Investment Workshop Summary Fort Lauderdale, Florida
Opening Remarks Speaker: Michael Dew, Chairman Fort Lauderdale Police and Fire Retirement System Capital Markets Review Firm: Asset Consulting Group Speaker: Jason Pulos Summary: The markets have rebounded significantly in 2009 as investors have once again embraced risky assets. Year to date through October 31, the S&P 500 is up 17% and is up more than 60% from equity market lows experienced in March of 2009. The fixed income markets have displayed a remarkable turnaround from 2008 where the only refuge was U.S. Treasuries. This year treasuries are down 2.34% while investment grade corporate fixed income securities are up 17.93%. High Yield (non-investment grade) corporates are up 51.65% through October 31. Investors‟ appetite for risk has changed markedly from the fourth quarter of last year and the first quarter of 2009. Consequently, many investment managers that led their respective peer groups in the declining markets through higher quality, more defensive securities have found themselves lagging their peers in the more bullish, speculative phase of the second and third quarters. Fixed Income Market Overview Firm: Asset Consulting Group substituting for BNY Mellon Speaker: John Jackson, CFA Summary: The financial industry has been going through a significant transition beginning with the sub-prime lending meltdown and overleveraged positions of financial organizations. The Fed and Treasury have taken extraordinary measures to stave off financial collapse. The bailout effort is not only U.S.-oriented, but global in nature as foreign governments have also intervened to mitigate the structural damage to their economic systems. Households are still de-leveraging and limiting spending. The level of unemployment for October is at 10.2%, a 26 year high. There is little wage and price inflation at this time and Mellon expects the Fed to hold rates until mid 2010.
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Investment Workshop Summary Fort Lauderdale, Florida Securities Litigation Monitoring Firm: Speaker: Saxena White Summary: There have been 127 securities fraud suits filed in the first half of 2009. 60% of the suits filed have centered on the credit crisis, and 80% have been against companies in the financial sector. Following a troubling judgment in the Stoneridge case that held that secondary actors are protected from civil liability even if they commit criminal acts, Senator Arlen Specter has sponsored legislation to protect investors. Lawsuits with an institutional lead plaintiff are less likely to be dismissed and have significantly large settlements. Real Estate Market Environment Firm: American Realty Advisors Product: Core Real Estate Speakers: Jay Butterfield, CFA Summary: “Buy high and sell higher” world is over. Rents and demand are weak with prices down as much 35-40% off the peak. Over $1 trillion of commercial real estate loans mature by 2012 As a “Core” Real Estate Fund, its strategy is focused on downside risk control by targeting properties substantially leased, with minimal need for capital expenditures. Return will come primarily from income rather than appreciation. The fund had 15%-25% leverage initially which has increased to 25%-35% in the recovery market. Firm: Prudential Real Estate Investors Product: Core Plus Real Estate Speaker: Darin Bright Summary: Prudential „s PRISA II strategy is “Core-Plus” which is more opportunistic than Core strategies. Therefore, it will assume a greater degree of leverage. As of 9/30, the Fund had effective leverage of 57%. The expected peak to trough decline is expected to reach approximately 65%. The Fund‟s liquidity has improved measurably since early 2009. The near term strategy is to manage the fund‟s liquidity and take steps to de-lever. Non – U.S. Equity Firm: Thornburg Investment Management Product: International Equities Speaker: Chris Neill, CFA Summary: Thornburg‟s approach to investing is “bottom-up” and value oriented. Securities are selected on a case by case basis looking at the key fundamentals. The Thornburg portfolio held 66 securities at September 30.
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Investment Workshop Summary Fort Lauderdale, Florida Firm: Artio Product: International Equities Speaker: Brian Holland Summary: Artio combines a bottom-up approach for developed markets with a top-down approach for emerging markets. Once a theme has been identified, Artio will hold a large number of securities employing that theme. The Artio portfolio held over 400 securities at September 30. This approach provides good complement to Thornburg‟s more concentrated, value-oriented style. Artio expects inflation to be low for the next few years, but the massive monetization of debt means inflation will win over time. Artio expects low grade bonds, inflation linked bonds, and real assets to outperform in an inflationary environment. Domestic Equity Panel Firm: Northpointe Capital Product: Small Cap Growth Equities Speaker: Karl Knas, CFA Northpointe seeks to acquire securities with strong projected earnings growth selling at a discount. Nortpointe performs an analysis of business trends and risks and incorporates that information into their security selection process. The Northpointe portfolio holds approximately 70 securities. Firm: Lee Munder Product: Small Cap Growth Equities Speaker: Todd Vingers Summary: Lee Munder selects small cap securities that are selling at a discount to their estimate of fair value. The portfolio holds approximately 112 securities. They focus on securities with a high probability of modest outperformance. Firm: Sawgrass Asset Management Product: Large Cap Growth Speaker: Martin LaPrade Summary: Sawgrass selects large capitalization stocks with projected growth in earnings that exceeds the benchmark. The portfolio holds approximately 47 securities Since October of last year, the markets have exhibited a great deal of volatility with the most speculative securities outperforming in 2008. Given its higher quality, larger cap orientation, the portfolio will lag in the types of markets that we have experienced since March of 2009.
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Investment Workshop Summary Fort Lauderdale, Florida Firm: Systematic Financial Management Product; Large Cap Value Speakers: Kevin McCreesh Summary: Systematic selects securities that have been discounted by the market due to some disruption such as earnings disappointments or management issues. They will not buy a security until it has exhibited that it has turned the corner. The portfolio will hold 65-90 securities. LargeCap Indexed/Enhanced Index Managers Firm: Rhumbline Product; S&P 500 Index Fund Speakers: Wayne Owen Summary: The Fund is designed to replicate the S&P 500 Index. This Fund does not participate in securities lending so it did not experience some of the issues that other funds had. Firm has increased its asset base as a number of institutional funds have gone from active to passive management, even in small cap. Firm: INTECH Product; Large Cap Core Equity Speakers: Dick Loebig Summary: INTECH utilizes a mathematical approach to portfolio management that is not driven by the customary fundamental approach to security selection. Rather, securities are selected based on the price behavior. Using a covariance formula securities are selected based on their relationship with others securities in the portfolio. Hedge Fund of Funds Firm: K2 Product; Long/Short Fund of Funds Speakers: Dan Elsbury, Kelsey Biggers Summary: K2 has 20-30 managers supporting this long/short fund of funds strategy. K2 has been a leader in requiring transparency from the underlying managers in this fund of funds 2009 has been an extremely volatile time for the markets. Three managers have been terminated in the last year for this fund. This fund offers liquidity in a time when many hedge fund strategies have encountered difficulty in meeting liquidity needs. Net flows have been positive for this fund in the last year.
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Investment Workshop Summary Fort Lauderdale, Florida Liability Driven Approach to Fixed Income Investing Firm: Agincourt Capital Management Product; Speakers: Patrick Kelly, CFA Summary: Liability Driven Investment (LDI) strategies is a different approach to the asset allocation process Asset allocation is considered in the context of liability behavior. LDI strategies have been used more often in corporate plans. The assets are invested in a fixed income portfolio that mirrors the liability schedule. For example, the current fixed income portfolio has a duration of approximately 4.5 years. The duration of the liabilities is an estimated 10+ years. Therefore, an LDI strategy would extend the duration of the assets to match that of the liabilities. As interest rates increase, the value of the assets would go down, but so would the value of liabilities. Duration measures an asset‟s sensitivity to interest rate changes. An asset with a 4.5 year duration would decline in value by 4.5% with a 1% increase in interest rates. Summary Firm: Asset Consulting Group substituting for BNY Mellon Speaker: John Jackson, CFA Summary: The consensus outlook appears to be calling for a lower growth environment with the potential for a weakened dollar and the possibility of U.S. inflation down the road. The portfolio has undergone a series of changes that offer a greater likelihood to participate more strongly in that type on environment. o Increased international equity target allocation from 5% to 15%. o Increased long/short target allocation from 7% to 15%
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