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HomeMy WebLinkAbout1994 10 27 Board of Trustees Regular Minutes r, BOARD OF TRUSTEES WINTER SPRINGS PENSION PLAN MEETING MINUTES OCTOBER 27, 1994 1. Call to Order: The meeting was called to order by Chairperson Hoffmann at 7:40 P.M. 2. Attendance: Art Hoffmann, Chairperson, Present Brian Fricke, Absent Joel Berk, Present Seymour Berman, Present Ralph Bowman, Present City Officials: Tom Lang, City Attorney Bill Breda for Philip G. Robert, Trust Investment Officer SunBank 3. Approval of Minutes of July 28. 1994: Chairperson Hoffmann asked for a motion; Mr. Berman moved to approved the minutes of July 28, 1994; Seconded by Mr. Bowman. Vote: All Aye; motion carried. {"""'\ 4. Quarterly review of the Pension Fund with the Pension Fund Investors. Mr. Breda, from SunBank gave the Board members a copy of the Performance Report for the three (3) months ending September 30, 1994. Mr. Breda stated they did what is referred to as a "time weighted performance" which is a conventional way to report investment performance. The one year number is basically in line with your calculations. The quarter was better than what we have seen in prior quarters; equity market perked up, stocks were up almost 5% for the period. A blend of the two stock funds that we own in this portfolio was up more than the market, but unfortunately, the fixed income was not performing in line with the stock market. The return was approximately a quarter percent positive. The Shearson and Lehman Bond Market index which we use as kind of a proxy, was up about one half of a percent during the period. Mr. Breda pointed out that there is about 30% of the bonds that comprise the Shearson and Lehman index we can I t purchase under Police and Fire Pension Plans. We are restricted, and we have to hold wi thin the higher qual i ty end of the bond market, and sometimes there is a price to pay. r" Chairperson Hoffmann questioned the maturity of this bond. Mr. Breda stated currently the average maturity is in the six (6) or seven (7) year range. Normally it would be around the nine (9) or ten (10) year range. r Board of Trustees IWinter Springs Pension Plan Meeting Minutes October 27, 1994 Page 2 Mr. Breda explained, when we would lengthen the maturity in line with normal conditions, our bond fund is an intermediate fund as opposed to a long term fund. It tends to have a little less volatility than the bond market overall. The trademark of our fixed income fund is really the consistency, because we don't make big bets, and we control the maturi ty somewhat; even when interest rates go down severel y , we very rarely, historically have under-performed the bond market. Going to the second page of the Performance Report, Mr. Breda explained they calculated the one year performance, and the time weighted return was 0.89%. Mr. Breda said there were fairly substantial contributions during the year, and fairly significant withdrawals in relation to the beginning balance. That typically could have some meaningful impact, but because of the blend as to where the funds are allocated it really didn't hurt the return. It didn't help it, and it didn't hurt it. r- Mr. Breda said the third page explains during the thirteen months we have been handling the account, the return was 1.12%. He explained overall we must have started with substantially less on the equity side because the equity funds on the thirteen month basis, the High Grade Equity Fund was up 3.66%, and the High Grade Equi ty Income was up 7.03%. Based on the funds performance themselves, Mr. Breda said, I think you have slightly under- performed on a thirteen month basis, had you been in a constant mix of the funds themselves. The Bond Fund on a thirteen month basis, while the return was negative, it was less negative than the Shearson and Lehman index, out-performing the downside on the bonds. On the equity side, a blend, or any combination of our equity funds is to out-perform the S & P 500. The out-performance on the value fund, (equity income) is very substantial. It has been a good market for that kind of fund. Mr. Breda explained, if you look at the 91 Day U.S. Treasury Bills, you can see that, had you been risk adverse in just roll ing T Bills, your return would have only been only 3.5%. Mr. Breda, explained that on page four (4) shows what our statement reflected at the end of the period. It should agree with the Trust Statement that everyone received a copy of. r Mr. Breda explained what they do on a regular basis is keep the cash monies, or money market balances to fairly minimal levels; the reason being, over the longer term, it's very difficult to tie into the markets. We would rather be participating on an ongoing basis than try to time it and decide when to be in and when to be out. . . r Board of Trustees/Winter Springs Pension Plan Meeting Minutes October 27, 1994 Page 3 Mr. Breda briefly discussed the economic and investment outlook. He said they felt that the Federal Reserve will try to engineer rates up a little bit higher than current levels. When the Federal Reserve act, they typically have the most impact on the short end of the yield curve. They have more influence on short term rates than on long term rates. Long term rates move more in relation to inflation fears and real economic activity as opposed to Fed actions. He said they did expect short rates would rise more than long rates when the Federal Reserve does act very shortly. We would expect them to be acting sometime before year end. r" We do expect sometime in the first quarter of next year, the economy will start to slow down, and anticipate slowing of the economy affecting cyclical stocks which have been out-performing the broad market. These would be papers, chemicals, containers, etc. Mr. Breda explained even though the economy might slow down, the overseas markets economies are picking up substantially here. There is a tremendous market opportunity for u.s. based companies that do a lot of business overseas to get incremental vol urnes there. Many of the stocks we own in the portfolio might get 30\ to 40\ of their earnings overseas. A pickup in activity, whether it be in the continent, Europe, or Latin America, etc. can have a real impact on the bottom line for a lot of the companies we own in the portfolios. Mr. Breda explained in the Bond Market, we would be hopeful that if we can collect a coupon next year, that would be good. We do expect interest rates to come back, but we aren't looking for a new "bull market" in bonds in the near term. I f we can colI ect a coupon and get a 6% to 7\ return, we would be very happy with that. Chairperson Hoffmann asked Mr. Breda what percentage of turnover exists in bonds presently. Mr. Breda explained there is less turnover now than normal because we have had a barbell strategy where we have participation on the short end where we wanted to be defensive; but we did have some 20 and 30 year bonds in the portfolio because we still got paid a good coupon out there. We didn't think long rates would rise as much as short rates, so we did have that barbell. We have had that strategy in place for quite a while now, so that has led to somewhat less turnover than normal. f' Mr. Breda said the next page profiles High Grade Equity Funds, and the funds the City is in. More of the equity monies are in this fund. We have historically taken more aggressive bets in industries, but we do not make big bets on individual companies. Rarely would we ever get into a 5% percent position in anyone stock; there are some bordering in the 4% percent area, but that is unusual. r f""" . . Board of Trustees/Winter Springs Pension Plan Meeting Minutes October 27, 1994 Page 4 Mr. Breda discussed the various industries; where they have been cutting back, and where they have been building, especially in the area of technology. Mr. Breda continued to the High Grade Equity Income Fund, and explained this fund has been performing better. It's a different stock selection methodology we use here. The industry bets are going to look very different. It's over-weighted in chemicals, and under weighted in the technology area. Mr. Breda explained again were they have been cutting back and where they have been building. Mr. Bowman asked Mr. Breda if they were going to stay in the natural gas market. Mr. Breda stated as long as the valuations are inexpensive, we will build positions. Mr. Breda explained that in this High Grade Equity Income Fund we tend to own fewer names than we own in the other fund. We take more two percent (2%) positions, and less in the three percent plus (3% +) area. This fund also tends to be medium to large cap; with a little bit smaller companies than we own in the other fund, but that's not by definition. That's really just a bottoms up stock selection process. Mr. Breda expl ained the High Grade Bond Portfol io in the last section of the Performance Report. He explained the maturi ty structure of the funds; the average coupon, average duration, and demonstrates where the portfolio is positioned. It's better explained on the next page where it shows the maturity structure graphically. The graph shows that the barbell is not much in the intermediate area, but a lot in the short end, and a lot in the long end. The basis we feel is that short term rates will rise more than long term rates, and the real i zation that the coupon return on the longer bonds was significant enough to offset any price erosion that might take place as rates went up. We have had this barbell in pI ace for qui te a whi I e now, and typically, when you have a barbell on, you would rather see rates rise sooner than later because we are not being paid much on the short maturities. Mr. Breda said they have come out with a mid-cap growth equity fund that is available. Unless they change the rules we follow ~ regarding asset quality, we wouldn't currently be able to use that fund. There is talk that the Legislature may relax some of the quality guidelines that we are forced to follow for Police and Fire plans. If that does happen, we could offer you a mid-cap or smaller stock growth equity fund. r Board of Trustees/Winter Springs Pension Plan Meeting Minutes October 27, 1994 Page 5 Mr. Breda also referred to the International guidelines, and stated there is a prohibition against using International stocks. Should they relax that, we will also have an international product to offer. Mr. Berk asked Mr. Breda to explain how they differentiate between putting money into the High Grade Equity Fund and the High Grade Equity Income Fund. I"'"' Mr. Breda explained the High Grade Equity Fund is the large cap growth, and the High Grade Equity Income is a medium to a large cap value fund. In retrospect, we have been over-weighting growth to value. At this point in time, we believe there is going to be a slowing of our economy sometime in the first quarter of next year. Then we think there will be a premium again for growth stocks. So, while they have under-performed recently versus our value fund, we think it could be exactly the wrong time to make a major shift from growth to value just because value has been doing better. Mr. Berk remarked that looking at the High Equity Income Fund under retail, two companies (K-Mart, 131,000 shares), and (Woolworth, 103,000 shares) are going through tough times. When one looks at that, that is your biggest position in the High Equity Income, is that correct? Mr. Breda replied no, if you look at the percent of assets column you will see that it's 4.1% of the assets that each represent; they average about 2% each. It might be large in number of shares, but that is because the share price is so low. The percent that is represented by each security is next to the far right hand column, (percent assets). Mr. Breda expl ained the reason they like K-Mart is, it's under va I ued in the market; the parts are worth more than the who Ie, which the company has also concluded. This is why they are doing the spin-outs of Office Max, Sports Authority, and Walden Books. Mr. Breda said they feel these entities are growing much faster than the parent company, and the parent company was under valued in it's own right. Mr. Breda briefly discussed K-Mart's closing of many of their stores and it's effects. ~ Mr. Berk asked Mr.Breda to comment on how we have put together a mix. Mr. Breda said, "you are slightly more aggressive than the average municipal plan that we manage, which I hope is somewhat of a reflection of the fact that you have a younger work force than our average account." r Board of Trustees/Winter Springs Pension Plan Meeting Minutes october 27, 1994 Page 6 Mr. Breda discussed the subject of withdrawals and contributions, and their effects. He stated in the long term, typically the more you have in equities, the better your return is going to be because stocks typical 1 y out-performed bonds. You should get a higher return if you are able to stick with that kind of a mix. The trick is, when the stock market goes into a negative period of performance, you have to be willing to ride that out, in order to come out the other side all right. Chairperson Hoffmann asked Mr. Breda what type of turnover was in equities. Mr. Breda stated there is higher than normal turnover, but we do a lot of analysis to determine whether that turnover will be incremental to the returns or not, and we have come to the conclusion that it has. It also depends on the market; a market with more volatility will have more turnover, a market that is flatter, will tend to have less turnover. I"'" Mr. Lang stated that this Board is held to a prudent man test with regard to being trustees. Is there anything that you observed that you would advise them to do differently as prudent investors on behalf of the employees of the City of Winter Springs? Mr. Breda stated they (SunBank), are very straight forward investors in terms of our style. We don't use puts and calls, we don't use derivative securities, we don't have hedge strategies, and we keep it very simp1 e, in terms of our buying and sell ing techniques. As to the type of securities in the portfolios ".. .we are constrained and forced to own high grade assets. They have to be in the top three ratings of value line, and so by definition, the rules we need to follow for these funds keep us in the more conservative end of the market as opposed to the risky end." Mr. Lang asked, "...our mix you would consider to be prudent at this point?" Mr. Breda said, yes, your mix is not out of line, it's slightly more aggressive than we see for other kinds. (assumed to refer to other pension funds.) Mr. Lang asked, ".. .there's no detriment to the employees that you can see right now by having to be a little bit more aggressive?" ~ Mr. Breda answered, no, it's actually been a positive contributor to the funds performance, because when we look at the one year returns for example, the bond market is down about 3.5%, and the stock market is up about 2.6%. Our stock funds are up a little bit more than the market, and our bond fund is down slightly less than the bond market is down. By having more in equity than less, you do better. r Board of Trustees/Winter Springs Pension Plan Meeting Minutes October 27, 1994 Page 7 Mr. Lang asked if there is anything the Trustees should consider this evening for the benefit of the employees over the next three months? Mr. Breda stated other than the need to watch the matching funds contributions, (you get them from the state), it I S all tied to insurance premiums that are paid on auto registrations in your community. We have found a number of cities around the state that feel they have been shorted. [Trustee chairman's note: our pension fund does not receive state contributions.] Brief discussion concerning change in political parties, and their effects on the market. 5. Old Business: No old business to discuss. I'" 6. New Business: Chairperson Hoffmann had questions concerning employees who leave employment, either by retirement, or otherwise. He stated that the amount in their pension plan is determined as of the end of the fiscal year preceding when they reti re or 1 eave. For example, if an employee would leave in July, the amount that is in that pension plan goes back to where it was the previous September 30th. The amount an employee accumulates from that previous September to the time that employee retires, is no longer theirs. It's now left with the rest of the plan; that is in the plan itself. Chairperson Hoffmann explained how that occurs. It refers to employees evaluation date which is only done once a year, at end of September. This creates a little inequity for a person I eaves. Mary Norton I eft September 30, which is the ideal because everything you get is in there, and you don't anything. the the who time lose I"" Chairperson Hoffmann checked with Diane Garcia at SunBank, and it appears that we pay $2,944.00 for an annual report. This amount includes all the calculation work, and making the report. If we would convert to a semi-annual report, (which requires the Commissioners approval), it woul d add approximatel y another $600.00 to the expense. If we went quarterly, add another $500.00. If we would go semi-annually then the employees would not lose a full eleven (11) months out of their plan just because they left or retired at the wrong time of the year. Mr. Berman asked,.. ."what you are saying is, the City contributes 6%, and let's sayan employee makes $10,000.00 a year, the City would be contributing $600. OO? II "Now, if the employee 1 eft earlier, the employee could possibly lose almost the whole $600.00?" r Board of Trustees/Winter Springs Pension Plan Meeting Minutes October 27, 1994 Page 8 Chairperson Hoffmann answered, yes. Perhaps we can have the City Commission consider it, knowing what the expense and addition would be. Mr. Berk asked for clarification as to the retirement age being 65. In a contract for the Firemen and Policemen, they can retire after 20 years, and receive their full vestment of whatever is in their account. Chairperson Hoffmann said that Fire and Police have their own plan. (See second paragraph which follows) Mr. Lang explained it is a state run plan in their contributions made which are matching, and we don't administer that. Discussion concerning whether the Police were on this type of plan along with the Fire Dept. The Fire Department definitely were on this type plan, and the matter of the Police Department being included will be looked into. (Our Police are in the plan) (". Mr. Berman asked if the Pension Board should recommend to the Commission that they consider, at the least, a semi-annual, and more desirable quarterly report? Chairperson Hoffmann said he would get the figures in writing from Ms. Garcia at SunBank to present to the Commission, and recommend that it should be at least semi-annual. The Commission will have to make the decision. Chairperson Hoffmann said the City Manager had asked him if it was possible to work out a system whereby employees could contribute amounts of their own to this plan like a "401K", and my first reaction is, it's going to complicate it because you would have to keep the amounts separate. It would almost double the expenses if you want to look at it that way for annual reporting of employees accounts because you would have to report separately an amount they put in versus the amount the City puts in. Mr. Berman asked if the City could setup a "401K". Chairperson Hoffmann said, yes, they have a system. Mr. Berman said maybe they should consider doing that. He said many companies have a "401K" plan aside from a pension plan. r Mr. Lang explained it is not really a "Cafeteria Plan", but they are going to allow a check-off plan for employees, something they can include if an employee wanted to have their own "401K". If the City Manager is really putting together a payroll deduction plan, he probably should consider putting a "401K" on the cafeteria menu. r- (' r Board of Trustees/Winter Springs Pension Plan Meeting Minutes October 27, 1994 Page 9 7. Adiournment: Meeting was adjourned at 9:00 P.M. Shirl A. Frankhouser, Administrative Secretary Prepared January 18, 1995 This document is a summary of the Board of Trustees/Winter Springs Pension Plan. The audiotapes of all meetings are maintained in the permanent records of the City of Winter Springs.