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HomeMy WebLinkAbout1994 07 28 Board of Trustees Regular Minutes ".-... ".-... ".-... , . . BOARD OF TRUSTEES MEETING WINTER SPRINGS PENSION PLAN JULY 28, 1994 The meeting was called to order by Chainman Hoffmann at 7:35 p.m. Board Merrbers: Art Hoffmann, Chairman, Present Brian Fricke, Present Joel Berk, Present Seymour Benman, Present Ralph Bowman, Present City Officials: City Manager Govoruhk City Attorney Frank Kruppenbacher City Attorney Tom Lang Philip G. Robert, Trust Investment Officer, Sun Bank Eric Bell, Representative Sun Bank Approval of Minutes of March 29. 1994: Hoffmann asked if there were any changes or corrections to be made minutes of March 29, 1994. There were no changes or corrections minutes of March 29, 1994 approved as presented. to the - the ~arterly Review of th~_Pension Fund with_the Pension Fund Investors: Philip Robert, Trust Investment Officer, Sun Bank, gave the Board members a copy of the Perfonmance Report through June 30, 1994. Robert stated that since he was at the previous meeting there has been considerable changes in the markets. One of the things that they continue to see is the deterioration of the Bond Market more than anything else. One of the things that has been a major factor in the first half of 1994 is a continued strong economy more than anything else; lately we've had a very weak dollar that has contributed to the deterioration of Bond Market. Robert said on the positive side earnings have been very good - I think the tone for equities is a little more positive now than it has been; certainly the worst is behind us here, we've had another rate increase in March and that affected the second quarter tied in through April and then we've had another "spin" with the weak dollar in late June, which really drove down most the second quarter results - I think we had a loss of about 3 1/2 - 4 percent in June alone, that was a considerable drop. Overall as far as things 90 I think we'll see a better economy in the terms that it will slow , down a little. I think what we are looking for tomorrow for instance in the GP numbers anything under 4% really should be positive, and I think anything over 3.7% - 4% in terms of economic growth in the Bond Market will take a "nose dive" because the Federal Reserve hasn't moved to tighten. Robert stated the bottom line he thinks, is that equity is before Bonds from here and that is certainly how our asset allocation model is working with ,..,..... r- r- , , ~ Board of Trustees Meeting winter Springs Pension Plan Ju 1 y 28, 1994 Page 2 this point with a favor towards equities. Robert went over with the Board the Performance Report. Robert stated that the latest quarter down 5.496, we are continuing to maintain basically a balanced account mixed between Stocks and Bonds, what we are doing at this point emphasizing more Stocks than Bonds, what we are doing at this point is moving our asset allocation a little bit more in favor of equity so our balance accounts are more along the lines of 5596 Stocks, 4596 Bonds. We have moved the value portion of the portfolio, which value Stocks as a whole have continued up to perform. We are moving from 2096 of your equity exposure up to about 3096 of your equity exposure at this time, we don't want to jump 50/50 because we think that would be doing a worse thing; value Stocks have been great performers and we don't want to chase the Market so to speak. Growth stocks as a whole are extremely cheap, as cheap as they every have been on a historical basis. For instance in the latest quarter our growth went down about 1 1/496, our Value Fund up 3 3/496 and the S & P 500 up just less a 1/296 Bonds on the other hand, and this is the third quarter in a row, of negative returns in the Bond Market, our Bond Fund, the high growth Bond Fund down sightly under a percent; the Bond Index, which is a medium term index, down about 1 1/496, so for those people who are in cash, they did 9OQd; you don't pay us to manage cash and taking that stance - I think we've done fairly well roughly in this time period. Looking at how you have done over the ten months, you have been with us on a accumulative basis down about 1 1/296, so you have out performed the S & P 500 even though you are negative, with about half the risk. So our growth down about 35 basis points, our value fund up just under a half percent and the S & P 500 down just sightly under 296. The key thing to look at here - look at what Bonds have done over the last ten months, if you were in the Market, you lost money almost regardless what you did; so that really hit Municipalities harder than most people, because most Municipalities have a mandate of only 3096 equity exposure, your group as a whole by having a little bit higher equity exposure has done well and I think we'll continue to be positioned well in going forward from here. Again it is difficult for us to bring out negative returns, certainly we don't like to see that, in these kind of Market conditions it is almost like you have to avoid the "craters" rather than picking the good Stocks. Discussion on the breakdown allocation. Robert stated that the Economic and Investment Outlook bottom line is there is a very nervous Bond Market and the Federal Reserve has not moved either way to tighten, and I think that is very necessary, I think if Greenspan and the F1C don't move to raise interest rates at least a half of a percent by the F1C meeting in August the Bond Market is really going to take a hit. I think that that's necessary, if we see 50 basis points I think the Bond Market will recognize that as a move to really kick back on inflation. I think Greenspan really wants to be ahead of the curve on inflation rather than seeing the numbers come out, I think overall we've got some things that r-- Board of Trustees Meeting winter Springs Pension Plan Ju 1 y 28, 1994 Page 3 can really point to inflation. Discussion. Robert said in 12 months from now where we expect the Markets to be, I think you can see any where from 7 1/2% to 10% in Stocks, we would be lucky again to see the coupon return in Bonds with the continue rising interest rate environment and a stronger economy, I think the key to watch here is if we have a strong economy you'll get very little in Bond returns, maybe 2%-3%, if the economy slows down we do hike interest rates a bit, let's say 3/4%-1% over the next 6 months, I think that Bonds will become a much more attractive instrument towards the end of the year. So again, if we can get 6% even 5% in the Bond Market in the next year, I think that would be a very good return. Discussion. Robert said to keep in mind that 1996 is an election year. r" Discussion on the Performance Report. Robert stated that he thinks what helped up more than anything that in this difficult time in the Bond Market is our Bond-L strategy, one is we hold some assets out of the long end to get the yield that I think you need because income certainly plays a part in that even though you are getting income we have to have some longer term maturities in order to get longer or better yields. But, we also have to hold a lot of our assets in short term instruments to really dampen the volatility, so we feel that that structure worked. Again I think more than anything the Markets are going to be really sensitive in what's going on particularly in the economy, tomorrows number will certainly set the stage for the rest of the year and whether we turn in positive gains on a calender year basic in the Stock Market and certainly whether we turn positive gains in the Bond Market. I think if we sit tight the worst is certainly behind us in the Stock Market and things can't get too much worse in Bond Market. Berk asked Robert how does the Board look at this as far as best serving the people that work for the City; is the mix that you have right now regarding Bonds and Stocks are going to meet the needs when people retire or leave, there has to be money for these people for whatever reason, and my question is if inflation goes up it will "eat" into whatever earnings that you are going to have, what is going to be the real net whenever they use the money to be given out as far as distribution is concerned. Would you consider this portfolio as you now have it conservative and would it warrant perhaps a more risk taking so that there is a potential for a higher gain? Robert answered that is certainly a very good question and will put it into two different perspectives: one in relative to what the average pension plan would have and then the second I'll put it in perspective of what other municipalities have done. As I mentioned before in the municipality perspective - I'm very happy that you are able to use more equities then the ;~ average municipality; which are mandated to use no more than 30% in Stocks, which means if interest rates start going up in the next five years that means that inflationary pressures are going to eat into their Bond returns. As it relates to other municipalities I think having more equities when we are talking about a pension plan, and we are talking about a longer term r" Board of Trustees Meeting Winter Springs Pension Plan July 28, 1994 Page 4 time horizons, you can't get the money out until you are retirement age, so I think from that perspective, very very good, as far as judiciary duty in terms of a municipality I think that certainly you are well within what a prudent man would do for investing retirement funds for the employees. As far as other pension plans, I would say that across the nation the average retirement plan is upwards of 55%-60% invested in fixed income assets so you are talking stable asset funds. It is our opinion that that is too much that certainly when you are talking, if you look historically certainly stocks are going to be the best way to do it and unfortunately we can't own international stocks but I think judging from the bottom line, I think that you have a good mix because we are mandated to hold high grade securities, as a method of evaluating I certainly think that you have to look at the indexes as to how you will accurately gage your manager's performance and are they in light of the circumstances doing their job. I think you certainly have a good mix and from a municipality stand point I love it, this is what I love to see. .r" Fricke said your comments lead me to believe that you are pessimistic on Bonds and optimistic on STocks, why not change the allocation even more so. Robert said that we can certainly do that, one of the things that we talked about when we come out here is about asset allocation and I talked a little about our being a little neutral and negative on Bonds, right now I believe we are working within the frame work of about 55% equities at this point; when I first came out here that is what the investment objectives that we set down, that can be certainly changed at any point. I think when we start bumping up 10%-15%, when we start getting above 60% in most municipalities then again we start getting a little too much, but I think if we do it in such a way that is gradual, I certainly wouldn't be adverse to have another 5% in equities, I think probably by the end of the month, as a matter of fact I'm changing the asset allocation right now, to go to that 55% which is only another 2% in equities which isn't going to matter a whole lot in the long term, I certainly wouldn't be adverse to giving our economic outlook adding a little more to equities at this point. That is something that the Trustees will have to come to some decision on if a decision needs to be made. Discussion. Berk said what happens if we have 3 years of no growth but we continue with this particular scenario at what point will you step in and say this isn't right, where is the cut off point and decide to make same decision. Robert stated that if we start looking like 1972-73 again, our philosophy is we want to be active in our management, we want to be involved in the Market, r" but if Market conditions warrant we don't have a aversion to go into 20% cash; in the past the belief is that if you are not in the Market you have not only the possibility of loosing money - you also have the possibility of not making any money. Discussion. ~ 1""""'. " Board of Trustees Meeting Winter Springs Pension Plan July 28, 1994 Page 5 Robert said if we do see a continual trend, it is our duty to say this is where we are at, and not only will we do it from an asset allocation stand point but we also do that from within the funds itself, so you have a dual cash reserve type situation, so it is certainly possible; at this point we don't think we will have and 1987 or a 1972-73, but that is certainly the role that we would take. We would be pro-active rather than re-active. Hoffmann asked if they would advise the Trustees through the City Manager in advance of our having a quarterly meeting because that is too far. Robert stated yes, to give you some idea what we do like what we did in February when we had the first Market decline, we sent out a letter to all of our clients and basically said this is where we think things are at and we are going to continue to buy on the way down, we think it is temporary and so again we try and be pro-active, so we don't have to wait, that is part of being an investment manager to be pro-active. Berman said on the Bond Market, the Bond Market has been going down at the same time the yield goes up so from our standpoint would it make more sense to hold on to whatever percentage of Bonds you have because your yield is going up so actually the value of your Bonds is lower but if you hold onto it you are not loosing anything and in the mean time the yield is going up. Robert said that he would agree with that except that we have to Market every month when we value them so even though on paper you are going to show a loss you are getting good yield and good income, I think one of the reasons why I would say to shift a little bit here or there, the component for the most part is going to be some trading games in price appreciation. The key is what we are hopefully trying to do is put it in an asset that is going to perform better than that so you no only recoup the loss but make out better in the long run. Fricke asked if they are buying premium Bonds or discount Bonds? Robert stated that what we do is we are very short term oriented, very trading oriented, so we are looking at where if falls on the yield curve, depending on our strategy. We are buying some premiums and some at discounts but where it fits on the yield curve what are richer what are a little bit more cheaper on an evaluation basis; one of things that we look at is the over all structure of the portfolio rather than micro managing the portfolio. Fricke asked what percentage of the Bonds would you estimate that the portfolio would hold to maturity. Robert said that is a hard ~. question because we do trade pretty well and I'm going to say that in a year our Stock Fund is any where from 100%-250% and in Bonds it is a little more than that - 500% Discussion. There was discussion on changing the mix. ,. ,.'.' r Board of Trustees Meeting Winter Springs Pension plan July 28, 1994 Page 6 Fricke moved to give Sun Bank the latitude to allocation up to 60% Stocks and 40% Bonds. Seconded aye. Motion carried. change the investment by Bennan. Vote: All Hoffmann asked about the description of the plan for the employees and a breakdown of the Administrative expenses. Robert said the mail-outs that give the employees information on the funds that are in the plan and guides to retirement have been sent out yesterday (07-27-94). Hoffmann said he would like to remind the City Manager that the Finance Director to be sure that the Administration expenses is taken out of the Fund and the Administration fees is taken out of the General Fund. ,.-.-. Hoffmann asked of there were any other questions for Robert and thanked him for coming. Robert said that if there are any major changes he will certainly let the Trustees know. Hoffmann mentioned the two letters that were made up from the last meeting which the City Attorney reviewed. Attorney Kruppenbacher said that the one question we had and we are waiting for a Tax Attorney to sign off on everything before we give it to Ms. Garcia for final approval. When you look at the summary plan that the Employee Relations Coordinator gives to employees, there are summary pages that are very specific and descriptive that if the employees take the time to read, does tell them everything and one concern we had was if you start generating other letters, but it is really covered in the packet given to the employees. What concerns me is if you send these letters you can't avoid giving the plan summary along with it again, or people will look at your letter and never truly read the plan itself. Discussion. Kruppenbacher mentioned to the City Manager that maybe part of the new employee orientation could be to have Ms. Garcia go through the Pension Plan and make them sign off on a packet. I think you run the risk of confusion to the employees if you give them the letter and then when the time comes give them the packet concerning the pension plan. Discussion. Kruppenbacher said the letters are fine if you want to give the employees a light condensed overview of things to think about with the pension plan, the one revision I would make is if we do give the employees the letter then attach the document (pension plan) and urge them to read the issues in ~ detail and not rely on the letter. Kruppenbacher said he only recommendation would be if you want to issue the letters, hold off and let the City Manager issue them as part of the whole process so the employees are getting it when they go through the orientation. t .. r Board of Trustees Meeting Winter Springs Pension plan Ju 1 y 28, 1994 Page 7 Kruppenbacher asked that the City Manager mail a confirmed signed copy to Ms. Garcia regarding the forfeitures. There was discussion regarding the plan with the Trustees and Commissioner Ferring. It was determined that Attorney Lang would draft a letter stating the Trustees concerns regarding the amount of turnover in the Bond Account. Hoffmann asked the City Manager to remind the Finance Director the Board of Trustees met in March and didn't receive the expense amount for that month. I""""" Hoffmann also asked that the Trustees receive a copy of the booklet that the employees received for their review. The meeting was adjourned at 7:40 p.m. Respectfully submitted, Margo Hopkins, Deputy City Clerk r