Download Minutes March 2016

ARLINGTON COUNTY VIRGINIA
EMPLOYEES’ RETIREMENT SYSTEM
Board of Trustees Meeting Minutes
March 3, 2016
The President of the Board, Mr. Peter Maier, called the meeting to order at 8:00 AM, in
Conference Room 511C at 2100 Clarendon Boulevard.
Voting Members Present:
Mr. Peter Maier, President
Mr. Richard Alt, Vice President
Ms. Michelle Cowan, Treasurer
Ms. Sandy DeGray, Secretary
Mr. Michael Brunner
Mr. Ken Dennis
Mr. Jon Kinney (arrived at 8:05 AM)
Substitute Member Present:
Mr. Jimmie Barrett, Asst. Treasurer
Mr. Alex Iams
Mr. Wayne Rhodes
Various Times:
Mr. Daniel Zito, Executive Director
Ms. Randee Stenroos, Assistant Director
Ms. Katrina Milne, Investment Analyst
Ms. Susan Bomberg, Accountant
Ms. Amy Rozier, Human Resources
Mr. Rob Gooderham, ACG
Mr. Garry Musto, ACG
Mr. Dennis Scannell, Rutabaga
Mr. Carter Newbold, Rutabaga
Mr. Scott Berg, T. Rowe Price
Mr. Kurt Umbarger, T. Rowe Price
Mr. Brad Meeker, T. Rowe Price
CONSENT LIST
A motion to approve the consent list, consisting of the February 4, 2016 meeting minutes,
was offered by Mr. Brunner and seconded by Mr. Alt. The motion passed by a vote of 60, with Mr. Kinney not yet present.
DISABILITY PROCESS AND ACTIVITY REVIEW
Ms. Amy Rozier of Human Resources (HR) provided an overview of the disability
retirement decision process and summarized FY15 activity. After an employee applies
for either service connected or ordinary disability retirement, HR schedules an
independent medical evaluation. Based on the results of this, HR will approve either
temporary or permanent disability or deny the application completely. All cases are
subject to periodic reviews to confirm that employees on disability continue to be unable
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to return to work. There were 4 approved permanent, service connected disabilities and
6 permanent, ordinary disabilities approved in FY15.
RUTABAGA CAPITAL MANAGEMENT
Messrs. Scannell and Newbold updated the Board about the firm, noting no changes
other than Brent Miley returning from family leave. As of 1/31/16, ACERS had $51 million
invested in the firm’s small cap strategy which totals $462 million. Net performance
versus the Russell 2000 and the Russell 2000 Value for various periods is summarized
below:
(%)
Net Performance Russell 2000 Russell 2000 Value
As of 1/31/16
- 8.0
-8.8
-6.7
1 Year
-14.3
-9.9
-9.9
3 Year
- 2.4
6.1
4.5
Since Inception – 11/30/12
1.8
9.0
7.6
As Rutabaga invests in small, turnaround situations, the benchmark agnostic strategy can
be, and has been, very volatile. Mr. Scannell noted that the 7-8 stocks in the portfolio
which have driven the significant under performance have been reviewed carefully and
subsequent action taken where warranted. In responding to several trustee questions, it
was emphasized that there is no institutional bias towards certain stocks but only towards
consistency in the investment process. He also noted that currently there are 5 to 7 names
in the pipeline of potential holdings. Mr. Newbold noted the firm’s expertise is in evaluating
the internal workings of companies that could boost profits not in the assessment of the
effect of the macro economy on a particular stock. After the presentation, a robust Board
discussion ensued.
T ROWE PRICE GLOBAL GROWTH
Mr. Berg discussed ACERS’ $92 million investment (as of 1/31/16) in the Global Growth
strategy. Investment performance for various periods is summarized below:
(%)
3 Months 1 Year Since Inception
TRP Global (Net)
7.1
1.0
8.6
MSCI ACWI
5.2
-1.8
7.5
Regarding the investment team, Mr. Berg noted the addition of Hari Balkrishna as a
second Associate Portfolio Manager located in London. The rationale for adding this
position to prepare for the eventuality that Baltimore based Associate Portfolio Manager
Jay Nogueira will move on to other opportunities within the firm. An added benefit of
having two associate portfolios in different regions is the ability to gain region-specific
information more efficiently.
Mr. Berg noted that many investors are selling equities to “derisk”, essentially driven by
increased negative market tone and fear. He believes that this will create opportunities
in a slow growth market. While the strategy is usually more sector neutral, it is currently
underweight in energy and overweight in financials due to fundamentals in these sectors.
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Regarding geographical diversification in volatile, emerging markets, selectivity is critical
and the focus has been on four countries: Indonesia, Mexico, Philippines and India. Mr.
Berg does not anticipate a global recession, but foresees improving developed world
growth and opportunities in certain emerging markets. After the presentation, a Board
discussion ensued.
T ROWE PRICE NATURAL RESOURCE VEHICLE RECOMMENDATION
Discussion of this agenda item was deferred pending additional information.
ASHFORD QUARTERLY PERFORMANCE REVIEW
Ashford Consulting reviewed the fund’s performance for the quarter year ended
December 31, 2015. Fund returns for various time periods were:
(%)
Quarter 1 Year 5 Years 10 Years
Total Fund (Gross)
3.1
-1.7
7.3
6.2
Total Fund (Net)
3.0
-2.0
6.9
5.9
Policy Benchmark**
2.9
-0.4
6.6
5.6
CPI + 3.5% Annualized
0.3
4.2
5.0
5.4
* Gross returns adjusted downwards for current annual fee rate per annual fee review and analysis, assuming all fees deducted
quarterly.
**Effective 10/1/07: 40% Ru3000, 17.5% MSCI ACWI ex-US, 39% BC Universal, 1.5% Barclays TIPS, 2% T-Bills
Net performance for the quarter outperformed the benchmark by 0.1% and for the last
twelve months lagged it by -1.6%, respectively, driven primarily by exposure to the energy
sector. Specifically, weak MLP performance was partially offset by the performance of
growth-oriented global equity managers. Relative to the TUCS universe of public plans,
ACERS performance was in the 87th, 57th and 32th percentile on a one, five and ten year
basis, respectively. The fund’s estimated diversified risk level at December 31, 2015 was
62.2. This compares to a benchmark estimated risk of 57 and the top of the policy risk
band at 65.
SECTOR UPDATE: MLPs
Mr. Musto presented a sector update on MLPs. He reviewed the top ten holdings in
ACERS active MLP strategy, which account for 58% of the account managed by Harvest,
in detail. Specific areas of discussion included the likelihood of a distribution cut, the
percentage of revenues from pipelines, distribution coverage ratios, leverage ratios and
access to capital over the next 12-18 months. Acknowledging some MLP holdings may
go through a period of slow/no growth, Mr. Musto related that Harvest’s worst case
scenario was one in which distributions could get cut but only until the capital markets reopen. It was also noted that several large value investors have begun to invest in MLPs.
While the sector remains under significant pressure, no changes were recommended.
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KEY INITIATIVES UPDATE/OTHER BUSINESS
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Mr. Zito noted that Transaction Cost Analysis was discussed at the Board
Education Training session on March 2. Trustees who attended found the
presentation informative and requested additional information be presented at a
regular Board meeting in the near future.
Ms. Stenroos and Ms. Milne presented analyses regarding historic asset allocation
ranges, passive vs. active splits, manager tenure and relative sector exposures.
Ms. Stenroos noted the termination of the Oaktree convertible mandates, the
trimming of Baillie Gifford position and the redeployment of the proceeds as
approved at the January 2016 meeting has been completed.
INVESTMENT RELATED
A. Fund Balance for January
B. County Board Update (as of 12/31/15)
ADMINISTRATIVE ITEMS
A. Calendar of Events
ADJOURNED
Mr. Alt, seconded by Mr. Brunner, offered a motion to adjourn the meeting. The motion
passed unanimously with a vote of 7-0. There being no further business, the meeting
adjourned at 11:00 AM.
Respectfully submitted,
Susan Bomberg
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