible situation and we would have to resign. Paul Becker: What the Mayor is saying as you get older, as the fund dwindles, and as the number goes down it's safer to move to safer investments. Unfortunately the asset level isn't enough to fully fund it and Elaine is saying she would be restricted to the point that she couldn't get the additional returns she would need to get it to the level it would have to be. Mayor Jordan: I'm no longer putting any money in that retirement so it is kind of a closed retirement. I would be taking it from high risk CREF stuff into the safer TIAA. Elaine Longer: Except that you don't have a required liability. What happens in this case is you have seen us fluctuate between 40% equities and 55% or 60% depending on the market. I can always go back in there. It's always a temporary situation, if I'm at 40% it is because I anticipate that it is a better buying opportunity to go back up to 50%. But, in a situation like this once you get to 40% you don't have the opportunity to go back in. What you're required to put the money into is government bonds, the five year treasury is at 1%, the ten year is at 2%, and your funding requirement is 5%. It just increases the risk of ruin because you can't get your actuary rate of return that you need to get to meet your liability when you're forced to go into government bonds. To give you an idea if you look at the side of the fixed income portfolio that we are invested in on page one the stocks that we own, which are 40% of total portfolio, getting a dividend yield which is just the income yield that comes in regardless of what the stock market does is a 3.9%. It's almost double what you can get in a ten year bond. The other securities listed that we invest in for income because the bond income is so low, Duke Energies, the utility sector fund, and the multi asset income index yields almost 5%, and that is a well diversified way to get income into the portfolio. You wouldn't have that option in the Fire Pension now because the money being raised would have to go into government bonds. Two year treasury is zero yield because the Fed has now said we are going to keep these interest rates at zero for two years which clasped the two yield to nearly nothing. The two year treasury is an average of what the market anticipates the yields will be for the next two years, if you were parked in short term money, when the Fed says short term money is not going up for two years the two year treasury drops to almost nothing. The five year drops to 1% and now the ten year, because of operation twist is at 2% and we can get 3.9% on stocks, and 4.9% on bonds. We use a combination of funds, which are investment grade corporate bonds funds, and the short term treasury fund to yield 4%. We have corporate preferred debts which we weigh very light as a percent of total portfolio because indeed they are investments on the debt side of individual corporations. AT&T is only 2.7% but Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 20, 2011 Page 6 of 11 it is a Double A rated credit and GE is 3.5% and that is a Double A rated credit but we are able to get 6.3% yield off of it. Then you get into the treasuries that you own which yield 4.1% but that is 4.1% on your book value. The price appreciation the 5 1/8% we paid par for or 100 cents for the dollar is now trading at 119 because interest rates have gone so much. If you were coming out of an investment in the Fire Pension portfolio and you had to go into treasuries they are not going to be yielding 4.1% they will be yielding 1% in the five year or if you go all the way out to ten years 2%. There is a lot of risk in the ten year treasury. At this point the duration, which is the measure of the price volatility of a bond for a change in interest rate, is nearly nine. What that means is on the ten year treasury the 2.2% yield, if the yield goes up to 3.2% you are going to see a 9% drop in the price of the bond. A 1% move in interest rates to the up side can actually reduce the value of the bond by almost five years worth of income. To say that this is safer, it is not safer to go into government bonds at 1% on a five year, 2% on a ten year given the fact that interest rates could rise. You could see a decline in the value in those bonds that clearly swamps what you are getting on income but also it hampers further your ability to get to funding the liability. When you look at the fact that if you are 50/50 bonds and stocks, if you are getting 4% or 4.4% on bonds, like we are, you can see you use a lot of different asset classes to get to that income return. Everything is still investment grade or government. It's really hard to get income out there in the market right now. You can't get it in treasuries so how do you get income but still adhere to a fiduciary responsibility of protecting the assets. You have to be very careful and you have to incorporate a lot of different asset classes. If you are making 4.4% on the fixed income side, like you are, that is 2.2% weighted in your total return. That means to meet your actuary assumption of 5% you need to make 2.8% on the other side that is 5.6% on equities and about 6.5% before fees. That is a very realistic assumption and that is a safe assumption. That is why we have always been comfortable with the 6% return assumption. Now if you take the 50% of the bonds side and you weight between five and ten years so you are making 1.5% on that, that reduces the return on the bond side of the portfolio to .75%. To make your 5% actuary return assumption you have to assume that you're going to be making about 12% compound annual on stocks which is above what anybody would have as any kind of an expected return for the next decade in the stock market. It paints them into a return that is very low any time anything is sold. I think it gets them further away from being able to fund their liabilities. It is amazing that is what they want to do but apparently it is the opinion. That is the reason why we could not stay involved in this because I would never manage a portfolio in this market this way. As you can see if I would be willing to manage a portfolio this way that is what your portfolio would look like right now and it certainly does not look like that. Tim Helder: Thanks. Eldon Roberts: When I first got on the board the law then was that the only thing we could invest in was saving and loans and banks and they had to be in your own town. It had to be in saving and loans, CD's or whatever you could do with banks. That probably hampered us and all these funds from doing well but then a few years later the law changed and we could go out and get money managers and get into the financial gain like we have which has been a plus for all of us. That's heading back to where we were. We can do business in secure financial deals. Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 20, 2011 Page 7 of 11 Elaine Longer: That begs a question about what is secure. It's like people think bonds are secure and right now the ten year treasury in our opinion is the scariest trade on my screen. You don't see me buying a ten year treasury. What you see the Fed doing with quantitative easing and the operation twist and then the fiscal side of the equation you have the Federal Reserve pumping the monitory system to try to stimulate the economy. Then on the fiscal side, the government spending side, we are still running a deficit as a percent of GDP of about 9%. It's still fiscally very simulative as well. If we hit traction you could see inflation numbers that are quite a bit different than where they are now and you will see the ten year treasury go up. Right now the question among money managers is what would the ten year treasury yield be today if the Fed wasn't in there doing quantitative easing and operation twist and everything else to hold the ten year yield down. We don't know because basically the ten year yield is being controlled by what the Fed is doing in the market. The reason for that is because the thirty year mortgage keys off the ten year treasury and they are trying to help the housing situation to recover by keeping those thirty year mortgage rates down around 4%. The question is what happens to that ten year yield when all of this manipulation goes away? I don't want to be holding it and if that 2% goes to 3% the price of those bonds will go down by 9%. It's not a risk free trade to hold government bonds right now. There is risk. The risk is if interest rates rise you have a significant price decline in the bond. Paul Becker: Unless you hold them until maturity. Elaine Longer: I wish I could hold them ten years to maturity but then you are making 2% and your funding requirement is 5%. Paul Becker: Part of the discussion you are having, as far as what is risky and what is not risky, is because of the unique economic times we are having. Traditionally your treasuries are the safest but you are right, because of the duration risk that you are talking about that's what makes them insecure. Jerry Friend: If you were all in securities, even in good times and bad, don't you still suffer from inflation? Can you really make quit a bit of money by holding securities? Elaine Longer: What you do when you are structuring that fixed income portfolio, the bond side, the two risks that you are always trying to guard against are inflation risk and reinvestment risk. The reinvestment risk comes from the fact that if you had all short term maturities and then we had a situation like what we have been through, where the interest rates dropped from 4% in the short end to zero and you have maturities rolling off too quickly your reinvestment rate drops. You go from 4% or 5% bond rolling off to reinvesting at zero. That is called reinvestment risk. You use a ladder portfolio approach where you have enough securities in the short hand that if interest rates go up, you've got a way to capitalize on it and pull from the short end and reinvest that and tap into the higher rates. Conversely if interest rates go down dramatically you still have enough out there in the longer maturities that your over all portfolio doesn't drop dramatically. It's like straddling the fence and that is why you see bond portfolios in laddered maturity structure. When you face a situation like this where you really can't trade government bonds, you lose your flexibility here as well. If I see an opportunity to tap into higher yields normally we would be selling the short maturities. A lot of times we don't hold the Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 20, 2011 Page 8 of 11 bond to maturity, that's cash to us, it is cash and we are going into something longer but in this policy you can't even do that. Tim Helder moved to approve the Investment Policy. Eldon Roberts seconded the motion. Upon roll call the motion passed 6-0. Sondra Smith was absent. New Business: Revenue and Expense Report Lisa Branson: We had not received a copy of the report when I put the agenda together. Accounting should send it to me in the morning and I will email it to you tomorrow. 2012 Meeting Schedule A copy was provided in the agenda packet. Discussion Items: LOPFI No discussion. Longer Investments: Elaine Longer: On page one of your reports what we have been doing, and I have talked about this in prior meetings, because of the risk that we saw out there with the budget deal, the high stakes debt negotiations, and the EURO zone problems, we have been pretty conservative on the equity side but you can't leave growth completely because you can't really go over on the fixed income side. On the equities that we've held we've adhered to the high dividend paying stocks so the blue chip high dividend multi national corporations have really been much more defensive not just in the US market but also internationally. The dividend yield on your stock part of your portfolio is 3.9%. The other income categories yield 4% to 6%. Page two we entered the quarter at about 11% cash. We are down now to 4.5% cash because we had a good dip the first week of October where we were able to deploy some of the cash. The overall income yield on the portfolio is 3.8% and that is with 50% of it invested in growth income. We are still getting a bond portfolio better than the bond portfolio income yield but you still have a 50% growth. Page three shows the update on where we are now. The equity side of the portfolio has gone up from 40% to 44% and that has brought cash down to 4.5%. We can go from 43% back up to 55% if we want to and we have plenty liquidity in the portfolio to do so but we are all sitting Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 20, 2011 Page 9 of 11 there watching the EURO negotiations. October 23`1 is suppose to be last final EURO deal and today the question is whether or not they are even going to have a meeting on Sunday. The market comes off and the statements come out that they are indeed going to meet and Merkel's office come out and said there is also going to be a statement next Wednesday. She didn't make the statement so the market is kind of trading on every single rumor. The fact of the matter is we don't know what the solution is yet and we don't know if they even from a legal standpoint can come together and do what some of the rumors are suggesting that they plan to do like leveraging up the ESFS bailout fund. We don't know if that is constitutionally available for Germany to commit to that without a vote. We are not out of the woods there. Even though the valuation of stocks relative to bonds is still very much favoring stocks we don't want to put all of our chips down until we see some of these bigger issues resolved. The EURO is one and the second thing we have coming up this quarter is the super committee. We could get into the brinkmanship that we saw in the summer going up to the debt deadline because of the fact that you still have quite a void between the parties in terms of how to attack the deficit. Will it be revenue increases or will it be cutting expenses? When I saw Nancy Pelosi recommendations to the super committee from the democratic side I thought oh no here we go again. It's basically the same argument that we faced in the summer and I don't think the other side of the table is going to be anymore willing to go for tax increases. Basically it's a philosophical division between the two sides between revenue increases or spending cuts. The problem is when you go into the next deadline there are automatic cuts that take place in defense and other things if they don't come to a resolution. We could actually replay what we were going through in July, waiting to see what happens, and can they come to a resolution and if they don't, what is going to happen? We are in a holding pattern here the earning season is coming through just fine. There are pockets of weakness but I would say most the corporations that have reported have not disappointed. It's a question of these external risks to the market that we are still kind of waiting to get more resolution. Page five the realized gains year to date are $178,000. A lot of that is from gains that we took to lighten up before the market got hit. Page six shows the bond portfolio. The average yield to maturity is currently 4.4% and that compares to 4.5% at year end. We have shortened the maturity to 6.1 years, from year end you were at 8.7 years. You have a more defensive posture in terms of the length of maturity of your bonds but you haven't given up any income to speak. The average duration is 5.4. The bonds maturing before five years make up 30% of the bond holdings. The portfolio is structured in a way that's' still liquid. You have good income yield, we have shortened up maturities to be a little bit more defensive because of duration risk but we haven't sacrificed any income. Page seven shows the performance of stocks year to date down 5.5%. The S&P is down about 10% through September 30th. In October we had an improvement of about 5%. The international stocks are down 15.2%. What's interesting is the United States, America's market, has really out performed the world. We have out performed Europe, Asia, China, emerging markets and so that is why you don't have any International in your portfolio at this time. We raised cash from the International side to be on the domestic side with a high dividend paying multi national corporations. As we go back into the market that's still the area that represents the most value in the world as far as we are concerned. At this point you don't have International Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 20, 2011 Page 10 of 11 exposure. The fixed income side is up 7.3% year to date and that's that much higher than your income return because of the fact that interest rates have continued to decline this year. The flip side of duration risk is that when interest rates are declining you're total return is higher than the income return because you have price appreciation. Your total is relatively flat year to date down .7%. I updated it through yesterday, your stocks are actually positive now about .8%. S&P is still down 2% to 2.5% and bonds are up 6.6%. Your total is up about 2% year to date, and cash is 4.5% of portfolio as of yesterday. The compound annual returns are still doing pretty well 4.5% on the equities side but 6.2% on the bond side because the 40% negative return in 2008 was what really hit the equities side so that your total return is still at 5.8% compound annual. When I looked at it today you are at the 6%. You hang pretty close to that 6% compound annual return, the actuary assumption from 1989. Page eight is contributions and distributions and year to date contributions have been minimal just recoveries from various class action lawsuits, only $109 but distributions have been $623,000. Page nine is the asset reconciliation from account inception. We update this each time we meet. The total contributions that came in from 1990 forward have been the distributions have been about $8.5 million and the net investment return has been about $7.2 million. It is a lot closer, the distributions verses the net investment return, than what I think the Fire has experienced but still the net investment return, even though it has achieved the 6% actuary assumption it still has trailed distribution. Elaine handed out a couple of charts and stated the first one shows the performance through September of the US market for the first nine months relative to the other markets in the world. At that time we were 16.7% off the peak coming off the 2009 low. Italy is down 44%, France is off 32%, Germany 31%, and China is off 30%. The emerging markets like Brazil off 27%, India 23%, even Canada is down 19.7% off their peak. It is interesting that the American market has held up so well but our currency has held up well too because the dollar is the world reserve currency. You look at the companies that you are invested in like Coke and Wal-Mart, I don't think I've ever seen Wal-Mart earn a dividend yield that was higher than the ten year treasury but they do. The next chart shows you why everyone is so nervous about what is going on in the EURO zone because this is the ISM manufacturing Index for America, the blue line, and the European five year credit defaults which are inverted is the red line. You can see what a close fit it is. A credit default swap basically tells you the risk that the market is attributing to a five year French sovereign debt. The more risk that there seems to be in the French banking system and the European zone in the EURO the more the manufacturing index tends to be affected by it. In a world like this where we are all so interconnected you can see what happens in Europe and China does affect the US market. The next chart shows the after tax profits relative to GDP. It breaks down the long term average and it goes back to 1950. Corporate America is at a level of profitability as a percent of GDP that we haven't been at in fifty years. Mom and Pop corporate America, which small businesses are not showing these kinds of trends. When you talk to people and you hear back from them how awful the economy is but the large cap corporations, the multi nationals that are tapped into Policemen's Pension and Relief Fund Board of Trustees Meeting Minutes October 20, 2011 Page 11 of 11 the emerging markets, the growth areas in the world, are doing well and because of the fact that they stream line and they have invested in capital equipment and technology and their fix cost and their cost structure is very low right now, their profitability is better than it has been since 1950. That is the reason the stock market is holding up well relative to the rest of the world. The next chart shows that the ten year treasury yield has not been below the dividend yield on large cap stocks since 1960. This is the first time since 1960 that you actually have the dividend yield on the S&P 500 exceeding the ten year treasury yield. We see it in a lot of the stocks that we purchase. There is still a lot of value in the stock market. Once some of these macro factors begin to sort out a little bit more, I think that is the most likely place for capital to flow because there still is value there relative to what you can get in a fixed income side. Longer Investment Letter Dated August 5, 2011 A copy was given to the Board Longer Investment Letter Dated August 15, 2011 A copy was given to the Board Longer Investments 3'd Quarter 2011 report A copy was given to the Board Longer Investment monthly report A copy was given to the Board Longer View A copy was given to the Board Meeting Adjourned at 3:50 PM