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HomeMy WebLinkAboutCOMM - Meeting Minutes - 148 - 4-11-1996 - RETIREMENT13 1 1 Sold By IMR 2. Form 825 E417350 Commissions on Trades Suggested change by Ron Schmeiser: Presently the Board is paying eight cents per trade on equity securities. This can be negotiated down to six cents which is a more appropriate charge. Implementation of this suggestion will result in savings to the fund of $20,000 to $25,000 per year and the savings will increase as the fund grows in future years. Don Herrington of Smith Barney stated that in 1991 when his firm first contracted with the County the offer was made for the fee to be paid in "soft dollars", but he noted that it is not a one-to-one offset for his firm and his firm would need approximately $40,000-$50,000 in order to net $25,000. He commented that he would be agreeable to six cents a share but would like a minimum trade size. Norm Allan of C. S. McKee stated that although the combined commissions that his firm and RRZ's firm generate for the fund may in fact enable the fund to reach the minimum $40,000 - $50,000 that Don Herrington would need to net his $25,000 fee, his only objection to that, from a management standpoint, is that it ties his hands to trade for the Board and he feels that it is not a good practice for the Board to do. -He stated that he feels that if the managers had the latitude to trade on an open market basis as opposed to placing trades as directed by the Board in its letter dated December 6, 1990, the fund would experience higher performance benefits. He stated that directed trades can affect fund performance as much as 1% annually and that the performance differential over the last three years for the fund has amounted to approximately $176,500.00. He stated that by directing trades to various brokers the fund's performance has been impacted in what he calls "lost opportunity costs" which means that the fund did not lose any money but at the same time there was no opportunity to earn. Frank Burnette of RRZ Investment Management, Inc., stated that within the last couple of years, the County Commissioners Association formed a Pension Best Practices Committee of which he, Norm Allan and Norm Pickering served as members. He stated that the committee's recommendation is if the Board employs a monitor, it should be a hard dollar arrangement because it allows the monitor to be 100% aggressive and there is no other determination or influence on favoring one money manager over another and allows the monitor to be completely 14 independent from the process. The committee also suggested that money managers should have the latitude to direct the trades in the open market at their discretion and to allow block trades which can provide more buying power. Francis King stated that he had the opportunity to speak with other money managers over the last several weeks and that most of them indicated that they would prefer a flat fee as opposed to the fee being paid in "soft dollars". Don Herrington indicated that it is his personal preference to have a flat fee which has been the procedure since he initially contracted with the County in 1991. The Board briefly discussed the downside aspects of paying the monitor's fee in "soft dollars" as opposed to a flat fee. It was the consensus among Don Herrington and Norm Allan and Frank Burnette that Smith Barney would charge C. S. McKee and RRZ six cents per trade and a minimum transaction fee of $50.00 when C. S. McKee and RRZ directed trades through Smith Barney. It was also noted that an accounting procedure would be established to reflect residuals to the fund for transactions directed through Smith Barney by C. S. McKee and RRZ. Moved by Mr. Ford-, seconded by Mr._King, to (1) continue to pay the monitor's annual fee of $25,000 as a flat fee as opposed to "soft dollars"; (2) remove the restrictions contained in the Board's letter dated December 6, 1990, wherein the money managers were directed to place 75% stock brokerage business with local brokers; (3) the fund to pay no more than six cents per trade; and (4) to establish an accounting procedure to reflect residuals to the fund for transactions directed through Smith Barney. Roll call vote taken: Mr. Belcastro - Yes; Mr. King - Yes; Mr. Burns - Yes; Mrs. Irey - Yes; Mr. Ford - Yes. Motion carried unanimously. 3. Quarterly Reporting Suggested change by Ron Schmeiser: Presently the money managers report the results of their quarterly performance on the second meeting after the quarter closes (i.e. February, April, August and November). This is too late to make changes, if warranted, by the performance in the quarter. Changes do 15 Sold By HR Limited Form 825 E417350 not necessarily mean a new manager, but could include changes in objectives, types of investments, etc. Ron Schmeiser suggested that the money managers report the results of their quarterly performance at the first meeting after the quarter closes and asked if it would be possible to have the quarterly reports on the last Thursday of the month. It was noted that the Retirement Board meetings are scheduled to coincide with the bi-weekly meetings of the Board of Commissioners and will occur sometimes on the third Thursday and sometimes on the fourth Thursday. Don Herrington stated that depending on when he receives the custodian's report, he may not have enough time to prepare his report for an earlier meeting. Norm Allan and Frank Burnette both commented that although they are willing to accommodate the Board, having earlier quarterly meetings may present a scheduling conflict with i their other clients. Therefore, it was the consensus that Don Herrington would provide to the Board members quarterly report information as soon as feasibly possible with his commentary and that he and both money managers would continue to attend quarterly meetings as scheduled in order to present their respective reports. 4. Statement of Objectives Suggested change by Ron Schmeiser: Presently the statement of objectives requires that the fund be 95% invested at all times. (The other 5% is invested in short-term investments.) In periods of a bear market, or the threat of a bear market, the managers should be given the discretion to move out of stocks or bonds and into short-term investments to limit the amount of losses from a falling market. Also, the investment objective calls for a return on investments to exceed the Consumer Price Index (CPI). This requirement should be changed to meet or exceed the actuarial assumption of 7%. (The CPI for 1995 was 2.5%. The Board should not be content with a return this low.) Ron Schmeiser suggested that more flexibility should be given to the money managers than the 95% invested requirement. Frank Burnette concurred. Commissioner Irey stated that she found that C.S. McKee has not followed that procedure and on August 25, 1994, recommended that the Board change the investment plan asset ratio. (See Minute No. 129 dated 8/25/94, pp. 258-259 for further reference.) She made reference to a report from Smith Barney relative to the quarterly asset allocation percentages and noted that C.S. McKee had been in the double digits in cash 11 out of 12 quarters straight. 16 Norm Allan stated that what Commissioner Irey was referring to occurred during the time period of 1988/89/90 prior to these restrictions being adopted. He explained that C.S. McKee changed its style of asset allocation and in 1994 advocated this policy. He stated that he has no problem with Ron Schmeiser's suggestion that the managers be given the flexibility to raise cash as they see fit. As an investment philosophy, C.S. McKee tried to embrace some of that concept in that when they felt the market was going to react negatively, they tried raising larger amounts of cash and found that it was not the most effective way, which he explained was essentially a form of "market timing". He stated that statistics show that managers that try and do that perform less advantageously than those that remain fully invested at all times. Therefore, C.S. McKee modified its overall philosophy as far as cash requirements. He also explained that part of what Commissioner Irey viewed in cash and cash equivalents may in fact have been treasury securities of under one year's maturity because traditionally C.S. McKee listed them in the cash category. He further stated that although he has no objection to Ron Schmeiser's recommendation, the Board will not see C.S. McKee pursue that because of its investment philosophy whereby C.S. McKee feels that it would be increasing the amount of risk that the portfolio faces by adopting that philosophy. He stated that C.S. McKee will be fully invested at all times and the only time the portfolio will be over 5% cash- or cash equivalents will be with the inclusion of short-term treasuries. The consensus was to leave the investment plan asset ratio as is but allow the managers flexibility to reduce those commitments at their discretion. Moved by Mr. Burns, seconded by Mr. Ford, that the investment objectives be revised to reflect the requirement that a return on investments meets or exceeds the actuarial assumption of 7% or the CPI, whichever is higher. Roll call vote taken: Mr. Belcastro - Yes; Mr. King - Yes; Mr. Burns - Yes; Mrs. Irey - Yes; Mr. Ford - Yes. Motion carried unanimously. 1 0 17 Sold By IMR Limited Form 825 E417350 11 I 5. Actuarial Assumptions Suggested change by Ron Schmeiser: The fund's actuarial assumption for future wage increases has remained at 5% per annum since the 1980's. This rate was appropriate in the 1980's, but in his opinion, is now too high. A 4% assumption in 1996 is both realistic and conservative. He drafted two letters (one from the Salary Board and one from the Retirement Board) addressed to the actuary asking for and justifying the lower assumption. A lowering of this assumption to 4% will require substantially less annual contributions by the County. It was noted that this change has been placed in effect. Commissioner Irey expressed her concern with the wisdom of foreign investments as a matter of public policy and C.S. McKee's investments in foreign companies through American Depository Receipts (ADR). She also expressed her concern with C.S. McKee's underperformance in the equities market and the presence of unrated bond funds in the holdings. Norm Allan responded that the previous Retirement Boards did not prohibit C.S. McKee's investments in foreign companies through ADR. He noted that over the last 25 years, most times the international market led the domestic market and C.S. McKee's foreign investments, although limited, added investment opportunities to the fund. Relative to Commissioner Irey's concern of the presence of unrated bond funds in the holdings, Norm Allan explained that the securities listed under the Mortgage Backed Securities section on the 12/31/95 asset listing are all triple A quality and that C.S. McKee will never buy an unrated bond; all bond purchases are at least "investment grade" (BBB) or better. He explained that the reason that the Mortgage Backed Securities section appeared to be unrated was that Data Exchange, C.S. McKee's software provider, was experiencing some bugs in their programs. He apologized for the confusion. Moved by Mrs. Irey that the Board solicit RFP's and qualifications from additional money managers. Motion died for lack of a second. There being no further business, Chairman Ford declared the meeting adjourned at approximately 11:30 a.m. THE FOREGOING MINUTES SUBMITTED FOR APPROVAL: +n J 1996 ATTEST: Minute No. 149 Washington County Retirement Board Washington, Pa., April 18, 1996 The monthly meeting of the Washington County Retirement Board was held at approximately 10:45 a.m. on Thursday, April 18, 1996, in the Public Meeting Room, Courthouse Square Office Building, Washington, Pennsylvania, with the following members being present: Commissioners Ford, Irey and Burns, Treasurer Francis King and Controller Paul Belcastro. Also being present: Chief Clerk Dallatore, Anthony Turriziani, Nancy Ellis, Joseph Gorby and Louis Brova, interested citizens; Joe Smydo, Observer -Reporter; and Chris Haines, Herald Standard. Approval of Minutes Chairman Ford entertained a motion to approve Minute No. 147 dated March 21, 1996. Moved by Mr. Belcastro, seconded by Mr. King, that Minute No. 147 be approved as written. Roll call vote taken: Mr. Belcastro - Yes; Mr. King - Yes; Mr. Burns - Yes; Mrs. Irey - Yes; Mr. Ford - Yes. Motion carried unanimously. Treasurer's Report RETIREMENT SYSTEM REPORT Bank Balance as of March 1,1996 Deposits to Checking Account Transfers from Investment Account Less: Cancelled Checks Less: Transfers to Investment Account Bank Balance as of April 1,1996 Less: Outstanding Checks Less: Retirement Check Run -March 31, 1996 Reconciled Balance as of April 18, 1996 $138,772.10 $105,272.81 $208,490.12 $217,128.57 $105,272.81 $130,133.65 $ 63,778.86 $ 66,354.79 $ -0- [1 �J E