MINUTES
HULL CONTRIBUTORY RETIREMENT BOARD MEETING
November 2, 2004
A special meeting of the Hull Contributory Retirement Board, duly posted to be held in the Selectmen's Meeting Room, Town Hall, Hull, MA on the above date was called to order at 9:05 a.m. for the sole purpose of receiving presentations and interviewing the three chosen firms for an Investment Consultant. Present were Leonard Colten, Chairperson, Members Donald Brooker, Chris McCabe, Ann MacNaughton and James Yacobucci, and Retirement Administrator Marcia Bohinc.
9:00 - Segal Advisors
Kevin M. Leonard, Vice President and Rafik Ghazarian, Senior Consultant both from the Boston, MA office made the presentation and provided bound materials. If selected, they will be the consulting team for the Hull Contributory Retirement System.
Mr. Leonard and Mr. Ghazarian immediately addressed the Board's overriding issue whether to invest fully in the Pension Reserves Investment Trust (PRIT) Fund or to hire a consultant to assist with the investment decisions for the system's assets. They agreed that investing in PRIT was a legitimate alternative, however they were happy with the opportunity to present to the Board why Segal could be a better alternative.
Segal Organizational Background:
- Independent investment consulting firm since 1969
- Wholly owned subsidiary of The Segal Group
- More than 200 clients with assets over $45 billion
- Six offices, headquartered in New York - All Massachusetts clients are handled out of the Boston office
- 16 consultants, averaging over 15 years experience
- 100% independent - employee owned, with all revenues in hard dollars from clients, without affiliations with money managers or broker/dealers, and no selling of products or information to the investment management community
- Registered with the Securities and Exchange Commission (SEC)
- Will assume fiduciary responsibility for their work
Mr. Leonard stated that he has been working with the Massachusetts public funds since 1994, the same year the Segal Boston office was established. Confidently he joked that "there isn't anything that I do not know about the PERAC market place". He elaborated remarking that one thing they think Segal adds above and beyond their competition is the way they view their roll; that they really look at it as being at the same table with the Board. The approach the relationship as part of the staff. To this, Mr. Leonard reported Segal currently has 25 Massachusetts public funds, the newest client just selecting Segal in the last week. He also stated that Segal has never lost a Mass public funds client.
Continuing to explain the depth of the organization, Mr. Leonard reported the full staff consists of 15 consultants, 15 associate consultants, relationship managers, financial analysts, actuarial and insurance consulting professionals, support staff, plus a close coordination with the national and international consulting staff. Using this depth, all work product, including research and report production is created out of the Boston office. Biographies of all members of the consulting team that would service Hull were provided.
Segal would employ a three-tier approach:
1. Planning
- Begin the process by doing research with the Board, including meeting to understand the decisions that the Board has made, to ask the questions to fully comprehend the Board's goals and objectives
- Using that information, along with current actuarial report, understand the liabilities and projected cash flows
- Be aware of trustee risk tolerance
- Develop the Investment Policy guidelines and objectives - Segal will write the policy for the Board to approve
- Develop the Asset Allocation
Mr. Leonard was very clear that each client has a different asset allocation because each client has a different return assumption and a different risk assumption. They do not take a "cookie cutter" approach to the asset allocation. He went on to say that the PRIT asset allocation is geared toward their goals and objectives; the Pension Reserves Investment Management (PRIM) Board does not take into account Hull's needs in their asset allocation. The PRIT fund currently has a very aggressive allocation, which assumes a great amount of risk. An asset allocation is only as good as the assumptions that were used in the design. Segal will take into account market activity over both the short and long runs and fold that into the needs of the specific system and the goal and objectives of
the Board.
Returning to the Board's original debate on whether they want to invest fully in PRIT or go with an investment consultant, Mr. Leonard said that the decision comes down to the level of dedication the Board wants to put into the Retirement System. The Board may determine that is it easier to invest in PRIT because the Board does not need to do manager searches or asset allocations. However he reminded that Board the investing in PRIT does not eliminate the Board's fiduciary responsibility. The Board is still responsible for monitoring and determining what is in the best interest of the system. Segal will mitigate the Board's work by developing the asset allocation, doing the investment manager searches and evaluating the money managers at a minimum of quarterly.
The final comment on PRIT was that it is a well diversified portfolio, however there are a number of plans the same size as Hull's that are just as well diversified, and Hull can be a fully diversified system outside of PRIT.
2. Implementation
- Develop an investment structure that will meet the stated objectives
- Coordinate the investment management changes, including balancing cost by maximizing investment efficiency, negotiating manager fees. Segal will construct the RPF, advertise it, analyze and evaluate the responses and present the finalists to the Board for decision. They will also mitigate transaction fees and prepare the PERAC forms and filings
- Develop and monitor manager guidelines
3. Monitoring
- Measure and monitor performance, preparing a complete evaluation with full explanations of the manager's performance
- Maintain and monitor against the investment policy statement and guidelines
- Ongoing monitoring and consulting
The cost of using Segal Advisors will be a first year fee of $30,000, with a slight increase each year thereafter. The fee is all inclusive, including unlimited manager searches, meetings, and education. Mr. Leonard stated that all contracts can be terminated on written notice.
In conclusion, Mr. Leonard stated that they were there to "hand hold the Board". They thanked the Board for their time and attention and invited them to call any of their clients for references.
10:00 - Wainwright Investment Counsel
Michael Dwyer, Senior Vice President and Jeff Fabrizio, Vice President and Managing Analyst both from the Boston, MA headquarters made the presentation and if selected will be the consulting team for the Hull Contributory Retirement System.
Mr. Dwyer provided a bound handout as background information to describe the Wainwright Investment Counsel organization and the people. Mr. Fabrizio described the investment process in general then directed the presentation to the specifics needs of the Hull Contributory Retirement System. The goal of their presentation was to outline what makes the Wainwright Investment Counsel different, and what the firm and specifically Mr. Dwyer and Mr. Fabrizio will do to add value to the system and the Board.
Wainwright Organizational Background:
- Investment consulting and advisory services
- Serving individuals and institutions in 1994, with corporate roots back to 1868
- Advisors to more than $3.7 billion of client assets
- Grew into 22 person operation with client service/consulting and research/analyst group
- One office, located in Boston
- 15 public fund clients, will control growth for excellent service
According to Mr. Dwyer, Wainwright Investment Counsel distinguishes themselves with service. He explained that Wainwright uses a team approach for each client, with a lead consultant, analyst, back up analyst and administrative support, all chosen from a highly educated, talented staff. Mr. Dwyer pointed out that the Board can go a couple of ways when making a decision for the investment of the system's assets:
1. Give all they system assets to PRIM,
2. Hire a consultant, or
3. Go it alone.
He remarked that the investment consultant puts the control of the assets in the Board's hand with expert guidance. To this, Mr. Dwyer strongly urged the Board to look at the people who are going to service the account and their backgrounds. Mr. Dwyer himself holds several licenses and is from the Wall Street side, as are many of the consultants. He also made a point of discussing the extensive training of the analysts.
Investment Approach and Process
- Open Architecture approach uses any manager as appropriate: Match managers to what they are really good at and hire them for their strengths
- Analyze the current portfolio: Do a current position analysis to determine where the system is today by analyzing each and every security to understand what is held, understand any existing manager guidelines, and review historical performance
- Develop an investment policy statement: Develop for the system based on what Hull is trying to achieve, the current objectives, liquidity requirements, risk profile, PERAC regulations, current funded ratio and funding requirements. The investment policy will serve as the foundation and be used for manager and funding issues to eliminate 'market timing' decisions.
- Determine asset allocation and construct the portfolio: Using the current position analysis, can the investment return better than where they are today and what will that look like
- Identify appropriate managers for each asset class: The desire is to have as few managers as possible for the appropriate diversification - they will do the RFP process as mandated by PERAC
- Monitor the portfolio
Regarding asset allocation, because of the mix of talent at Wainwright, half from academia and half from Wall Street, Wainwright feels that they understand the value of diversification when building a portfolio, and understand how portfolios behave over time. Mr. Dwyer emphasized that diversification should be measured in the "down" markets. He stated that downside protection is even more important than upside gain for a system such as Hull. The structure of the portfolio must be dependent on the funding ratio and how quickly the system can get to a healthier funding ratio.
Consultant vs. PRIM
When asked if Wainwright can outperform PRIM, Mr. Dwyer commented that perhaps they did not want to outperform PRIM. Out performing PRIM may put too much risk in the portfolio that would create too much loss in a down market. He commented that PRIM can be outperformed with the right portfolio structure; reminding the Board again that over 90% portfolio performance can be explained by the asset allocation choice.
Both Mr. Dwyer and Mr. Fabrizio stated that investment in PRIM is very good for some situations. However for Hull, given the current funding of the system, they would not recommend investment in PRIM as a whole, but would recommend taking advantage of pieces of PRIM. Hull can be properly diversified using segments of PRIM that would otherwise not be available, while accepting more moderate risk. Understanding the shape of the liability curve to make sure liabilities will be met; they do not recommend anything more than moderate risk due to current demographics.
Hiring a consultant, instead of going with PRIM and accepting their asset allocation, should control the portfolio. They both suggested that Hull would be best served to go with a consultant to monitor and adjust the asset allocation as required with changes in the funded ratio. They remarked that the Board could also benefit from the educational benefits from a consultant, market research, individual information on markets that is more critical than a better funded system.
They explained that manager selection is important, but second to allocation. An index fund is appropriate for large cap investment because a manager cannot outperform the S&P because those funds are followed so closely any change in immediately imputed in the price. For the long-term time horizon, the returns on average are expected to be the same as an active manager. This results in lower expenses, therefore more directly to the bottom line. Bond markets are even more efficient than the domestic equities therefore can also be indexed. Mr. Dwyer suggested saving active management for the more inefficient areas such as international or small cap. The better managers are like good detectives finding good value before everyone else. Because of the funded ratio, he was very
clear that it is very important for Hull to be careful on the down side, remarking that you "don't want to take the same ground twice". He stated that it is imperative that the actuarial picture is a critical component to the asset allocation.
Responding to a Board question regarding getting more money into the system in an effort to be fully funded without going fully into PRIT, Mr. Fabrizio remarked that the Board must be patient. Wainwright would put a process into place - set up a road map, walk down that road and do not veer unless new information became available that required a change. Giving all the assets to PRIT may not be a good decision; PRIT has very high numbers in the good years, their numbers will be just as extreme to the negative in the down years. By giving all the money to PRIT accepts their risk profile.
Regarding investment performance and comparing returns against other systems, Mr. Fabrizio cautioned against a straight comparison of return. He explained that return is a product of the asset allocation - each plan has a very different profile, with a different funding ratio, therefore have a very different level of risk. Different profiles, i.e. risk, will return different performance. The Board must look at long term performance relative to the actuarial risk. He went on to say that what really matters is getting fully funded, not how Hull does against another system. Again Mr. Dwyer reminded the Board of downside protection; the compounding effect of a down market would hurt Hull enormously, therefore the goal is to eliminate the volatility so that the up markets compound positively, and
the down markets are minimized.
The cost of using Wainwright Investment Counsel will be a first year fee of $25,000, with a slight step up each year thereafter as the assets grow. $25,000 is the minimum fee based on assets. The fee is all inclusive, including unlimited contact, manager searches, meetings, and education. Mr. Dwyer stated that all contracts can be terminated on a 30-day written notice.
In conclusion, both Mr. Dwyer and Mr. Fabrizio stated that they were there to meet the Board's requirements, and would meet with them as often as necessary to establish the fundamentals for the system. They thanked the Board for their time and attention and invited them to call any of their clients for references.
11:00 - Dahab Associates, Inc.
Mr. Greg McNeillie, senior vice president from the Franklin, MA office made the presentation and if selected will be the lead consultant for the Hull Contributory Retirement System.
Dahab Organizational Background:
- Founded in January 1986 by Richard Dahab
- 100% employee owned (currently by Mr. Dahab)
- Headquarter in Bay Shore, NY with additional offices in Franklin, MA and Lauderhill, FL
- Currently four lead consultants serving the eastern US, Mr. McNeillie being the consultant for public funds
- 100% independent - not affiliated with any investment advisor, actuary investment banker or broker/dealers
Provider of investment consulting services only
Mr. McNeillie brings with him almost 20 years experience in the business, as well as a relevant educational background. Dahab has been consulting to Massachusetts public funds since 1988 and has been involved with MACRS since 1986. The firm has over 60 years combined experience with public pension plans and over 50 clients with total assets exceeding $12 billion.
Admitting that a lot of what consultants do is the same as far as monitoring and reporting, and in that respect the consultants are all about equal, Mr. McNeillie explained why he felt that Dahab was different and could provide the best service to Hull. He spoke of Dahab's complete independence, with 100% of revenues from the consulting clients and their organizational strength using a team approach, which he feels results in a high level of client satisfaction.
Consulting Services
- Performance Measurement - Dahab distinguishes themselves with their measurement and reporting skills with very easy to understand reports (samples supplied in the RFP). All reports are created in-house and available in various media. Mr. McNeillie stated that the main thing to look for in performance reporting is to make sure there is adherence to the investment policy guidelines - which Dahab will do.
- Asset Allocation/Liability Studies - Develop the process of determining asset classes with an asset allocation to get to the goal with the least amount of risk. This is the best way to get to the actuarial assumed return. They key is to create an asset allocation that is specific to the Town of Hull with the least amount of risk at the least cost.
- Policy and Guideline Formation - Create an investment policy to outline the what and the how of achieving the goals for the system. This is the document for the portfolio, including individual addenda for each manager outlining goals, guidelines and benchmarks. Mr. McNeillie pointed out that "if you don't know where you're going, any road will get you there", which is not what you want for your investment managers. Dahab will evaluate managers, using individual managers for their strength and monitor companies, not only for return but also for activity within the firm. Internal activity can be an indicator of future activities and returns of which the Board needs to be aware.
- Manager Searches - Conduct searches for all asset classes - Dahab recommends investing with known managers, conducting over 200 face-to-face meetings with managers each year. They will go through all responses quantitatively to present appropriate responses to the Board. At the point of Board interviews, all of the presented firms will be appropriate for selection - the result will be what the Board considers a "good fit". They will also leverage other relationships to negotiate the best fees.
Dahab makes a commitment to their clients, when firm grows so will the staff. Mr. Dahab will be the back-up consultant if Mr. McNeillie is not available. Responding to a Board concern, he did not see a one-person office in Franklin as a drawback.
Regarding investment for Hull, segmentation through PRIT for diversification at low fees is a potential option. Mr. McNeillie remarked that the bigger the portfolio, the more you look like the index - the more managers, the more you look like the index. If you are going to look like the index and get index return, then invest in the index for the index fees. To beat the index, the investment must be different - either rebalance, make active bets, or find the managers that make the bets and do them right. He explained that was why the manager search process is so important. To a question from the Board, Mr. McNeillie suggested taking advantage of more selective assets classes in PRIT, such as real estate to get at diversified alternatives. The system's other investments can do better
with appropriate managers and allocation. Ten years ago, an existing client was in the same situation as Hull, and is now 80% funded. He stated that the funding can be fixed.
Dahab will "hold the Board's hand", including producing all PERAC forms and waivers. Their managers are always monitored as if they are on probation. If something changes within the organization, the system does not need to wait for a full market cycle to get out. Understanding that all managers will under perform at some time, the Board needs to look at the reason instead of the excuse.
The cost of using Dahab Associates, Inc. is a first year minimum fee of $25,000 based on assets. The fee is all inclusive, including quarterly performance reports and meetings unlimited manager searches, asset studies, policy formulation and miscellaneous meetings. Because of Hull's financial situation and a desire to help Hull, Mr. McNeillie is willing to negotiate a first year fee of $20,000 with an increase over the following two years. Mr. McNeillie stated that all contracts can be terminated on a 30-day written notice.
Summary
- Independent, no conflicts of interest
- Pro-active vs. re-active - the only way to add value is to meet with the Board and make recommendations before things happen
- Strong organization and lead consultant - get the services of Mr. McNeillie Extensive experience with Massachusetts public retirement plans
- Understand the importance of the client relationship - Mr. McNeillie wants Hull as a client - he can help Hull and wants to do the job
Next Steps
Chairman Lenny Colten requested a presentation from PRIM to compare the consultant presentations to what PRIM can offer. All members of the Board concurred, therefore PRIM Client Service Officer Michael Reardon will be invited to present at the regular November meeting.
The Board felt that all presentations were informative, however the substance of the presentations was basically the same. The people presenting made the difference. The fees are not a determining factor. After a brief discussion, the Board agreed to make a decision following the PRIM presentation.
The Hull Contributory Retirement Board meeting adjourned at 12:06 p.m.
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