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HomeMy WebLinkAbout1995 04 25 Board of Trustees Regular Minutes MINUTES BOARD OF TRUSTEES WINTER SPRINGS PENSION PLAN APRIL 25, 1995 MEETING 1. Call to Order: The meeting was called to order by Chairperson Hoffman at 7:05 p.m. 2. Roll Call: City Officials. present Art Hoffmann, Chairperson, present Brian Fricke, absent Joel Berk, present Ralph Bowman, present Seymour Berman, present John Govoruhk, City Manager Tom Lang, City Attorney William Breda, Jr., Assistant Vice President - Sun Bank 3. Approval of the January 31. 1995 Minutes: Hoffinann asked for any questions or comments on the minutes. All Ayes for approval. Minutes stand approved as stated. 4.0uarterly Review of the Pension Fund with the Pension Fund Investors: Breda announced some changes in personnel. John Race-president, Dick Solo-Head of Marketing, and Greg DePrince-ChiefValue Manager left Sun Bank Capital Management on good terms to open their own firm. Greg DePrince being the only one who would have indirect impact on the city. The Value Fund in which the city participates is run by someone else. A couple of people from the value team have left. Mills Riddick, Second Senior Manager has taken over the value function. An International Manager began in January. The skepticism that has arisen in the last few months are not well founded, more of a temporary situation. Berk stated the aura that Sun Bank presented to the city was stability of the organization; however, this is not the case now. Breda responded that instability would be overstating the situation. There has been changes, but the core of the people that would influence asset allocation type decisions remain. Many people who were around at the inception of Sun Bank Capital Management when we were made a separate subsidiary from the bank still remain. The potential to put up very respectable returns continues. The changes will not effect the process of how business is conducted. Lang said that Sun Banks performance has been flat over the last eighteen months from what he has been reading. Should we have concerns? Breda maintained that the performance has been good in Board of Trustees (Pension Plan) - Minutes April 25, 1995 Meeting Page 2 the fixed income area, and very good in the value area. In the growth area, it has been below par. Breda feels the changes that have been made are steps in the right direction. It seemed that anything that could go wrong in 1994, did go wrong. Later in that year, there was a lack of confidence in terms of decision making. As the numbers demonstrate this year, we have turned that around. It has been a good market so far this year. Hoffmann requested an updated team roster. Breda said he would be glad to get him one. Breda distributed the Performance Report-Quarter Ending, March 31, 1995. Page 1 explained that the economy is growing strong, but is in a period of slower growth. In terms of the markets, companies have adjusted their cost structures in the last few years. Profitability should be fairly good even though there may be a slow down. The thirty (30) year treasury, Breda thinks, will trade between 7 and 8 percent. Right now, it's at the lower end of the range with an allowance for temporary spike up in rates, but not a significant move which was seen 12 or 18 months ago. A coupon should be collected on the fixed income portion of the portfolio. The equity markets have been driven by corporate buy backs, good earnings, insiders that are aggressive buyers of stock, and corporations that are generating excess cash. Across the wide band of industries, stock retirements are very much a part of corporate strategy. This is positive because these people are best informed of what their stocks should be worth, and what their earnings ability is going forward. There are deals in the hopper. There has been buyout activity, and foreign concerns are tempted by evaluations. As we move forward there will be more strategic actions and buyouts; slow downs will hurt the market. It is not a market without risk even though there are some good fundamentals. The pace of growth is clearly unsustainable. You don't get twenty five or thirty percent up years in the stock market off of a very high level. Typically, these big moves in the market tend to take place after you've had a declining stock market, not after coming off record valuation levels. This is not expected to be an extraordinary year of performance, but with the market already up in the double digit area(year to date) something in the teens is not out of the picture. We have to collect dividends, and center on growth and principal. The picture would change if interest rates go up beyond expectations. The feeling is that the period of rising interest rates is significantly behind us, and the market has room to do better as earnings continue to come in. Page 2 showed that the three month return was 7.39%. The equity portion was up 9.8%. The stock market was up 9.74%. The High grade equity fund was up 9.3%, and the high grade income was up 10.8%. There was an under performance on the Bond side, and a little out performance on the Equity side. Hoffinann questioned why interested dividends shows the 3 month period at $441.00. This is coming from our income fund, not income from a (equity) portfolio. Breda stated that the income in each portfolio is re-invested within the fund. Hoffmann stated that everyday interest and dividends are received; how do we identity between equity and income? Is there a way to identity from your funds Board of Trustees (Pension Plan) - Minutes April 25, 1995 Meeting Page 3 (not percentage wise) and down into ours what percentage of the money came in as a result of interest and dividends? Breda answered that the high grade equity fund has a certain dividend yield based on the underlying portfolio at the end of the quarter. The high grade equity income is going to have it's own dividend yields; looking at the percentage of the portfolio that's weighted in each will give you an approximation, but we change stocks all the time during the quarter so it's not the income actually collected. For instance, in this report the portfolio current yield in the high grade fund is 1.8% so it would be basically for a quarter, and a quarter of that is income. If that fund was up 9.3% for the quarter, we're looking at basically 45 basis points (or so) of that is income return, so you'd say 8.8% is appreciation. This isjust an approximation. Some of the stocks that we hold to the end of the period were not owned for the whole period, so we did not collect dividends on those stocks necessarily during the quarter. We might have collected dividends, but from another stock that was already sold which is not showing at the end of the period. In the portfolio, you get a sense of where the returns are coming from within a fund, based on it's return versus it's yield. Page 3 showed the six month return since the September quarter (fiscal year). The unannualized return's actual rate of change is a little under 6%. A pretty good six months. The equities driving the portfolio performance slightly harder than the fixed income side; although the fixed income on a six month basis is up close to 5.5%. Berman asked about the $41,756.00 withdrawal. There may have been a couple of big pay downs. The computer system flags withdrawals by transaction codes whether it's a fee or a distribution to a vested participant. Page 4 showed the nineteen month annualized return as 4.5%. The S & P 500 market was up almost 8%. One of the stock funds under performed it, the others out performed it. The out performance is approximately equal to the under performance. The blend of both gives an S&P 500 market (sort of) return. The bond fund is doing a little better. Berman asked if we got hurt by changing to more equities than bonds. Breda said it would depend on how the mix went. In 1994 the bond market was down 3.5% and the bond fund was down a little less. The high grade equity fund lagged a high grade equity income, so depending on where the money was shifted into which fund is how much benefit was gotten out of it. For Example: ifit went into the equity income than it was a good experience, but if it went into the growth equity fund than you didn't have the same good experience because the two funds didn't perform exactly in line last year. Last year value funds did better than growth funds. A tough year for many market players. Page 5 displayed an asset statement as of the end of the March time frame. There is a little bit of cash which is either awaiting a distribution or just received in. These funds are bought or sold at mid month and month end so sometimes there is temporary cash. The high grade equity fund has a larger allocation (commitment) than the high grade equity income. Again, the high grade equity income has been the better performing of the two. We are fairly close in the 60% range of equity. Page 6- The quarterly performance section quoted returns for the quarter ending March 31, 1995. Under the Domestic General Stock Funds (Quarterly Returns-Top QTR) , the 25th percentile Board of Trustees (Pension Plan) - Minutes April 25, 1995 Meeting Page 4 performer for the growth fund was up 8.9% Our growth fund was up 9.3% so we are clearly in the top 25% during that quarter. In the value area ( equity income) the top quarter performer was up 9%, our value fund was up 10.8%. The median performer was up in the growth area-7. 7% and the value area was up 8.2%. Our funds clearly had a pretty good quarter relative to the universe of other funds. The bond funds are broken out by category. The return can be measured relatively in the universe of other bond funds in this section. Page 7 is the profile of the industry bets of the high grade growth fund. Technology stocks have been pretty good performers so that has paid off at this point. Those bets are broadly diversified so we don't have a huge position riding in anyone company. We own the bigger names in technology. We are not really participating in the energy area so we have a big bet versus energy. So far this year it has not worked out because the energy stocks through present have been fairly good performers with many at new highs. The health care area continues to build our position in drug stocks. We own some HMO's, and these stocks have been hit very hard. We trimmed some back, but did not eliminate them before they fell. We own Home Depot and Walmart. K Mart is owned in the Value Fund. Page 8 shows the Top Holdings of the High Grade Equity Fund. Core names in the technology area are Motorola at 2.8%, Intel is doing well at 2.1%, AMP, and Scientific Atlanta. A T & T is struggling. There is some anxiety about the NCR Division, but we think it will work out long term. The next four pages is a portfolio of a higher level of cash than normal, but temporary. The high end of the range is 10% cash which is a function of having sold stocks and not having reinvested. The Electronics Office Equipment area show the number of holdings; nothing too large-Motorola at 2.9% in the big position. Page 13 is the High Grade Equity Income Fund (Value Fund). The positions are almost upside down from the other fund in terms of industry bets. We own almost nothing in technology. In the energy area, we have a significant overweighting. In Utilities, we have a significant participation where in the other fund we have minimal participation. Stock selection process is very different and expect on a fairly regular basis that the industry bets are also very different. Page 14 shows the Top Holdings for the High Grade Equity/Income Fund which is dominated by energy stocks. Many companies may have been poorly managed over the years whether it's Marathon or Texaco or K Mart. We own these because they are cheap relative to their peer (industry)group, and we think there is some potential strategic action that could unleash a better valuation. This fund focuses on buying when the companies are out of favor. With the other fund, we try to buy companies where the earnings are growing faster than the market, and we think the earnings growth will continue or accelerate. This fund we look at valuations saying this stock is to cheap relative to it's industry group; it's a better value than the markets giving credit for, and it pays Board of Trustees (Pension Plan) - Minutes April 25, 1995 Meeting Page 5 above average dividend which is what we look for in this fund. The other fund doesn't care about dividends. The next three pages shows the holdings for the High Grade Equity Income Fund which is fairly broadly diversified with medium to large companies. The bond funds profiled on page 19 show that we own a high quality portfolio. AAA at 27%, Treasuries at 38%, and a little cash. Maturity structure is shown on page 20. We're shorter than average in terms of maturities because we have a cautious outlook on fixed income. We felt short rates would be rising more than long rates. In the recent quarter, this fund has under performed because the bond markets rallied better than thought~ however, this fund has a great long term success and sometimes if we make a significant bet- it's towards the conservative side not the aggressive side. Breda believes this will work out in our favor. The Portfolio is shown on page 21. Hoffmann asked if there was a way of determining the earnings rates. Breda stated that the cost is not reflected in this particular holding. They are bought on a yield maturity basis. Very rarely are we going to own a bond and hold it until maturity, so what we own it at is somewhat immaterial~ it's what we buy it at versus the market at that time and then our disposal price. The coupon rate insulates you in a period of rising interest rates. The higher the coupon, it brings down your risk a bit because you have more cash flow that is reinvested in a rising interest rate environment. For example: Ifwe buy a lot of discount paper and interest rates went up then we would suffer a little more than if we owned fuller coupons. There can be a strategy, at times you want to own a fuller coupon, and at times you'll want to own with discounted paper and look for depreciation to drive your performance. This portfolio is a fairly full coupon so most were bought close to par or slight premium in some situations. This is a function of a more defensive posture as opposed to a more aggressive. Ifwe were aggressive, we would buy "zero" coupons which is the most aggressive way to play an interest rate move. The price is pretty big if you're wrong. Overall, the blocking and tackling approach to investing has worked for us in the past, and we continue here. Breda expects to have a tough quarter which may be the result of short term interest rates rising. Stocks will probable sell off Hopefully, we will have a little bit higher than normal cash and take advantage, but we don't try to time the market too much. It's very hard to be out of the market, and then back in because once you take a negative view then you really need to turn yourself around mentally in order to take a positive view. Breda feels the stock selection is going to be the driver on the equity side, and maturities will probably be the most important on the fixed income side. The spreads have become tight between corporates and treasuries recently. There is not a lot offear in the market to create opportunities in the fixed income area now, but we try to take advantage of those situations so when you get temporary sell offs, the fixed income managers are active. We expect a lot of turnover in our fixed income portfolio because we try to buy and sell known entities Board of Trustees (Pension Plan) - Minutes April 25, 1995 Meeting Page 6 at the right price. We don't try to buy undiscovered situations that are going to blossom. We would own more convertible securities if we were really cautious. The rate of growth we have seen so far is unsustainable, unless interest rates plummeted which is not expected. The Fed is suppose to be independent of the dollar, although with the dollar showing weak, it's hard to envision that they might not cave into political pressure and prop up interest rates to strengthen the dollar. Hoflinann said that the international market is telling the U.S. not to prop up the dollar. Breda stated that the foreigners still under own our stock market. Individuals (as long as interest rates don't go back up) seem to be willing to buy into mutual funds after they show a period short term performance, and willing to come back even into bond funds. On an international basis, a large amount of money was moving overseas into international funds then they hit a rough spot in performance; their flows still occur, but at a lesser rate. The international markets are somewhat syphoning off the some capital from our markets because everyone wants to be a global investor. Hoffinann asked Breda, Based on the current market conditions, do you recommend we make any changes in our 60/40 Mix (mix of equities versus mixed income)? Breda stated that most of these kinds of plans are defined as benefit plans which have hurdles, but the city's plan is more like a profit sharing plan. This plan gives the ability to be as aggressive as you think the participants are willing to go. Hoflinann said that we don't have control (except by recommendation) in the mix within the equity fund. Breda said that they have kept a bias towards growth. When the economy slows down, typically food, beverage, tobacco, health care, media, and entertainment stocks do well. Growth stocks are coming back into favor. The value fund has done better for you over the longer term; we think now is a good time to be weighted more toward growth than value. Breda stated that the city is at this point now. Page 5 of the portfolio shows that it has tilted 2 to 1 towards growth. Markets get overvalued more than you think they should, then they get undervalued more than you think they should. We will need continuing good news to take the market higher in many respects unless the foreigners come in and start acquiring stock. Maybe to go to 45% or 50% stock with the notion that the money would sit in the money fund and then to go back in the market, if the market corrected. The only way to really gain ground without taking too much risk is to cut the equity position in half, but if the market keeps going you'll never catch up. If the equity fund has 10% cash and the market is up 9% in the quarter, the cash is only paying 6% annualized-there is only a percent and a half made on the cash which is 10% of the fund. Your stocks have to be better than the market to keep up. The same thing would apply ifwe went more to cash; it would be much harder to catch up to the market ifmarket continues to go. We are not looking for a 25-30% year; it's a 10-12% plus year to date. Hoflinann asked if staying with the 60/40 mix is a conservative approach. Breda answered that the bond fund is more conservative than the average bond fund. Our bond fund is shorter term in maturity than the Lehman/Index. The equity fund is more aggressive. It's hard to be too much of a market timer; if the market repeats itself, it would be hard not to take some money off the table. There's always a temptation to bank some profits. Board of Trustees (Pension Plan) - Minutes April 25, 1995 Meeting Page 7 Breda also announced that he will be the person to contact instead of Philip Roberts, who has realigned down state. 5. Old Business: Langs tax people have said that anything that the board wants to do-they can do. The concern is about the gap on the reinstatement changing from 5 years to 1 year because there are potential problems that are attached. If someone takes a five year payout and decides to come back in, it creates legal problems for them. The plan now reads if you come back within 5 years and pay back what you have taken out, then you get put back into the plan. Shortening the plan to 1 year will cause them to lose the ability to reinstate. Lang asked Hoffmann if his concern was about the non- vested portion of the account that they didn't get which they may be entitled. Hoffmann answered, Yes. Berman asked why they shouldn't start anew? Hoffmann said that they get to put back in what they took out so the non-vested part is re-instated. If an employee left with 5 years and took 50% out, then when they come back and put the 50% back in~ they would have to stay another 5 years to get to 100% vested. Lang said it would be better to leave it at 5 years and find a way to keep them from getting their non-vested money back once they vest, or get rid of any ability to come back in and recoup the non-vested funds that have been forfeited and redistributed. Lang said he would run this back by his people. Berman asked, there are vested and non-vested funds? Lang explained that the city puts in 6% a year, but during the first five years they will only get 50% of what gets vested so if they leave, they get half The other half gets redistributed. This is the city's contribution. The problem is when they come back two years later and give back the 50% that was vested, you will have already redistributed the other 50% to the other employees. Hoffmann stated that this didn't happen before because the amounts for the non-vested went back to the city. Now, we want it left in the fund. Bowman said the purpose of the plan is to award the long term employees. Bowman asked how many employees have come back with the request to pay back. Govoruhk answered, One, but within the year. Hoffinan also mentioned when an employee leaves at a time when the fund hasn't been evaluated, they lose the money for the period. There are two ways to correct this situation: 1) move the evaluations to twice a year which would cost the city $500.00, or 2) leave their funds in the plan until the next evaluation period. Lang stated that his tax people said either could be done. Bowman asked what decision would the employees gain by, and what would be the down side for the city. Hoffmann said the evaluation would take some bookkeeping by the city to show at that period of time what actual (amount) salaries were put in from the previous time. Ifleft at the single evaluation period and give the option of keeping it in, then it doesn't cost the city anything, but the employee has to leave his pension money in for that period of time. Lang asked if the options were taking it out immediately and give up any earnings for that year, wait until the next evaluation period and take the earnings thru that period, or wait until the end of the year Board of Trustees (Pension Plan) - Minutes April 25, 1995 Meeting Page 8 and get their earnings for the entire year. Hoffmann said that they would have to go to the previous evaluation or the next evaluation. Lang said the mid evaluation would be April. A problem we had was that one person didn't realize that they needed to take it out. The money stayed in there, but they didn't get earnings on it. Hoffmann said that was a problem of the administrator of the city. Lang said that it would be our position at this point that if they went beyond the next evaluation date then they didn't continue to accrue earnings if they stayed in the fund; We're only giving them to the next evaluation date to get it out so there is no loss. Hoflinann said the funds were in escrow, and they should have been notified properly. Lang said that he could put together a document for the employees, but still half the employees are not going to understand it. He suggested finding someone who has an interest in explaining their options on the way out. Hoflinan said to put it in a simple form with an explanation plus giving them the more technical written form. Bowman said to be careful getting Personnel involved in the process. Lang suggested getting a list (with disclaimer) of people who would be interested in talking to employees who are leaving. Brief discussion. 6. New Business: There were no comments when Hoffmann inquired of New Business. 7. Adjournment: Hoffmann adjourned the meeting at 8: 47 p.m. Respectfully Submitted, I Martha Jenkins, y City Clerk