FRESNO COUNTY BOARD OF RETIREMENT
BOARD OF RETIREMENT
FRESNO COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION
October 1, 2008
Trustees Present:
Alan Cade, Jr. Michael Cardenas
Nick Cornacchia Vicki Crow
Eulalio Gomez James E. Hackett
Phil Larson John Souza
Trustees Absent:
Steven Jolly
Others Present:
Ronald S. Frye, Alternate Trustee
Michael Cunningham, FCERA Member
Jeffrey MacLean, Wurts & Associates
Tom Lightvoet, Mercer Investment Consulting
Kevin Smith, SEIU Local 521
Susan Coberly, Senior Deputy County Counsel
Roberto L. Peña, Retirement Administrator
Becky Van Wyk, Assistant Retirement Administrator
Elizabeth Avalos, Administrative Secretary
1. Call to Order
Vice Chair Cade called the meeting to order at 8:42 AM.
2. Pledge of Allegiance
Recited.
3. Public Presentations
None.
Consent Agenda/Opportunity for Public Comment
Trustee Larson pulled Consent Agenda Item 12 for discussion.
A motion was made by Trustee Souza, seconded by Trustee Gomez, to Approve Consent Agenda Items 4-11 and 13. VOTE: Unanimous (Absent – Jolly)
*4. Approve the September 10, 2008 Retirement Board Special Meeting Minutes and the September 17, 2008 Retirement Board Regular Meeting Minutes
RECEIVED AND FILED; APPROVED
*5. Retirements
RECEIVED AND FILED; APPROVED
|Lori G. Baley |VMC, Deferred |6.59 |
|Peter Carrion |VMC, Deferred |12.19 |
|Kathy L. Collins |District Attorney |37.05 |
|Debbie Duncun |District Attorney |17.66 |
|Mary Jane Heinze |Sheriff |20.04 |
|Debra S. Hunt |Sheriff, Deferred |18.91 |
|David D. Hunt |General Services |10.01 |
|Susan M. Johnston |Probation, Deferred |5.49 |
|Rosalinda E. Lopez |Child Support Services |29.39 |
|Ronald L. McKelroy |General Services, Deferred |9.37 |
|Sandra M. Nelson |Behavioral Health |9.32 |
|Vicki Peachee |Sheriff |24.88 |
|Cynthia D. Richardson |Behavioral Health |11.57 |
|Judith A. Williams |Child Support Services |10.23 |
|Sandra Yovino |VMC, Deferred |7.40 |
| | | |
*6. Deferred Retirements
RECEIVED AND FILED; APPROVED
|Julie A. Betteridge |District Attorney |9.27 |
|Amy Henry |Child & Family Services |10.26 |
|Melissa J. Lopez-Shahan |Superior Court |13.03 |
|Daniel Munoz |Probation |20.24 |
|Julia M. Pando |Behavioral Health |20.47 |
|Pukan Phaoudom |Behavioral Health |14.14 |
|Todd L. Rudder |Probation |8.46 |
|Jennifer A. Swain |Public Defender |3.33 |
|Jill R. Tran |Superior Court |1.99 |
|Daniel C. Tiktin |Public Defender |1.26 |
*7. Most recent investment returns, performance summaries and general investment information from investment managers
RECEIVED AND FILED
*8. Public Records Requests and/or Retirement Related Information Requests from Jessica Reese, R.V. Kuhns & Associates; Ron Madsen, FCERA Member; David McNary, FCERA Member; Vivienne Crawford, SEIU Local 521; and Marc Sorondo, Investment Management Weekly
RECEIVED AND FILED
*9. Update of Board of Retirement directives to FCERA Administration
RECEIVED AND FILED
*10. Correspondence from Patricia Guisler, Alliant Insurance Services, regarding their views on the impact of the Government takeover of AIG Insurance
RECEIVED AND FILED
*11. Correspondence from Jeffrey MacLean, Wurts & Associates, thanking Board for “re-selecting” Wurts as FCERA’s investment consultant
RECEIVED AND FILED
*12. Correspondence from Jeffrey MacLean, Wurts & Associates, regarding BlackRock: Ramifications of Bank of America’s Proposed Purchase of Merrill Lynch
Trustee Larson inquired about the ramifications, if any, that Bank of America’s proposed purchase of Merrill Lynch will have on BlackRock. Jeffrey MacLean, Wurts & Associates, stated that since BlackRock has operated autonomously from Merrill Lynch since 2006, Wurts & Associates does not believe the purchase by Bank of America will substantially affect BlackRock’s portfolio management ability. Additionally, the revised distribution agreement and shareholder agreement will ensure Bank of America will not be able to change this arrangement. Mr. MacLean noted concerns regarding how or if Bank of America will propose an integration of BlackRock’s investment team with their own investment managers or how they will distribute BlackRock’s investment strategies alongside their own strategies. It is simply too early to determine how these issues will proceed at this time. Wurts will monitor this potential transaction closely and will update the Board as necessary.
RECEIVED AND FILED
*13. Correspondence from various Investment Managers regarding the direct exposure to Lehmann Brothers, AIG, and other financials and related information on the current financial crisis
RECEIVED AND FILED
14. Discussion and appropriate action on presentation from Artisan Partners regarding potential termination presented by Craigh Cepukenas, Portfolio Manager, and David Heiny, Institutional Client Services
Roberto L. Peña, Retirement Administrator, reminded the Board of Wurts and Associates’ previous recommendation to terminate Artisan Partners (Artisan) based on poor results, the departure of Carlene Ziegler, and the Board’s intention to reduce the number of managers employed in the Small-Cap Growth strategy space. At the request of Artisan, the Board agreed to delay its decision to terminate Artisan pending a presentation providing a more comprehensive update on the strategy.
David Heiny, Artisan Partners, began the presentation with a brief overview of the firm’s history and investment staff experience emphasizing the team concept that has been in place since the implementation of the strategy at Artisan.
Craigh Cepukenas, Artisan Partners, gave a brief overview of the investment strategy and process and noted that the investment process focuses on security selection and portfolio construction. The strategy is a conservative approach to an aggressive asset class and is designed to mitigate volatility and enhance liquidity.
Mr. Heiny reviewed FCERA’s performance since inception (November 18, 2004) and noted that the first half of 2008 was a substantial drag on the performance. He noted that Artisan had an underweight in the energy sector which was responsible for -1.68% of the relative performance and individual stock selection within the sectors contributed -7.47% to the performance of the strategy relative to the benchmark. Mr. Heiny noted that there have been other periods where Artisan has looked out of step in this strategy (1998-99).
The top 5 and bottom 5 contributors to the returns were reviewed. It was noted that Artisan feels that the portfolio is trading at a substantial discount to their intrinsic value estimates and this portfolio valuation measure has historically been an early indicator of attractive points on the strategy.
General discussions ensued regarding the current financial market.
At the request of Trustee Crow, Mr. MacLean clarified that Wurts believes Artisan is fundamentality a good investment management firm and the strategy employed by the team makes sense and that actual performance over time will deviate from the benchmark. The departure of Carlene Ziegler is a concern in that she created the investment process her successors in the Small-Cap Growth product now employ. The process relies heavily on the team’s collaboration and fundamental stock selection ability. Her departure diminishes Wurts’ confidence in this team and leads to questions if the remaining professionals ability to produce long term results going forward. These facts coupled with FCERA’s intention to reduce the number of managers employed in this space, led Wurts to recommend the termination of the Artisan Small-Cap Growth strategy and to consolidate the assets with Kalmar.
Trustee Souza expressed concern of terminating Artisan prematurely as they could potentially be poised for an upward trend and suggested that the Board table its decision to allow Artisan the opportunity to work through the current underperformance. Mr. MacLean noted that, in the event the Board decides to continue the relationship with Artisan, the Board could negotiate a performance based fee agreement lowering the fee to a nominal amount based on Artisan’s future performance.
Discussions ensued regarding the current financial market and the impact, if any, on Artisans investment strategy.
A motion was made by Trustee Souza, seconded by Trustee Gomez, to Table the item and bring back for further review in 3 months and to negotiate the fees to a performance based fee structure.
Mr. Heiny stated that he was uncomfortable discussing a potential fee change without the guidance of Legal Counsel in that this is a closed strategy and Artisan has “most favored nation” clauses with some managers which they adhere to with all of their accounts.
Mr. MacLean commented on the amount of fees paid to Artisan over the past 4 years and noted that Artisan has underperformed approximately 350 basis points relative to the benchmark for the same period.
Trustee Souza revised his motion as follows:
A motion was made by Trustee Souza, seconded by Trustee Gomez, to Table the Item until November 5, 2008 and for Administration to negotiate a performance based fee agreement. VOTE: Yes – Cade, Cardenas, Cornacchia, Gomez, Larson, Souza. No – Crow, Hackett.
RECEIVED AND FILED; APPROVED
Roberto L. Peña, Retirement Administrator, suggested that the Board hear Items 16 and 17 due to their relationship with Item 14. The Board agreed.
16. Presentation and update on the current financial/credit crisis presented by Jeffrey MacLean, Wurts & Associates
Jeffrey MacLean, Wurts & Associates, began the presentation by stating that investors are simply discounting continued weakness in the credit markets and the associated implications for future growth. This process has been ongoing since the middle of 2007 and continues as market participants slowly come to grips with the inevitable side effects of an historical expansion and reversal in liquidity.
Mr. MacLean stated that people tend to extrapolate current poor conditions too far into the future. This is why capital markets rapidly deflate as investors collectively succumb to fear of loss and irrational pessimism.
Mr. MacLean noted that the most important thing to keep in mind as fiduciaries is to avoid acting irrationally during tumultuous times. The asset allocation is designed with these events in mind and investment policies are designed specifically for these sorts of occurrences.
Mr. MacLean noted that, practically speaking, investors are faced with three basic options as follows:
o Abandon asset allocation policy and sell risky assets with the hope of purchasing them again at an unspecified point in the future at an unknown price. This is market timing and will result in random results.
o Ignore rebalancing guidelines and allow the portfolio’s asset allocation to drift; or do a little market timing. Again, the results of market timing are unpredictable.
o Follow investment policies and rebalance by purchasing risky assets as they become cheaper. Over the long term, it is reasonable this option will result in the highest expected return of all three options.
It is simply not known how much further the market may or may not fall. Moreover there is no way of predicting when investor expectations will reach the lowest point or when markets will rebound.
Mr. MacLean noted that the upcoming Plan’s quarterly report will provide details regarding the effects of the recent market volatility and assured the Board that the Plan’s assets are sound.
Mr. MacLean reviewed the strategic implications of the current events as follows:
o Public equities are attractively priced
o Credit risk is well rewarded
o Treasury Inflation Protected Bonds (TIPS) are highly attractive
o Great environment for Distressed Debt Investing
o Some Hedge Fund strategies will suffer
o Time to begin accumulating Real Assets
Mr. MacLean gave a brief overview of the events leading to the current market crisis and the potential government “bailout”. General discussions ensued.
RECEIVED AND FILED
17. Discussion on FCERA exposure to Financial Holdings presented by Jeffrey MacLean, Wurts & Associates
Jeffrey MacLean, Wurts & Associates, opened discussions by stating that Wurts ran a report as of September 19, 2008 to determine the total exposure to financials of both debt and equity within the FCERA separate accounts. The query included the following companies:
o Lehman Brothers
o Bear Stearns
o American International Group (AIG)
o Merrill Lynch
o Fannie Mae
o Freddie Mac
o Washington Mutual
o UBS
o Morgan Stanley
Mr. MacLean noted that three of the four fixed income managers had to exposure to AIG, Lehman Brothers, Merrill Lynch, Morgan Stanley, and Washington Mutual and reviewed the debt holdings as September 19, 2008.
Mr. MacLean stated that BlackRock and Western Asset Management Company (WAMCO) had positions with AIG with an unrealized loss of approximately $900,000. It is expected that AIG will be able to pay their bond holders if the securities mature at par. BlackRock and WAMCO also had positions with Lehman Brothers which is the biggest source of loss at $2.8 million plus or minus depending on recovery rates, which is not likely to be recovered. Losses with Merrill Lynch and Morgan Stanley will likely be recovered.
Trustee Crow departed at 11:17 AM.
Mr. MacLean noted that Wurts requested that managers provide any counterparty exposure to any of the securities listed above. State Street was the only manager that responded with counterparty exposure. They have exposure to Lehman Brothers, Merrill Lynch, and Morgan Stanley. They had $13.4 million in securities on loan with Lehman Brothers. Through a combination of returned securities and foreclosure on the cash collateral, State Street was able to close the entire book with Lehman Brothers except for a pending trade and created no harm to FCERA’s portfolio.
General discussions ensued regarding potential future institutional failures and the impact it may have on the FCERA portfolio.
RECEIVED AND FILED
15. Discussion and appropriate action on recommended implementation plan for the new Asset Allocation presented by Jeffrey MacLean
Roberto L. Peña, Retirement Administrator, opened discussions by reminding the Board that it adopted a new asset allocation on August 6, 2008 and as part of that decision the Board requested that Wurts & Associates (Wurts) prepare an implementation plan for its review. Mr. Peña noted that the Board received a survey conducted by Administration that reflects the asset allocation of other retirement systems.
Jeffrey MacLean, Wurts & Associates, noted that there is a fair amount of search work with various degrees of due diligence required to properly implement the new asset allocation and there will also be some additional education required to help the Board feel comfortable with the aspects of the new asset classes.
Mr. MacLean stated that Wurts doesn’t believe it makes sense to use the same due diligence process for every recommendation. Some asset classes do not lend themselves to as much due diligence as others and some allocations are sufficiently small enough that they do not warrant on-site visitations. Mr. MacLean reviewed the recommended approach to each asset class and noted that the Treasury Inflation Protected Securities (TIPS) recommended approach does not call for on-site due diligence in that there are only a few managers to choose from. The Board will receive detailed information on each of firms prior to the Board making a decision on which manager to select.
The recommendations were reviewed for implementing the following asset classes:
o TIPS
o Core Real Estate
o Value Added and Opportunistic Real Estate
o Infrastructure
o International Small Cap Equity
o Opportunistic Fixed Income
o Hedge Fund of Funds
o Commodities
o Private Equity
Trustee Souza noted that the Board policy requires on-site due diligence prior to selecting an investment firm and raised concerns that the TIPS recommendation will not require on-site due diligence by the Board. Discussions ensued regarding the importance of adhering to the Board’s policy. Mr. MacLean recommends that Wurts draft a memorandum recommending a specific manager for the TIPS allocation with appropriate support documentation. Trustee Souza stated his preference for the potential firms, even if that is with the firms attending a Board of Retirement meeting.
At the request of Mr. Peña, Mr. MacLean explained the reasoning for employing two International Small Cap Equity managers as apposed to one. It was noted that the justification for the diversification is the difference in management styles.
Discussions ensued regarding the 9% allocation to Hedge Funds. It was noted that the survey of other retirement systems reflects that FCERA has the highest allocation. Mr. Peña clarified that although the survey indicates that FCERA has the highest allocation to Hedge Funds, other systems may have exposure to Hedge Funds under a separate allocation such as Private Equity. The Board will receive an educational presentation regarding Hedge Funds, as well as other asset classes, at the upcoming Board Retreat.
A motion was made by Trustee Cade, seconded by Trustee Larson, to Accept the Asset Liability Implementation recommendations with the associated time-line as presented.
Trustee Souza opposed the motion stating his concern that the TIPS recommendation departs from Board policy.
VOTE: Yes – Cade, Gomez, Hackett, Larson. No – Cardenas, Cornacchia, Souza. (Absent – Crow, Jolly)
[Prior to the vote, the public was not offered the opportunity to comment, therefore the vote did stand.]
Kevin Smith, SEIU Local 521, agreed that the Board should not depart from policy as suggested by Trustee Souza.
It was clarified that the motion accepts the implementation recommendations as presented for the Asset Allocation adopted by the Board on August 6, 2008. It was noted that the Board will receive education on the different asset allocations at the upcoming Board retreat prior to implementing the new asset allocation and once the Board is fully informed on the asset classes, changes may be made to the allocation.
ROLL CALL VOTE: Yes – Cade, Larson. No – Cardenas, Cornacchia, Gomez, Hackett Souza. (Absent – Crow, Jolly)
Detailed discussions ensued regarding the language reflected in the Due Diligence policy. It was noted that the policy reflects that “at a minimum on-site due diligence visits will form part of the due diligence for the following types of perspective service providers…investment managers”. Detailed discussions followed regarding the intent of the policy and the importance of documenting reasons for departing from the policy. The Board agreed that in the absence of on-site visits with the investment managers, potential managers will be invited to Fresno to make a presentation.
A motion was made by Trustee Souza, seconded by Trustee Larson, to proceed with the Asset Allocation Implementation Plan as presented. VOTE: Unanimous (Absent – Crow, Jolly)
RECEIVED AND FILED
16. Presentation and update on the current financial/credit crisis presented by Jeffrey MacLean, Wurts & Associates
Please see discussion following Item 14.
17. Discussion on FCERA exposure to Financial Holdings presented by Jeffrey MacLean, Wurts & Associates
Please see discussion following Item 16.
18. Discussion on Western Asset Management’s organizational updates
Mr. MacLean opened discussions by reminding the Board that in April of this year, Ken Leech, Chief Investment Officer of Western Asset Management Company (WAMCO), announced that he would be taking a medical leave of absence. Earlier this month WAMCO announced Mr. Leech’s condition has stabilized and he has decided to return to WAMCO on a part-time basis. As a result, WAMCO has promoted Stephen Walsh to the role of Chief Investment Officer.
Mr. MacLean noted that, given Mr. Walsh’s long tenure with the firm and the positives relating to the organizational changes, there is no need for action at this time.
RECEIVED AND FILED
19. Discussion and appropriate action on Mercer’s offer for Specialized Investment Consulting Services
Tom Lightvoet, Principal of Mercer Investment Consulting, opened discussions by stating that is quite common for retirement systems of FCERA’s size and complexity to use specialty consultants in areas where they believe additional expertise is advisable. Mr. Lightvoet gave a brief overview of some of the firm’s specialized investment consulting services. General discussions ensued.
A motion was made by Trustee Larson, seconded by Trustee Gomez, to Table the Item until a time that Chair Jolly could participate in the discussion. VOTE: Unanimous (Absent – Crow, Jolly)
RECEIVED AND FILED; APPROVED
Roberto L. Peña, Retirement Administrator, pulled Closed Session Agenda Items 20.A.1., 20.A.2., and 20.B., as there was nothing to discuss.
20. Closed Session:
A. Conference with Legal Counsel – Actual Litigation - pursuant to G.C. §54956.9(a)
1. Fresno County Employees’ Retirement Association v. Public Pension Professionals
2. North Central Fire Protection District v. Fresno County Employees’ Retirement Association
B. Conference with Real Property Negotiators – pursuant to G.C. §54956.8
Property: 1713 Tulare Street, Fresno, CA 93721
Agency Negotiators: Brian Decker of Colliers Tingey
Negotiating Party: Any potential qualified buyer
Under Negotiation: Price and terms of sale
21. Report from Closed Session
20.A.1. Pulled.
20.A.2. Pulled.
20.B. Pulled.
22. Report from FCERA Administration
Roberto L. Peña, Retirement Administrator, reported on the following:
1. The Personnel Committee will meet immediately following the October 1, 2008 Regular Board Meeting to discuss the performance of the Retirement Administrator.
2. The Board will meet for its annual Retreat on October 15, 2008 at the Harris Ranch Inn in Coalinga, CA.
3. The auditors from Brown Armstrong are currently conducting their annual audit of the Plan.
4. The nomination period for the Safety election closes October 1, 2008 at 5:00 PM.
5. A letter from NEPC complementing the Board on its professionalism during the Investment Consultant review process.
23. Report from County Counsel
Susan Coberly, Senior Deputy County Counsel, had nothing to Report.
24. Board Member Announcements or Reports
Trustee Souza requested that Administration agendize a discussion regarding the use of more than one securities lending law firm. Administration agreed.
There being no further business, the meeting adjourned at 12:47 PM.
Roberto L. Peña
Secretary to the Board
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