March 24, 2000 – Investment Committee Agenda

Call to Order: Ms. Colson called the Public Session of the Investment Committee of the Board of Retirement to order at 1:06 P.M., March 26, 2001, in SamCERA’s Board Room, Suite 280, 702 Marshall Street, Redwood City, California.

2.0

Roll Call: Mr. Buffington, Mr. Bryan, Mr. Cottle and Ms. Colson. Board Members in Attendance: Mr. Lewis, Mr. McMahon, Ms. Salas and Ms. Tonsfeldt. Alternate Board Member: Ms. Arnott Staff: Ms. Carlson, Mr. Clifton, Dr. Fracchia and Mr. McCausland. Consultant: Ms. Jadallah and Mr. Thomas Custodian: Mr. Gleason Public: Two Retirees: Three

3.0

Approval of the Minutes: Ms Arnott and Mr. Cottle submitted corrections to the November 27, 2001 Minutes. Approval of those minutes had been held over from the prior meeting. There were no modifications to the February 26, 2002 minutes.

Action: By consensus the Committee approved the minutes for November 27, 2002 and February 26, 2002 minutes.

4.0

Oral Communications From the Committee: None

5.0

Oral Communications From the Public: Mr. John Murphy provided an article from the March 25, 2002 Wall Street Journal. The article spoke to the California Public Employees’ Retirement System’s exposure to Enron. In addition the article notes that CALPRS will be voting 1.5 million shares on matters related to the Lockheed Martin Board of Directors. He asked the Board to clarify SamCERA use of proxy votes and its exposure to the decline in value to Enron’s stock. Ms. Colson noted that SamCERA did not have direct exposure to Enron. Mr. Clifton agreed noting that SamCERA’s exposure came through ownership of the Russell 1000 Index Fund at Barclays Global Investors. In the fund concept SamCERA owns units of a fund rather than direct ownership of individual securities. BGI finds it difficult to attribute unit price movement to an individual security. However, their best estimate indicates that during the calendar year 2001 the approximate effect of Enron’s decline on the unit value of BGI’s Russell 1000 Index Fund may be -0.52% or -$0.30929 per unit. The resulting decline can be applied to SamCERA’s year-end unit balance for an approximate loss of $2,585,000. Mr. Clifton referred Mr. Murphy to SamCERA’s Investment Plan for guidance regarding SamCERA’s policy on voting proxies. He also noted that currently SamCERA’s equity investments are either in indexed or commingled funds. In either case the shares would be voted by the fund not by SamCERA.

6.1

Acceptance of Monthly Portfolio Performance Total Plan Return for the trailing twelve months is

–1.97% and for the first eight months of the Fiscal Year –2.84%. Plan Returns outperformed the Plan Benchmarks by 1.18% and 0.83% respectively.

Below are the composite returns and target allocations for the period ending February 28, 2002.

February 28, 2002		One Month	Trailing Three Months	Trailing Six Months	Trailing Twelve Months
Equity Aggregate	$774,853,845	-1.73%	-1.75%	-2.32%	-9.55%
Equity Composite Benchmark		-1.48%	-1.54%	-2.24%	-9.78%
*Variance*		*-0.25%*	*-0.21%*	*0.08%*	*0.23%*
Fixed Income Aggregate	$401,153,636	1.02%	1.22%	<3.29%	8.26%
Fixed Income Composite Benchmark		0.97%	1.14%	3.01%	7.66%
*Variance*		*0.05%*	*0.08%*	*0.28%*	*0.60%*
Real Estate Aggregate (1)	$94,977,357	0.63%	2.52%	5.21%	13.69%
NCREIF (one quarter lag)		0.63%	1.61%	4.15%	10.17%
*Variance*		*0.00%*	*0.91%*	*1.06%*	*3.52%*
Cash Aggregate	$1,928,791	$1,928,791	0.55%	1.35%	3.67%
91 Day Treasury Bill		0.13%	0.44%	1.35%	3.63%
*Variance*		*0.04%*	*0.11%*	*0.00%*	*0.04%*
Total Fund Returns	$1,272,913,628	-0.70%	-0.52%	<0.10%	-1.97%
Total Plan Policy Benchmark		-0.68%	-0.57%	-0.12%	-3.45%
*Variance*		*-0.02%*	*0.05%*	*0.22%*	*1.48%*

(1) The aggregate is a current return. A variance against the one-quarter lag in the NCREIF in misleading.

Asset Allocation As of 2/28/2002	Market Value	Allocation		Portfolio Off Target	Rebalance Range
Asset Allocation As of 2/28/2002	Market Value	Actual	Target	Portfolio Off Target	Rebalance Range
BGI Russell 1000	$480,925,711	37.78%	40.00%	-2.22%	±5%
BGI Russell 2000	$132,790,347	10.43%	10.00%	0.43%	±5%
BIAM	$161,137,786	12.66%	15.00%	-2.34%	±5%
*Total Equity*	$774,853,845	60.87%	65.00%	-4.13%
BGI US Debt	$222,397,815	17.47%	16.00%	1.47%	±3%
DAMI	$178,755,821	14.04%	13.00%	1.04%	±3%
Total Fixed Income	$401,153,636	31.51%	*29.00%*	2.51%
Real Estate	$94,977,357	7.46%	6.00%	1.46%	±2%
Cash	$1,928,791	0.15%	0.00%	0.15%
*Total*	*$1,272,913,628*	*100.00%*	*100.00%*

Mr. Clifton introduced an expanded version of SamCERA’s Monthly Investment Report. Various trustees suggested revisions to the overall format or individual page format. Those suggestions will be incorporated in the next iteration of the report. Mr. Cottle pointed out variances between BGI’s Russell 2000 Index Fund and the Russell 2000 Index. The Fund underperformed the Index by 10 basis points (0.10%) for the trailing three months and 14 basis points (0.14%) for the trailing six months. He asked staff to investigate and report back. Mr. Buffington asked staff to review what appears to be an anomaly between BGI’s fiscal year to date return versus the trailing six-month return. He noted a one basis point variance for the fiscal year to date, which is eight months, while the trailing six-month variance is fourteen basis points. Mr. Cottle questioned Bank of Ireland Asset Management’s underperformance relative to the benchmark over the past quarter. Mr. Clifton reported that BIAM attributes two thirds of the underperformance to the portfolio’s underweight of Emerging Market securities, which performed well during the quarter. The other third of underperformance may be attributed to stock selection.

Action: The Committee unanimously accepted the Monthly Performance Report. The Committee will recommend to the Board of Retirement that it accept the report.

6.2

Acceptance of INVESCO Realty Advisor’s Compliance Certification Statement.

SamCERA’s Investment Plan mandates that each Investment Manager completes and submits a Compliance Certification Statement semi-annually. INVESCO Realty Advisor’s Statement is due in March and September. Today the Committee reviews the Compliance Certification Statement submitted by INVESCO. The Board will invite INVESCO Realty Advisors to appear before it on September 24, 2002 for its annual interview and review of the Compliance Certification Statement.

Presently, INVESCO Realty Advisors manages a portfolio of seven separate properties benchmarked against the NCREIF Property Index. On February 28th, INVESCO had ~$95.0 million under management, representing 7.46% of SamCERA's Plan Assets. As an asset group Real Estate is over its target allocation of 6.0%. The Board has determined to allow INVESCO discretion regarding disposition of assets to bring the actual allocation into conformity with the target allocation. The Association’s contractual agreement with INVESCO stipulates that they receive a performance-based fee in addition to a management fee. The management fee is 7% of Net Operating Assets (NOI), which equates to approximately 65 basis points.

The February 28, 2002 property performance, as calculated by INVESCO, appears in the table below.

Gross Returns

3 Month

Rolling Return

6 Month Rolling Return

12 Month Rolling Return

Since Inception

Matthews Festival

1.984%

4.316%

14.681%

Tysons Office Center

2.674%

5.254%

13.728%

Campus Circle

2.691%

5.067%

10.123%

Boca Colony Apartments

2.489%

4.839%

2.683%

Highland Bank Building

3.028%

6.002%

2.023%

Pacific Corporate Center

2.539%

5.154%

13.542%

Hunter’s Creek Plaza

1.906%

3.561%

8.134%

SamCERA Portfolio- Property Level

2.475%

3.838%

12.416%

12.523%

After reviewing INVESCO’s completed Compliance Certification Statement, the Committee had no additional questions related to INVESCO’s responses.

Mr. Bryan noted staff recommendation that the Board grant INVESCO Realty Advisors a waiver from Section 12.3.a.2 of SamCERA’s Investment Plan for Tyson’s Office Center, which due to appreciation exceeds 20% of the market value of the real estate portfolio. The property represents approximately 28% of the Real Estate Portfolio. Mr. Bryan believes there is risk when one property is such a large portion of the portfolio. Other Trustees questioned what could be done. The possible solutions which were mentioned include selling the property, moving the real estate target to 8%, leveraging the property and using the proceeds to acquire additional property or looking at real estate on a cost basis rather than a market basis. Mr. Buffington noted that it was through appreciation that the property surpassed the percentage threshold. He is not in favor of penalizing a manager for doing what the Board asked. Mr. Cottle suggested that the Board discuss the options with INVESCO at their next review. It was the consensus of the Committee that INVESCO did not need to appear on this issue prior to its annual review in September. However, staff was instructed to ask INVESCO to respond in writing regarding the impact of tracking the properties on a cost basis versus market values.

Action: (1) The Committee unanimously accepted INVESCO’s Semi-Annual Compliance Certification Statement and will recommend that the Board of Retirement accept the Statement.

(2) The Committee acknowledged that Tyson’s Office Center represents approximately 28% of the Real Estate Portfolio. The Committee will recommend that the Board of Retirement discuss the options available to bring Tyson’s Office Center into compliance with Section 12.3.a.2 of SamCERA’s Investment Plan with INVESCO at the annual review scheduled for September 24, 2002.

6.3

Acceptance of the Investment Committee Schedule for Fiscal Year 2002/2003. The Investment Committee is charged with providing direction to the Board in its ongoing evaluation of SamCERA’s Investment Plan. The Committee’s scheduled work plan for the 2002 / 2003 Fiscal Year was introduced, and reviewed by the Committee and the Board on February 26. This month the Investment Committee unanimously approved their schedule for the next fiscal year. It should be noted that the schedule may be amended at anytime as the Board of Retirement, Investment Committee or staff identifies additional topics for consideration.

Action: By consensus the Investment Committee Schedule for Fiscal Year 2002 / 2003 was accepted and the Investment Committee will recommend to the Board of Retirement that it also accept the Schedule.

6.4

Approval of request to actuary for Alternative Interest Rate Actuarial Valuation Scenarios.

As part the process of setting the schedule for the coming year, Mr. Lewis proposed that the Audit Committee hold a workshop with the actuary prior to the launch of the triennial experience study and actuarial valuation. One of the topics that the Audit Committee would like to address with the actuary is alternative actuarial interest assumptions. However, the Investment Committee Charter delegates matters relating to the actuarial economic assumptions to the Investment Committee, as follows:

11.0 Evaluate & Recommend Revisions to the Economic Actuarial Assumptions and Other Actuarial Asset Considerations

11.1 Evaluate the data and methodology employed by the Actuary when setting the assumptions for inflation, investment return, salary increase and when establishing the actuarial value of assets and recommend revisions as appropriate.

11.2 Assure that the Consultant integrates Actuarial input with all Asset Liability Modeling Studies

11.3 Evaluate the consistency of actuarial-economic and investment policies and processes

Mr. McCausland reported that SamCERA’s 8.25% actuarial interest rate is at the 50^th-75^th percentile of twenty-four California Plans surveyed by William M. Mercer. As a general rule a 1% change in investment return can be expected to generate a 20% change in total cost of a pension plan. However, the relationship is nonlinear, so the general rule is only general. Nevertheless, this general rule illustrates the critical nature of the actuarial inflation rate and real rate of return assumptions in the calculation of funded status and the setting of contribution rates. It makes a significant difference whether a change in the actuarial assumption rate is reflected in the inflation assumption or the real rate of return assumption. Staff believes the change should be to the inflation assumption so as to test what happens as you narrow the gap between the Strategic Investment Solutions and William M. Mercer capital market assumptions. SamCERA’s current inflation assumption for actuarial considerations is 4.25% (WM Mercer), while for investment capital market considerations 2.5% (SIS) is used. A change in SamCERA’s actuarial inflation assumption also changes the salary assumptions and the COLA assumptions.

In response to a request from Mr. Lewis to review alternative actuarial interest assumptions staff recommended that the Board make a comparison of 7.75%, 8% and 8.25% actuarial interest assumptions. Mr. Buffington began the discussion by reminding the Committee that the difference between the Actuarial and Investment Consultant’s inflation assumptions is primarily due to different time horizons. The Board should consider what time horizon to use and adopt one inflation rate. He suggests Mercer’s 4.25% inflation assumption may be more appropriate than SIS’s 2.5%. Ms. Colson & Mr. Bryan found value in employing Mercer’s inflation assumption for actuarial purposes and SIS’s inflation assumption for capital market purposes. Mr. Cottle offered that a 7.75% interest rate assumption is impractical. However 8.0% & 8.25% should be reviewed. The Committee unanimously agreed. Ms. Colson would like to review a matrix consisting of four assumptions. Those would be an 8.0% & 8.25% interest rate assumption built on a 4.0% & 4.25% inflation assumption. The Committee found a review employing two inflation assumptions to be an interesting concept and agreed to recommend it to the Board.

Action: By consensus the Investment Committee agreed to recommend to the Board of Retirement that the Board meet with Mercer prior to this year’s triennial experience study and annual actuarial review to discuss the inflation assumption. The Committee will also recommend that the Mercer provide an 8.0% & 8.25% interest rate assumption based on 4.0% & 4.25% inflation assumptions.

7.0

Other Business:There was no further business.

8.0

Adjournment: There being no further business Mr. Colson adjourned the Committee at 1:35 P.M.

Top
Minutes Index

The information in SamCERA's web site is general in nature and is not considered a legally binding interpretation, enlargement or amendment of the provisions contained in the County Employee's Retirement Law of 1937 or by-laws of the Board of Retirement. Although considered accurate, information within the site is limited and, should there be an inconsistency between the web site and the governing law, the law will govern.

E-Mail:samcera@samcera.org - Tel:(650)599-1234 - Fax:(650)591-1488 - Hours:M-TH 7am-6pm
Address: 100 Marine Parkway, Suite 125, Redwood Shores, CA 94065-5208 - InterOffice Pony: RET141