Presentation: Second Quarter Results Mr. Wetzel reviewed the Executive Summary, saying in June the markets were down 6% and in July they were up 7%. All of the indices were negative, most were in the double digits, he said, and fixed income or bonds have been the best place to be for the last year. Mr. Wetzel pointed out that it has been a very tough quarter leading to a down year-to-date, with the one-year number still pretty good.
Both plans are not far off their target allocations, he said, with a little extra in fixed income which has helped in this difficult year so far.
Mr. Wetzel then reviewed the Performance Summary, with the Employee Pension Plan down 6.3% and the Police & Fire Pension Plan down 6.4%, which is slightly ahead of benchmark in a difficult year. He listed the reviewed the funds that performed well, and those that underperformed.
He said that FIA recommends putting Bank of America and related funds on ‘watch’ status, as they have been sold to Ameriprise and that no managers are being recommended for ‘terminate’ status.
Mr. Wetzel pointed out the Vanguard Intermediate Term Investment Bond fund, in which the Boards invested in April 2009. At that time corporate spreads were very wide, he said, with rates very high and corporate bonds were considered underpriced, as if 50% of corporations in America were going out of business. FIA thought it would take a couple of years to get a good return, but that fund has actually returned 20.8% annualized and probably 24% has been made accumulatively in bonds. The index fund has been up 9% in that time frame, so the index fund was beat by over 10%. But what’s happened in the market place, Mr. Wetzel explained, is that those spreads between corporate bonds and treasuries have come in a lot and a lot of that return has already happened. He said now it’s time to take some of that risk off the
table and move it back to a manager.
Mr. Wetzel explained that in December half of the Vanguard Intermediate Investment Grade Fund allocation was taken off and now it’s time to take the second half off. He said that since the market is very volatile right now, FIA is comfortable being a little overweight in fixed income allocations, and waiting to see how things unfold over the next few months. Their ultimate recommendation for both retirement plans is to move this allocation into Vanguard Index Fund, which has a cost of less than 1/10 of 1% as fees.
Mr. Mattiello questioned the plans’ allocations, saying the largest allocation is shared between the fixed and the domestic, the domestic slightly larger at 41%, yet it took the biggest hit. He asked at what point you change that allocation. Mr. Wetzel replied that over time, they would like to get the US allocation and the International allocation closer to each other so that within the global equity markets the US represents only 45% of the world equity markets and International about 55%. The International markets have actually been a little more volatile he said, but if you moved to fixed income, which didn’t get hit as much, you get no return as rates are under 3%
and when rates go up, you’ll lose money in bonds. He said FIA is trying to hit our actuarial assumptions but if you move too much to bond, you have to lower the actuarial assumptions and contribute more. Mr. Wetzel said it is a fine balancing act in a very tough time.
In answer to Lt. Hayes’ question, Mr. Wetzel explained the managers’ percentile rank within their peer group, saying the smaller the percentile the better. For example, the Fixed Income, in the 12th percentile, beat 88% of similar funds during the quarter. Mr. Wetzel then explained FIA’s effort to keep the fees as low as possible while trying to generate competitive returns. Fees on the Employees’ Pension Plan are .54% and fees on Police and Fire are .56%. Mrs. Gillette questioned the
calculation of the total fee, saying they add up to 7.94%, but Mr. Wetzel said they need to be weighted by first determining how much money is in each manager. All performance figures are net of fees, he said.
Mr. Mattiello observed that it’s more shocking to consider the losses of 1.6 million and 2.3 million, as that’s a lot of money. Mr. Wetzel reminded him that in July the figures go up, but the June report is what’s used for actuarial studies.
REALLOCATION OF FUNDS On a motion by Councilor Carbone, seconded by Councilor Soliani, the Board of Trustees of the City Employees Retirement Fund voted unanimously to liquidate the Vanguard Investment Grade Corporate Bond Fund and move the proceeds into the Vanguard Total Bond Market Index Fund, as recommended by FIA.
REALLOCATION OF FUNDS On a motion by Lt. Hayes, seconded by Commissioner Cook, the Board of Trustees of the Police and Firemen’s Pension Fund voted unanimously to liquidate the Vanguard Investment Grade Corporate Bond Fund and move the proceeds into the Vanguard Total Bond Market Index Fund, as recommended by FIA.
BUSINESS On a motion by Councilor Dalla Valle, seconded by Commissioner Potter, the Boards voted unanimously to consider business by the Boards of Trustees. Mr. Mattiello said he has a recommendation for actuarial services for the pension plans, having reviewed five proposals, interviewing two firms, and choosing EFI Actuaries from Washington, DC and Philadelphia, PA to replace
the current actuary, Hooker & Holcomb, who has served the City for 40 years. The reason EFI Actuaries was chosen, he said, was due to their clarity, energy, and having the lowest bid by $2500.
Mayor Bingham suggest this be considered at the next Regular Meeting of each Board.
ADJOURNMENT On a motion by Councilor Carbone, seconded by Commissioner Potter, the Boards voted unanimously to adjourn at 6:38 p.m.
ATTEST: Joseph L. Quartiero, CMC City Clerk
Respectfully Submitted, Carol L. Anderson, CCTC Asst. City Clerk
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