Employee Representatives

ABINGTON TOWNSHIP
PENSION COMMITTEE MEETING
August 19, 2014
6:30 p.m.
CALL TO ORDER:
PRESENT:
Committee Members:
Employee Representatives:
Police Representative:
Finance Director:
Assistant Finance Director:
Township Manager
Commissioners Hecker (via conference call), Kline, Myers
Tim Clark, Tim Zurybida,
Officer Posey
Susan Matiza
Kevin Barron
Michael LeFevre
OTHERS:
Diane Smola, Sr. Investment Consultant, Hewitt
EnnisKnupp, Inc., an Aon Company
Greg Fox, Investment Consultant, Hewitt EnnisKnupp,
Inc., an Aon Company
Janet Werner, Relationship Manager, Wells Fargo
Minutes of May 27, 2014:
Commissioner Hecker made a MOTION, seconded by Commissioner Kline to approve
the minutes of the May 27, 2014 Pension Committee meeting.
MOTION was ADOPTED 6-0.
Board Action Request-Resolution No. 14-019 - MMO:
Ms. Matiza said Resolution No. 14-019 is to set the MMO (Minimum Municipal
Obligation), and by law, it must be adopted by the Board of Commissioners by
September 301h.
The Township's associate, Tom Anderson & Associates has worked with the Actuary to
come up with the MMO for each Pension Plan for 2015. On a smoothed asset basis, the
Non-Uniform Plan has an obligation for next year of $1,139,029 and the Police Pension
Plan's obligation is $1,057,363.
These obligations are partially offset by State Aid. The Township will budget 2014 State
Aid amount as revenue partially offsetting pension expense for 2015. State Aid is
received late September, or the beginning of October for current year. The Township
must pay the difference between the stated MMO and State Aid amount received.
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Pension Committee Meeting
August 19, 2014
Commissioner Kline asked what the costs were last year.
Manager Lefevre replied Police Pension Plan increased about $70,000 and NonUniformed Pension Plan increased about $47,000, so for both plans approximately
$117,000.
Commissioner Kline asked for the amount of State Aid last year.
Ms. Matiza replied she will look into it. State Aid value changes every year and whatever
the 2014 value is we will use that for the 2015 budget.
Commissioner Kline asked have there been fluctuations in the amount of State Aid every
year.
Ms. Matiza replied it has been increasing every year.
Commissioner Hecker made a MOTION, seconded by Commissioner Kline to
recommend approval to the full Board adoption of Resolution No. 14-019 recognizing
that the Township's minimum municipal funding obligation for the calendar year 2015
with respect to the Municipal Employee and Police Pension Plans, is $1,139,029 and
$1,057,363, respectively.
MOTION was ADOPTED 6-0.
Second Quarter Performance Review:
Ms. Smola reported that all markets were up in the second quarter. All equity markets
were positive due to signs of improving economy in the U.S. as well as stabilization in
emerging markets and some monetary easing by European Central Bank.
The S&P 500 representing the large cap stocks were up 5.23% in the second quarter as
compared to small cap stocks, which were up 2.05%. Value outpaced growth in the
second quarter in both small and mid-cap segments of the market, while growth was the
winner in the large cap segment.
The best sectors during the second quarter were energy and utilities and the three worst
were industrials, consumer discretionary and financials, which was a continuation from
the first quarter.
The U.S. outpaced Non-U.S. markets on a developed market basis, which is shown by the
S&P 500 return of 5.23% for the quarter as compared to the MSCI EAFE returning just
slightly over 4.00%. Emerging markets were strong performers in the second quarter up
6.60%.
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Pension Committee Meeting
August 19, 2014
We have seen continued strength in the large cap area of the market as well continued
strength in emerging markets. Year-to-date, large cap is up over 8% and emerging
markets are up just over 9%. Weakness has been in developed Non-U.S. and small cap
area.
The second quarter fixed income returns were all positive with Barclays Aggregate up
over 2%. We have seen continued strength in the long-end of the market due to yield
curve flattening. Overall, returns for the second quarter were positive.
Commissioner Kline questioned whether the markets have adjusted to Fed-buying bonds.
Ms. Smola replied the managers indicate that has already been priced into the markets.
Mr. Fox reviewed asset allocation for Non-Uniformed Employee Pension Plan that
increased from approximately $49.7 million to about $50.8 million during the quarter.
This was driven by investment gains. As of June 30, 2014, all allocations were within
their target guidelines as defined by investment policy statement.
Total plan performance for the Non-Uniformed Employee Pension Plan gained 2.77% in
the second quarter of 2014, lagging its Policy Index by 77 basis points and ranking in the
bottom decile of the corporate $20-$250 million plan universe. Underperformance for the
period was primarily attributable to the Plan's active equity managers as they trailed their
specific benchmarks.
A slight overweight to Davis also detracted from returns. While outperformance from
Dodge & Cox Income Fund and PIMCO Total Return Fund contributed positively to
overall results, the Plan's allocation to fixed income was below its policy benchmark
target. The Vanguard Extended Markets Index was the best performer on an absolute
basis and the Dodge & Cox Income Fund was the strongest performer on a relative basis.
For the seven-year period ending June 30, 2014, the total Plan underperformed its Policy
Index by 113 basis points and ranked in the bottom quartile of its peers.
Asset allocation for the Police Pension Plan increased from about $56.0 million to
approximately $56.8 million during the quarter. This was mainly driven by modest
investment gains. As of June 30, 2014, all allocations were within their target guidelines
as defined by the investment policy statement.
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Pension Committee Meeting
August 19, 2014
Total plan performance for the Police Pension Plan gained 2.77% in the second quarter of
2014, lagging its Policy Index by 77 basis points and ranking in the bottom decile of the
corporate $20-$250 million plan universe. Underperformance for the period was
primarily attributable to the Plan's active equity managers as they trailed their specific
benchmarks. A slight overweight to Davis also detracted from returns. The Vanguard
Extended Markets Index was the best performer on an absolute basis and the Dodge &
Cox Income Fund was the strongest performer on a relative basis. For the seven-year
period ending June 30, 2014, the total Plan underperformed its Policy Index by 113 basis
points and ranked in the bottom quartile of its peers.
Comparative performance showed that the Non-Uniformed and Police Plans were
identical in terms for the quarter a little under 3% and trailed their benchmarks for that
period. Allocations close to their targets was attributable to underperformance from
active managers.
Davis NY Venture and Thornburg International are two strategies the committee
discussed at the last meeting in regards to monitoring them closely making sure
performance is in line with our expectations and, if they continued a downward trend, we
would consider taking action and replace those managers.
Davis NY Venture missed its target by a little over 2% for the quarter and was in the
bottom decile of its peer group, which is a strategy heavy in financials, and the financial
sector was an out-of-favor.
There was similar performance from Thornburg also underperforming by a little over 2%.
Emerging markets were in favor and that is where we would typically have seen
Thornburg do well, but their security selection has been poor relative to their long term
history. So we prepared in-depth materials regarding potential replacements for those two
managers.
Commissioner Hecker clarified that Thornburg has underperformed the market for the
last five years. Is that correct?
Mr. Fox replied Thornburg underperformed its benchmark for five years ending June 30,
2014, but in 2012, they outperformed their benchmark and also in 2011. The year 2014 is
built into the trailing numbers and they had significant underpeformance in the last year
bringing the trailing numbers down.
Ms. Smola said in regards to the watch list review; we talked about changes that occurred
with PIMCO at the top of the organization. Previously, they had their Chief Risk Officer
reporting through the Portfolio Management Group and that has been changed. Now the
Risk Manager reports to the President of the organization along with reporting through
the Portfolio Management Group.
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Pension Committee Meeting
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We see that division of risk monitoring versus portfolio management as a positive point
and we are no longer flagging qualitative issues with PIMCO.
Mr. Fox said consideration ofreplacement options for the Plan's existing large cap core
equity manager, Davis NY Venture, which has struggled with performance and recently
undergone some key staff changes, and after the research process was completed and
onsite meetings were held, we recommend three replacement candidates: PRIMECAP
Odyssey Stock Fund, Diamond Hill Large Cap Fund and Sound Shore Fund.
PRIMECAP Odyssey Stock Fund's management team is recognized for having industry
level insights and this strategy is typically overweight in healthcare and information
technology. Also PRIMECAP out of the three recommendations has the most
diversification and, although there will be volatility, we expect a fund like this to be as
volatile as Sound Shore, which has 44 holdings as opposed to PRIMECAP' s 111.
Diamond Hill Large Cap Fund, which is bottom-up research intensive, has a level of
quantitative research and screening as part of their process. Also, there is a slight macro
overlay applied by the portfolio manager, Chuck Bath. Chuck is the talent and stock
picker and he knows what is going on with the markets and tilts the portfolio based on
that. We have a lot of conviction in him, but at the same time, there is concern that if he
is no longer associated with that strategy, we would begin to doubt their forward thinking
success. Their preferred benchmark is the Russell 1000 with a value tilt.
Commissioner Kline asked for further explanation of the significance of ownership
structure.
Mr. Fox explained that our researchers tend to like firms that are highly employeeowned, so 100% ownership by employees is something that our dedicated research
division is keen on and preferred.
Manager Lefevre asked for explanation on expense ratio for Davis, Diamond and
PRIMECAP being almost identical and Sound Shore being much higher.
Mr. Fox replied while still slightly higher, we found that there is another share
classification of the same Sound Shore strategy with a 75% basis point expense ratio as
opposed to 93%, which we should be able to get the Plans in. So ifthat is the one chosen,
the expense ratio would be 75%.
Ms. Smola added that Sound Shore is just large cap value and that is all they do. The
other firms have multiple products that they offer in the equity space.
Mr. Fox said Sound Shore Fund's current number of holdings is 44, which are the most
concentrated of the portfolio, and we expect additional volatility from this strategy. It is
more valued-tilted than the Diamond Hill.
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Pension Committee Meeting
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Commissioner Kline asked for further explanation on Sound Shore Fund's weaknesses as
noted in the report.
Mr. Fox replied the fact that this is their only strategy, we would monitor their capacity
closely staying in constant contact with the manager finding out what asset level we think
they should begin considering for new money.
In regards to performance; some of the managers have preferred benchmarks that are
specific to their strategy. Up market capture and down market capture shows that when
the market is up, Sound Shore has the highest up capture, but also the lowest down
capture, which is a function of it being a very concentrated strategy.
All statistics are on a five-year basis, and PRIMCAP took the five-year return as it has
the bottom of standard deviation and the highest information ratio.
Commissioner Hecker asked what is the strong preference between these three funds?
Mr. Fox replied PRIMECAP Odyssey Stock Fund because we like the fact that
performance over the three and five year periods was strong and volatility was lower than
the other funds. They have a disciplined, well-defined process and there is no key risk. It
is not as value-tilted and concentrated as Sound Shore Fund, so we feel PRIMECAP
Odyssey would be a nice change of pace.
Commissioner Hecker agreed with the concern about a fund so heavily dependent on one
individual and he would not like to see the Township be in a similar position one year
from now.
Mr. Clark commented that he was in favor of PRIMECAP.
Officer Posey was also in favor of PRIMECAP.
Ms. Matiza asked for further explanation on PRIMECAP's weakness as noted in the
summary in which approximately 75% of the firm's business is concentrated with
Vanguard.
Ms. Smola replied they manage a lot of strategies offered on Vanguard's platform and
they have been doing that for a number of years, and it is a strong relationship. We would
not want to see that relationship broken up; however, we do not foresee that as it has been
longstanding and positive for both sides.
Ms. Matiza questioned whether it is a weakness to be concerned about.
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Pension Committee Meeting
August 19, 2014
Mr. Fox replied it is something to monitor. The clear risk is if Vanguard decided not to
do business with PRJMECAP, then they would take all of their assets out at once and/or
work out a deal, but we are not anticipating that happening.
Mr. Zurybida said ifthe Township already has Vanguard as one of our managers and
PRJMECAP follows that same strategy; would that be a lack of diversification?
Mr. Fox replied not at all. It is completely unrelated as Vanguard is following the S&P
Completion Index, which is a totally different market, and it is not managed by
PRJMECAP, it is managed by Vanguard.
Mr. Clark questioned how long-term their relationship has been and has the percentage
increased recently?
Ms. Smola replied percentage has not increased in the last three to five years. It has been
a large portion of PRJMECAP's assets for awhile and some strategies have been in over
10-year relationships, but she will verify that and report back on it.
Commissioner Hecker made a MOTION, seconded by Commissioner Kline to
recommend to the full Board to replace Davis NY Venture Fund with PRJMECAP
Odyssey Stock Fund.
MOTION was ADOPTED 6-0.
Mr. Fox continued that we have provided replacement options for the Plan's existing
international equity manager, Thornburg International Equity Fund, which has struggled
with performance and recently undergone structural product changes regarding
management responsibilities.
DFA World ex US Core Equity is a low cost option. It will be relative to its benchmark
with modest outperformance and underperformance, but more or less it will be in line
with their benchmark. It also has a percentage of emerging markets exposure and this is a
fund-to-fund strategy, so there are two funds that make up the substructure of the product.
There is a developed piece and an emerging piece, which can be invested on a standalone
basis, but for the purposes of this strategy, the Township would invest in this strategy and
they invest in both pieces for you. It is 4 7 basis points, so costs are low and there is a lot
less research intensity so it will be less volatile.
Ms. Smola added that there are tilts in the portfolio because of the way they look at the
market and it will be small cap-oriented.
Mr. Fox said Harding Loevner International Equity has a co-portfolio manager structure
that provides accountability and moderate diversification.
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Pension Committee Meeting
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Industry analysts conduct both qualitative and quantitative research to determine a quality
quotient score and this fund has 13.40% in emerging markets.
Dodge & Cox International Stock focuses on individual stocks and has a fundamental
bottom up stock selection approach and they share their research with the fixed income
department with 19 .17% in emerging markets.
Performance on a five-year basis showed that Harding Loevner was just under 14% and a
little below the top fifth of their universe. Dodge & Cox was below 15% and in the top
fifth of their universe and Thornburg was at the bottom of the universe.
Peer group analysis showed Dodge & Cox was at the top for the five year up market
capture and above 100 for the down market capture. Harding Loevner was just below 100
for up market capture, but a better protector on the downside. In terms of performance,
Dodge & Cox was the winner on a five year basis, and in terms of volatility, Harding
Loevner was the least volatile strategy of the recommended replacement candidates.
Mr. Zurybida asked what international equity fund is strongly recommended?
Mr. Fox replied Dodge & Cox has served the Township Plan's well on the fixed income
side and we like their process and research department, and we feel they would serve the
Township well on the international side as well.
Officer Posey asked what would happen if one or both owners pull out of the DFA fund?
Mr. Fox replied that is a concern and we would monitor it. But we prefer stable, 100%
employee-owned organizations.
Ms. Smola added that we are not forecasting that DFA will be divesting of their
ownership share in the near term. Dodge & Cox is very strong in terms of succession
planning and they let us know when there are upcoming transitions and there is broadbased ownership amongst employees.
Commissioner Kline said his preference is Dodge & Cox.
Commissioner Hecker and Officer Posey were also in favor of Dodge & Cox.
Officer Posey made a MOTION, seconded by Commissioner Kline to recommend to the
full Board to replace Thornburg International Equity Fund with Dodge & Cox
International Stock.
MOTION was ADOPTED 6-0.
ADJOURNMENT:
7:32 p.m.
sev
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