Minutes of Pension Sub-Committee Regular Meeting - 2/14/13 - APPROVED
PENSION COMMITTEE - MINUTES
REGULAR MEETING - 7:30 AM
FEBRUARY 14, 2013
I. Call to Order
Tom Cooke called the regular Pension Committee meeting to order at 7:35AM on Thursday, February 14, 2013 at the Simsbury Town Offices, in the Board of Education Conference Room, located at 933 Hopmeadow Street. In attendance were the following Pension Committee members: Nick Mason, Board of Finance; Lisa Heavner, Board of Selectmen; Moira Wertheimer, Board of Selectmen; Michael Wade, Board of Education; Paul McAlenney, member-at large; and Philip Schulz, member-at large. Thomas Cooke, Director of Administrative Services; Mary Ann Harris, Finance Director; Burke LaClair, Board of Education Business Manager and Chris Kachmar, Fiduciary Investment Advisors, LLC, were also in attendance.
II. Acceptance of Minutes
a. January 25, 2013
Mr. Mason made a motion to approve the January 25, 2013 Pension Committee minutes as presented. The motion was seconded by Ms. Heavner and unanimously passed with two (2) abstentions. Ms. Wertheimer and Mr. Wade abstained from voting.
III. Presentation by Fiduciary Investment Advisors
Chris Kachmar, Principal of Fiduciary Investment Advisors, LLC (FIA), distributed a presentation package titled “Town of Simsbury Defined Benefit Pension Plans - Executive Summary - Fourth Quarter 2012”. He said the objective is to walk the committee members through activity and results through December. Mr. Kachmar said he also will have discussions regarding the Asset Allocation Study.
a. Capital Markets Review
Mr. Kachmar began by saying this calendar year was a constructive one. He said this emanated from the ongoing application of Fed stimulus. The reduced risk, Mr. Kachmar continued, in conjunction with a decent economy has produced a constructive year. Mr. Kachmar continued by saying a very important factor is the strengthening housing market. At this point, Mr. Kachmar reviewed the additional contributing economic factors resulting in a relatively solid year across the spectrum. Mr. Kachmar discussed the Domestic Equity Review (page 3) and provided some detail of specific stocks and how they performed throughout the year. Mr. Kachmar noted that the full year, as opposed to the quarter, was more consistent across the market, with all ten sectors of the market being positive, helping the rally. Mr. Mason said he thinks the message from the data in these pages seems to be that investors are looking for more yield by gravitating towards riskier assets.
At this point, Mr. Kachmar reviewed the information presented in the International Equity Review (page 4). He noted that Emerging Market Equities posted solid gains, benefiting from the improving economic data out of China, as well as improved investor sentiment in Europe. Mr. Mason asked about Japan and Mr. Kachmar said Japan is inconsistent, and spoke about currency manipulation and political factors that have affected Japanese equities. Mr. Kachmar moved on to the Fixed Income Review (page 5). He said investors continue to seek out the positive growth and healthy debt profiles offered by the emerging markets.
Mr. Kachmar moved onto the Alternatives Review (page 6). He discussed the movement underway towards high-grade physical property fund, which dovetails into the strategy selected for Simsbury; a low-leverage, high-quality orientation.
Moving onto 2013 Capital Market Themes (page 7), Mr. Kachmar reviewed the following topics; 1) The continuing expectation for modest economic growth globally, 2) Relative valuation advantages for equities persist and 3) low base rates are likely to inhibit fixed income total returns and should orient investors toward “spread” sectors. Mr. Kachmar spoke about the concern regarding interest rates, as we have had persistent decline of rates and there will be a point in time when that shifts and interest rates start to go in the other direction. At that point, Mr. Kachmar continued, fixed income returns will struggle, and the Committee and he will need to talk about the fixed income allocation and consider adopting different tools that will do better in a rising rate environment. Mr. Kachmar said he does not see this happening immediately, because interest rates will remain stable for the next few quarters, but the issue will need to considered in the future.
In summary, Mr. Kachmar said, they are cautiously optimistic for the balance of the year and think it can be a productive year.
b. Portfolio Review & c. Asset Allocation Study
Ms. Heavner asked Mr. Kachmar for his thoughts regarding the recent interest rate assumption change made from 7.75% to 7%. Mr. Kachmar directed the committee members to Asset Allocation Study (page 50) and spoke specifically about the investment assumptions (page 54). Return expectations have been truncated a little bit, Mr. Kachmar said, but they see these as reasonable proxies. He directed the committee members to look at the Current Portfolio Efficiency, (page 55) saying the portfolio in place today plots in the middle, exposed to some risk, but is not subject to too much volatility. The ultimate goal, he continued, is trying to strike the best balance and the current mix is statistically an optimal mix. He then discussed how this relates to return expectations and referred to page 58. Mr. Kachmar spoke about the additional return that active managers are able to generate and when looking at the numbers, he says it is currently at an appropriate level for the 7% return target and he doesn't think they need to go below 7%. When asked about Simsbury’s peers and where they are in terms of interest rate assumptions, Mr. Kachmar said the State average hovers around 7.5-7.75%. He continued saying he does not think the Town of Simsbury needs to overreact and go to 6.5%. Ms. Harris asked if they will need to drop further in coming years and Mr. Kachmar said there is always that potential, but said he doesn't think they will need to dramatically change their strategy in the next three (3) years, as he thinks this allocation strategy will remain valid for several years’ time. Ms. Heavner asked Mr. Kachmar if he thinks the current allocation is appropriate and he said yes, absolutely.
Mr. Mason stated his concern about the timing of rate increases and the Town’s ability to respond. Mr. Kachmar spoke about some defensive capabilities of the current managers which will allow for a response to an onerous interest rate environment. Mr. Mason asked who makes the call regarding these adjustments and Mr. Kachmar said he is ultimately responsible to let the Pension Committee know when the adjustments need to be made, but the managers alongside have the wherewithal to make adjustments that are consistent with the objectives of the strategy. But, Mr. Kachmar said, he is in charge of initiating that conversation and if in two (2) quarters the interest rate landscape is changing, he and the Pension Committee can meet and reassess. Mr. Mason spoke further about the potential for this interest rate swing and in response, Mr. Kachmar said Simsbury can rely on the diversity of its portfolio, which is the best defense in a volatile market. He said today, Simsbury has done everything they can/should do in order to prepare for that future potential interest rate swing.
Mr. Kachmar said he would have no additional recommendations, as he thinks the current allocation is appropriate.
Mr. Kachmar extended an invitation to the Pension Committee members to attend FIA’s 4th Annual Client Conference on Thursday, June 6, 2013 at Water’s Edge Resort in Westbrook, CT.
Mr. Cooke said he had attended previously and that it was extremely informative.
Item IV on the Agenda was an error and therefore was not discussed.
ADJOURNMENT
Ms. Heavner moved to adjourn the Regular Meeting of the Pension Committee at 8:32AM. The motion was seconded by Mr. Schulz and passed unanimously.
Respectfully submitted,
____________________________________ ______________________________
Thomas Cooke, Director of Administrative Services Leslie U. Faraci, Commissions Clerk