Download minutes - San Antonio Fire and Police Pension Fund

MINUTES
INVESTMENT COMMITTEE MEETING
FIRE AND POLICE PENSION FUND, SAN ANTONIO
TUESDAY, FEBRUARY 20, 2007
PENSION OFFICE – 1:30 P.M.
ROLL CALL:
COMMITTEE
MEMBERS
PRESENT:
COMMITTEE
MEMBERS
ABSENT:
OTHERS
PRESENT:
Mr. Stewart called the meeting to order at 1:30 P.M.
Lieutenant Bart Moczygemba, Fire Representative; D.I. Teddy
Stewart, Police Representative
Captain Harry Griffin, Police Representative
Captain Donald Wagoner, Fire Representative; Mark Gremmer,
Financial Officer; A.C. Berry, Investment Analyst; and Mr.
Warren Schott, Executive Director/CIO.
Approval of Minutes from January 25th, 2007
Mr. Moczygemba made the motion to approve the minutes of the January 25, 2007
Investment Committee Meeting. The motion to approve the minutes was seconded by
Mr. Stewart. Motion carried unanimously.
Annual Review Presentations

Waddell & Reed - Representing Waddell & Reed were Mark Seferovich and
Charles Deeds. Mark Seferovich, CFA and Chuck Deeds, presented on behalf of
Waddell & Reed (WR). Waddell & Reed’s Small Cap Growth Equity is a
“bottom-up” portfolio with primary emphasis placed on long term growth and
superior financial characteristics. Typically, there are about 48-50 issues in the
small cap portfolio. WR was asked to enlighten the Fund on its 2006
performance. Waddell & Reed realized (gross) returns of 5.0% for 2006, 8.9% for
a 2-year annualized return, 11.1% for a 3-year annualized return, and an
annualized return since inception of 17.1%. This compares to the benchmark
return (Russell 2000 Growth) of 13.3% for 2006, 8.6% for a 2-year annualized
return, 10.5% for a 3-year annualized return, and an annualized return since
inception of 18.3%. Taken from the Fund’s perspective, this equates to over /
under performance of - 830 bps for 2006, + 30 bps on the 2-year annualized, + 60
bps on a 3-year annualized return, and – 120 bps since inception. Waddell
presented additional insight into sector performance within the Russell 2000
Growth. Specifically, how value oriented strategies won out in 2006 with sectors
as energy, utilities, consumer staples, and materials rising at 2.5 times the gain of
the overall benchmark. WR’s allocation to consumer discretionary, healthcare,
and technology accounted to 78% of sector weight while underperforming the
benchmark in 2006.

Longview Corporation - Mr. Robert Gershen, President, Jack McCandless,
Exploration Manager, and David Fuller, Vice President, presented to the
Committee on behalf of Longview Corporation. Longview Corporation is the only
remaining asset of the SAFP’s investment in the Energy Income Fund. Energy
Income Fund, L.P. (the “Fund”) is a Delaware limited partnership organized on
December 8, 1994 that commenced operations on May 17, 1996. The Fund’s
original investment objective was to achieve a high total return by investing in
secured loans to small domestic independent energy producers, with
accompanying gross overriding royalties and equity interests. The Fund has
original commitments from investors totaling $100M of which $93.9M has been
called and received as of October 31, 2006. The Fund returned $126.2M of capital
of the $93.9M invested. The only remaining asset of the Fund is Longview
Corporation which has no debt outstanding, was profitable in 2005 & 2006,
improving cash flows, and projects a 24-month liquidity event.
Venture Lending & Leasing V
Staff briefed the Committee on a new fund offered by Westech Investment Advisors. San
Antonio Fire & Police Pension Fund has a longstanding relationship with Westech and
has invested in all four of their previous funds. Westech is a proven leader in the area of
venture capital investing. Staff informed the Committee that Westech previously solicited
indications of interest for Venture Lending & Leasing V. Westech now seeks a firm
commitment in the Fund V. Mr. Moczygemba made a motion to invest $12M in the
Venture Lending & Leasing V. The motion was seconded by Mr. Stewart. Motion carried
unanimously.
Consulting Services Group
Mr. Robert Longfield and Ronny Partain presented to the Committee on behalf of
Consulting Services Group (CSG). CSG briefed the Committee on the Fund’s
performance during its first quarter of the fiscal year (FYQ1-07) / fourth quarter of the
calendar year (Q4-06). During that period, the Fund achieved a 6.6% return. Key drivers
during the Fund’s fiscal quarter were the domestic and international equity allocations
which achieved asset-weighted returns of 7.3% and 12.4%, respectively. Aggregate
equity-weighted return for the period was 9.2%. Additionally, CSG discussed various
attributes (strengths/weaknesses/opportunities) in the portfolio. Specifically, CSG
suggested reducing San Antonio Fire & Police Pension Fund’s (SAFP) exposure to small
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capitalized (small cap) stocks. As of fiscal-year first quarter end (FYQ1-07), SAFP had
13.15% in small cap stock with a target rate of 13.00%. The asset class has a range of 818%. Given present market valuations, CSG preferred reallocating to an all-cap manager
which could seek out the best investment opportunities in the market. CSG recommended
reducing the Waddell & Reed and Rothschild allocation by $20M and $10M,
respectively. The proceeds would then be allocated to Century Management, which is the
SAFP’s only all-cap manager. Staff concurred with the recommendation and supported
the recommendation with Century’s long-term performance. Mr. Moczygemba made a
motion to redeem $20M from Waddell & Reed and $10M from Rothschild and reinvest
the proceeds with Century Management. The motion was seconded by Mr. Stewart.
Motion carried unanimously. Additionally, CSG recommended taking Goldman Sachs
and Silver Creek Capital Management off the Pension Fund’s “Watchlist” status. Mr.
Stewart made a motion to take both managers off “Watchlist” status. The motion was
seconded by Mr. Moczygemba. Motion carried unanimously. CSG also discussed
present-day interest rates and its effect on compressing spreads on high-yield securities.
MacKay Shields presented before the Committee at its January meeting and discussed
return potential in the high-yield sector. They felt a realistic return expectation for the ’07
year was 8.00%. As of December 31, 2006, the Lehman Brothers High Yield Index had a
weighted-average coupon of 8.30%. Targeting a 8.00% return equates to essentially
“clipping the coupon” in the asset class. Should spreads stay where they are (versus
widen) and a modest default rate (normalized), investors typically realize the coupon.
This is typically called “clipping the coupon”. As a proactive measure (in the event of
spreads widening), CSG recommended reducing SAFP exposure in the high-yield sector
and reallocating to more “opportunistic” investments. CSG suggested pursuing an
emerging market, local currency debt (LCD) allocation. Supporting the asset class are:
rising local currency debt issuance, shrinking dollar denominated debt supply, weak US
dollar, strong savings pools outside the G7 (U.S., France, Germany, Italy, Japan, United
Kingdom, and Canada), and a desire by non-G7 nations to develop local yield curves.
CSG recommended the Ashmore Local Currency Fund (ALCF). Mr. Stewart made a
motion to redeem $15M from MacKay Shields and invest in the Ashmore Local
Currency Fund (ALCF). The motion was seconded by Mr. Moczygemba. Motion carried
unanimously.
CSG also recommended the Acadian Asset Management allocation (emerging market
equity) be considered as a source of capital, should the need arise.
ADJOURNMENT:
Mr. Moczygemba made the motion to adjourn the meeting.
The Investment Committee adjourned at 4:30 P.M.
Approved this ____ day of _________________, 2007.
______________________________________
Teddy Stewart, Investment Committee Chairman
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