ARLINGTON COUNTY VIRGINIA
EMPLOYEES’ RETIREMENT SYSTEM
Board of Trustees Meeting Minutes
December 3, 2015
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 (arrived 8:04 AM)
Ms. Sandy DeGray, Secretary
Mr. Michael Brunner
Mr. Ken Dennis
Mr. Jon Kinney (arrived at 8:11 AM)
Substitute Member Present: Mr. Jimmie Barrett, Asst. Treasurer
Voting Members Absent: Ms. Michelle Cowan, Treasurer
Substitute Members Absent: Mr. Alex Iams
Mr. Wayne Rhodes
Various Times: Mr. Daniel Zito, Executive Director
Ms. Randee Stenroos, Assistant Director
Ms. Katrina Milne, Analyst
Ms. Susan Bomberg, Accountant
Mr. Rob Gooderham, ACG
Mr. Garry Musto, ACG
Mr. Thomas Rey, Clifton Larson Allen
Mr. Brian Kiernan, Clifton Larson Allen
Mr. Jim McGovern, Franklin Park
Mr. Lou Mintz, JFL Equity Investors IV, LP
CONSENT LIST
A motion to approve the consent list, consisting of the November 5, 2015 meeting minutes, was offered by Mr. Brunner and seconded by Mr. Dennis. The motion passed by a vote of 4-0, with Messrs. Alt and Kinney not yet present and Ms. Cowan absent.
INTEREST RATE ON MEMBER CONTRIBUTIONS
A motion to set the crediting interest rate on member contribution account balances for 2015 at 0.95%, pursuant to Board policy, was offered by Mr. Dennis and seconded by Mr. Brunner. The motion passed with a vote of 4-0, with Messrs. Alt and Kinney not yet present and Ms. Cowan absent.
QUARTERLY INVESTMENT PERFORMANCE REVIEW
Ashford Consulting reviewed the fund’s performance for the quarter year ended September 30, 2015. Fund returns for various time periods were:
(%) 1 Qtr 1 Year 5 Years 10 Years
Total Fund (Gross) -6.2 -3.2 7.9 6.2
Total Fund (Net*) -6.3 -3.6 7.5 5.8
Policy Benchmark** -4.8 -1.4 7.1 5.5
CPI + 3.5% Annualized 0.6 3.5 5.2 5.3
* 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 and last twelve months lagged the benchmark by -1.5% and -2.2%, respectively, driven primarily by exposure to the energy sector, specifically MLPs. Relative to the TUCS universe of public plans, ACERS performance was in the 90th, 58th and 28th percentile on a one, five and ten year basis, respectively. The fund’s estimated diversified risk level at September 30, 2015 was 61. This compares to a benchmark estimated risk of 57 and the top of the policy risk band at 65.
INVESTMENT REALLOCATION RECOMMENDATIONS
Ashford Consulting presented two investment reallocation recommendations for the Board’s consideration.
First, Ashford recommended terminating the approximately $91 million investment in Brown Brothers Harriman’s (BBH) Core Select Strategy due to prolonged performance below expectations. Ashford presented three options for reinvestment of the proceeds, endorsing funding a new Russell 1000 Value Index with $81 million and investing the remaining $10 million to the existing Northern Trust Aggregate Bond Index. It was noted that these actions would reduce manager fees by approximately $700,000 per year. Staff concurred with the recommendation and a robust discussion ensued. Mr. Kinney suggested allocating $10 million to the Harvest MLP mandate rather than the Aggregate Bond Fund. After further discussion, a motion was offered by Mr. Brunner and seconded by Mr. Dennis, to authorize staff to take the actions necessary to terminate Brown Brothers Harriman and to reallocate $81 million to a new Russell 1000 Value Index fund and $10 million to the Harvest MLP strategy. This motion passed with a vote of 6-0, with Ms. Cowan absent.
Ashford presented several Russell 1000 Value Index fund options, some of which included a securities lending component. After discussion, Mr. Brunner, seconded by Mr. Kinney, offered a motion to authorize staff to take the actions necessary to invest the aforementioned $81 million in the Northern Trust Value Index with securities lending, subject to satisfactory completion of documentation. The motion passed with a vote of 6-0, with Ms. Cowan absent.
The second investment recommendation was to terminate the Oaktree Domestic and Oaktree Convertible mandates due to concerns with the convertible market’s fundamentals. After reviewing the case for exiting the convertible market, Ashford presented two options for reinvestment of the estimated $157.6 proceeds, including using a new currency hedged EAFE provider. Two firms were discussed with Ashford recommending Blackrock. Staff noted its comfort with the recommendation but that additional due diligence on the product was necessary.
Mr. Brunner, seconded by Mr. Dennis, offered a motion to authorize staff to take the actions necessary to terminate the Oaktree Domestic and International Convertible mandates and to reallocate the proceeds as follows:
· $70 million to the Northern Trust Value Index with securities lending
· $40 million to the Blackrock Currency Hedged EAFE Index Fund, subject to satisfactory completion of due diligence and documentation.
· $40 million to the Northern Trust Aggregate Bond Index Fund
· $7.6 million to the Vanguard Short Term Federal Fund
After further discussion, Mr. Kinney proposed a friendly amendment to reallocate the $7.6 million earmarked for the Vanguard Short Term Federal Fund in the original motion, proportionally among the other three investment vehicles. This amendment was accepted by the makers.
The motion, as modified, passed with a vote of 6-0, with Ms. Cowan absent.
FY 2015 AUDIT FINDINGS AND CAFR SUBMISSION
Mr. Rey presented Clifton Larson Allen’s report on the audit of ACERS’ financial statement for the fiscal year ended June 30, 2015. Clifton Larson Allen issued an unmodified opinion that the financial statements are presented fairly, in all material respects and in conformity with U.S. Generally Accepted Accounting Principles.
Mr. Kiernan discussed new analytical data procedures that have allowed analysis of a broader data set than traditional sampling techniques. He noted consistent handling of transactions and praised the County for its procedural compliance.
Staff left the room and the Board had further discussions with Messrs. Rey and Kiernan. Upon staff’s return, a motion was offered by Mr. Brunner and seconded by Ms. DeGray to approve the 2015 Comprehensive Annual Financial Report (CAFR) as submitted. This motion passed unanimously by a vote of 6-0, with Ms. Cowan absent.
CLOSED SESSION
A motion was offered by Mr. Maier, seconded by Mr. Brunner, and passed by a vote of 6-0, to enter into closed session for discussion or consideration of the investment of public funds where competition or bargaining is involved, where, if made public initially, the financial interest of the governmental unit would be adversely affected pursuant to Virginia Code §2.2-3711(A)(6). The closed session began at 10:08 AM.
The Board returned to open session at 10:54 AM. On a motion by Ms. Degray, seconded by Mr. Brunner, and carried by a vote of 6-0, the voting recorded as follows:
Member Vote
Mr. Maier Aye
Mr. Brunner Aye
Mr. Dennis Aye
Mr. Alt Aye
Ms. DeGray Aye
Mr. Kinney Aye
The Board certified that only public matters lawfully exempted from open meeting requirement by Virginia law and identified in the motion convening the closed session were heard, discussed or considered by the Board.
After the Board returned to open session, Mr. Brunner, seconded by Mr. Dennis, offered a motion to commit $15 million to JFL Equity Investors IV, LP, subject to satisfactory negotiation of documentation, funded via distributions from existing private investments and the Vanguard Short Term Federal Fund, as necessary, unless the Board directs use of other funds before installments are due, and to authorize staff to take the actions necessary to implement the investment. The motion passed by a vote of 5-1, with Mr. Maier dissenting.
KEY INITIATIVES UPDATE/OTHER BUSINESS
· Financial Disclosure forms, due December 15, have been distributed to Board members.
· A draft of the Retirement Fund Annual Summary was presented for review.
· The annual training session will be held on January 9, 2016.
· The $244,000 positive budget variance as of 9/30/15 was primarily due to lower investment manager fees resulting from reduced asset levels.
· Ashford Consulting provided a training session on the convertible marketplace on December 2.
· Mr. Zito noted that negotiations with Ashford Consulting concerning the firm’s reappointment as the System’s general investment consultant were successfully completed.
· Mr. Zito noted that staff was discussing a transition management agreement with Northern Trust and sought authorization to execute the contract. Mr. Maier, seconded by Ms. DeGray, offered a motion to authorize staff to proceed with the Northern Trust transition management agreement. The motion passed with a vote of 6-0, with Ms. Cowan absent.
INVESTMENT RELATED
A. Fund Balance for October
B. County Board Update (as of 9/30/15)
ADMINISTRATIVE ITEMS
A. Trip Report: Baltimore
B. Retirement Office Budget Variance Report
C. Calendar of Events
ADJOURNED
Mr. Dennis, seconded by Mr. Brunner, offered a motion to adjourn the meeting. The motion passed unanimously with a vote of 6-0. There being no further business, the meeting adjourned at 11:08 AM.
Respectfully submitted,
Susan Bomberg
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