St. Mary's County, MD Sheriff's Office Retirement Planning Board for St. Mary's County, 25 Mar 2021

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From YouTube: 3/25/21 - Sheriff's Office Retirement Planning Board for St. Mary's County

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A

Good afternoon welcome to the sheriff's office retirement plan board meeting on thursday march.

A

25Th at one o'clock in the afternoon welcome to all members of being present uh today so excited.

A

About that for our board of trustee members, uh we'll begin with item 2a with the approval of.

A

Today's meeting agenda take a minute to review and then we'll entertain a motion to approve. Please.

A

I will move to approve. Thank you, sir. Do we have a second I'll? Second, any discussion all.

A

Those in favor any opposed motion carries. Thank you item. 2B is approval of the february 25th.

A

Meeting minutes, if you take a minute to review, then we'll entertain a motion to approve. Please.

B

I'll make a motion to approve the february 25th 2021 minutes.

C

A second we have a motion and a second is there any discussion all in favor, aye aye any opposed.

A

Motion carries thank you. Items three is new business. Three, a is patrick wing from.

A

Marquette associates with a transition update and recommendation good afternoon. How are you today.

D

Doing well good afternoon, dr bridget, good afternoon, everyone it's great to meet everybody.

D

In person today nice to see you all again, so we have just one book today, all of the all of the.

D

Discussion materials are in this one book, we'll start out. If you hop behind the exhibit there.

D

Or excuse me the cover page and hop behind the title page to page two just spend a quick minute.

D

Covering exactly what we're going to discuss today, so the first item on the agenda, there will be.

D

Largely around the transition update, you know, as you all well know, over the past few.

D

Months we've tackled implementation transition as it relates to equity markets.

D

Fixed income, private reits- I will have an update on the latter there shortly so today we'll take a.

D

Look at hedge funds and once we get through that and some recommendations, we will circle up with.

D

Some other items that we talked about in the past, namely related to the alternatives, start to talk.

D

About the alternatives in the fund think about things from a total portfolio perspective, namely.

D

You know what sort of what are we looking for when we allocate to alternatives? What are the role we.

D

Want them to play in the portfolio, what are the? What do we want them to do, for the fund itself.

D

We'll spend a quick minute talking about asset allocation tools and resources, since.

D

We're focused at a very high level today just want to give you a quick flavor of some of the.

D

Those tools and resources that we'll be taking a look at in the coming months to help develop.

D

That long-term road map from an asset allocation perspective, updating the policy statement related.

D

To asset allocation and also ensuring some best practices and then we'll just talk about next.

D

Steps so we've talked about them regularly in the past, but important to make sure that those steps.

D

And priorities, as we see them, are in line with how the board would like to proceed so with.

D

All that said, if you can hop behind, exhibit one to continue with our transition update.

D

The hedge fund overview on page four. If we could start there, please.

D

So right now the fund has four hedge fund investments. They are listed there in the.

D

The various color columns I'd like to spend a brief minute on two of them.

D

Namely hatteras, which is the second one and the last one and we'll call it orange-ish on all the.

D

Way to the right, morgan, stanley, so there's not a lot of information beneath those funds.

D

Because they are currently being liquidated, based on my understanding of the historical.

D

Data around those funds they initially were allocated to all the way back in the late 2000s.

D

2007 and 09, respectively for morgan stanley and hatteras in the early 2000 early to mid 2010s.

D

It appears that the board made the decision to liquidate or redeem from those funds and.

D

Again, this is based on the data that was provided to us from the previous advisor.

D

However, there's still nominal allocations to those funds, so it's unfortunately taken many.

D

Many years for them essentially to wind down so right now within hatteras, there's about 35 000.

D

Or so we continue to submit the redemption paperwork. The tender offers to get that.

D

Out of the equation and then for the morgan stanley fund all the way to the right. It's.

D

About a six thousand dollar investment right now so again, very very small immaterial and we're.

D

Just waiting for it to wind down and return the remaining funds, so I'd like to focus you.

D

Know predominantly on the two other funds there. Graham, you see all the way to the left in blue.

D

And then millennium, there in yellow, so at a very high level. These are very similar type strategies.

D

You can see we list graham as absolute return and then millennium is multi-strategy, but even.

D

Though there are labeling differences, they operate very similarly, so how they they work.

D

Is graham and and millennium, respectively, allocate investor capital to various portfolio managers or.

D

Traders that work on behalf of the fund, so it might be traders looking in the equity markets.

D

In fixed income markets, commodity markets um employing some arbitrage opportunities.

D

But the long and short of is is they are very very similar and I want to come back to the fees.

D

In in just a second and talk a little bit more about the historical performance of those funds,.

D

So so graham's a firm that did very, very well uh subsequent or amid the global financial crisis in.

D

0809 in 2010, and usually what we see is success, usually begets more investor money, but doesn't.

D

Necessarily beget more success for the fund itself. Typically, a smaller fund will be more nimble.

D

Have operate a little bit more efficiently and we saw that earlier on, but as the fun grows.

D

You know operating more nimbly and then execution can tend to suffer and when we.

D

Show the returns on the next page that does appear to be part of the story, as grim hasn't necessarily.

D

Done particularly well over the life of the investment over the past almost eight years now.

D

Now millennium is a different story. They operate very similarly, but millennium is actually one of.

D

The strongest multi-strategy hedge funds out there they historically have an exceptional track record.

D

They are very hard to get into for investors, they're very selective about the capital that.

D

They take on because of their track record because it has been so well and they're actually closed.

D

They're not accepting new capital now from a fee perspective, if you look in blue they're.

D

Below gram, where the fees are boxed up, you see a two percent management fee and a 25.

D

Incentive fee that is fairly high for hedge funds. These days, that was historically the case, but.

D

That's come down over time, particularly that 25 management or I'm sorry incentive fee, essentially.

D

What that's saying is that the manager will share in the profits, along with the investors. So if the.

D

Fund gains and hits a high, what's called a high water mark or just think a high market value. Then.

D

The difference between that gain and the previous high water mark is shared 25 to the manager and.

D

Then the investor keeps 75 percent. We've seen those fees come down to not two and 25, but really.

D

uh One and a half and more 15 or 20 over time. So the fact that graham's fees have remained pretty.

D

Sticky is, admittedly, a little surprising um just given the track record that they've had over the.

D

Past couple years and they're, certainly on the higher end from a feed perspective related to.

D

Fees as we've talked about previously, I spoke with graham their two percent management fee.

D

One and a half percent or 75 percent of that goes directly to half. A percent goes to morgan stanley.

D

As things stand right now, so if you were to keep graham and that's not in line with my.

D

Recommendation later on- and I don't want to scoot myself- but that fee wouldn't change.

D

Instead of being one and a half just per to gram, the half a percent going to morgan stanley right.

D

Now would actually go to graham then, so those fees are are are static, they're not going to change.

D

For a millennium, it's a little bit of a different story. I confirmed that with the manager and.

D

Reviewed the contract um myself, along with ms pratt and miss gates, that that is a contract.

D

Directly with millennium, so there's no third party to that contract. It's between the county, the fund.

D

And millennium directly, so the fees that you see there are going to millennium and millennium alone.

D

That's a little that's somewhat of an aberration to what we've seen with some of the other.

D

Managers as we've discussed in the past, but it was good to see that millennium, it's just a.

D

Direct contract between the county and there are no other parties uh as a part of that contract.

D

Now, if you look on the next page and I'll, just I'll pause after this for any questions.

C

I'm gonna ask you a question, I'm sorry. Yes, sir, you talked about these uh fees being on the.

C

High side and now historically they're drifting downward, but these are baked into those particular.

C

Pies, are they not? I mean you're stuck with them for the life of the investment.

D

Yes, you're stuck with them for the life of the investment, but these are. These are open. End funds.

D

So and I'm going to talk about this shortly, the board can vote to redeem.

D

From I, you know one and or both of those managers, if you choose to do that, so it's.

D

Not a closed end fund, where the money's tied up for 10 12 15 years, so the liquidity dynamics.

D

Are more favorable to the investor which brings me to my second question.

C

For the two that are liquidating and where there is small change left over, what made it.

C

Impossible to completely exit the position when the trustee said we went out of this.

D

So I'm going to have to.

D

Make a supposition there since I wasn't around, but typically when you see I wasn't either so you're.

D

Okay on this, when you see those dynamics, it's usually an asset liability mismatch.

D

And you know by saying that so the underlying assets of the fund themselves.

D

Are less liquid than the liquidity they're promising the investors, so they were underwater.

D

They weren't they they may have been. I don't know that for certain, but when you think about it,.

D

So just like um say a an open-ended real estate or the private reit discussion that we talked about.

D

At the last month, meaning an asset liability mismatch, so the liquidity.

D

For the underlying assets doesn't line up with the liquidity or the liability.

D

That they're promising to the investors right so when you have a run on the fund or a large.

D

Amount of redemptions, then they typically throw up these quote unquote, gates, which then limit.

D

Limits your redemption over time and extends the life of your redemption, so that would be my.

D

Guess but I honestly don't know for certain well: does that mean these last two pieces that that.

C

Ratio is now in balance or that the whole fund has come to at the end of its life.

C

I'm sorry I I don't follow. Well, we've got 35 ish right and six ish, so does that mean they have the.

C

Liquidity asset value on the plus side now or is the whole shebang due to mature and that's when.

C

Our money's going to come back so for hatteras. The way that operates is they. Unfortunately, we.

D

Have to submit quarterly, they have quarterly tenders. So if you want to redeem your.

D

Position, you submit a quarterly tender to them and they uh prorate those redemption proceeds.

D

And I think that's why it's it's taking as long as it has we submitted one uh last quarter and.

D

We will essentially get a max of 15 of that remaining value, we'll submit another one. This.

D

Quarter to continue to have this ball rolling, but it could be still a number a couple of just.

C

Nibble away till it's zero, unfortunately, yes, all right! Thank you. You're welcome.

D

So we look on page five to wrap up the head. Excuse me, the hedge fund discussion, so quickly at the you.

D

Know then the name of the game. Obviously, is you know how have these managers done? You know there.

D

Are obviously other considerations, and I don't I don't want to minimize them to any degree, but.

D

I wanted to show the performance of the two funds relative to the larger hedge fund universe, so you.

D

See in blue those are gram returns, uh green is millennium and gray is the benchmark. So.

D

The common time periods between the three are the fourth quarter, one year and three year.

D

And then further towards the right, where you see since may 31st 2016, that was the.

D

Inception of graham and then all the way to the right that was the inception of.

D

Millennium, so just to echo my comments earlier, obviously, you can see graham and blue. There.

D

Certainly, uh haven't necessarily kept pace with the peer group by any stretch of the imagination.

D

Because of the challenges I talked about a little bit ago, millennium, on the other hand, you could see.

D

Their returns uh pretty strong over time and again these returns- I should have mentioned it.

D

Is footnoted? This is net of all fees, including the management fee and that incentive fee so.

D

These are the net returns that the fund has been experiencing so millennium since 2013, with a 10.

D

Return sort of equity-like returns with lower volatility, which is really the name of the game. If.

D

You're gonna look at the hedge fund, universe that is sort of what's been sold to investors over time.

D

Hasn't come to fruition uh in aggregate or for many of the funds, but, as I mentioned millennium,.

D

Is a very strong fund has been around for 30 plus years and historically, very, very hard to.

D

Get into because a lot of investors like to try and allocate their funds to millennium so with.

D

All that said, let me pause for a quick second, I think, as I saw on the agenda, this is more of a.

D

The transition update where the the latter would be really around the recommendations. So let me.

D

Pause for any any questions before we move on yes, sir uh down at the bottom there, on the right hand,.

C

Side, what does the r indicate hedge fund relative index or, what's the r edge, it's just hedge fund,.

D

Returned into c and then the specific one f, o f, is the fund of funds composite within that index.

D

So they have various hedge fund strategies, depending on the actual funds themselves.

D

Got it? Thank you. You're welcome.

A

Okay, okay, so then this would be the next item in in the agenda. Okay, so we look at recommendations.

D

On the next underneath the next tab and start on page seven, as you all well know, we have to.

D

Have some considerations for what we're going to propose so number one? The private reits.

D

Based on the board's rec or excuse me decision at the last meeting again working with miss.

D

Pratt and miss gates, those redemption documents were submitted uh really immediately following.

D

The next meeting, however you'll note there in the second sub bullet point, is funds likely to.

D

Be wired back on or around 86 or april 6., so I use the word likely there for a couple reasons.

D

Number one we have heard back from black stone and starwood that everything is in good order and.

D

That will be moved forward for black creek. We haven't received 100 confirmation, yet.

D

We provided them everything that they need. They have told me they're working internally. I spoke.

D

With them yesterday, they have every expectation their words that it's going to be processed along.

D

With these other ones, but we as we sit here today, we don't know with a hundred percent.

D

Certainty, so I just want to keep that in the back of our mind when we talk about rebalancing, because.

D

A lot of the rebalancing is predicated on all this money coming back so we'll have to maybe.

D

Qualify any approval or motion from the board just in case we don't see all that money come back, so I.

D

Wanted to bring that to your attention. Finally, as relates to the etfs, as we've discussed in the past.

D

We're looking to bring everything under the wells fargo umbrella, uh we liquidated pretty much all.

D

The etfs previously there are two remaining ones so that'll, be a part of the recommendation to.

D

Again, move out of that type of investment vehicle bringing everything under wells fargo, the hedge.

D

Funds there finally, and then investment policy, and I mentioned that if you look on page eight.

D

You know we spent a lot of time talking around implementation, but we have to operate within.

D

The confines of the current investment policy statement until we can tackle that later, this.

D

Year, so importantly, if you look in the bottom right all the way, the bottom right, the small table.

D

There, if you recall the global equity target, has a range of plus or minus nine percentage points.

D

So all the way to the right of that table where you see green there.

D

That means you're overweight in asset class and red underweight. But when we.

D

Aggregate the u.s developed non-us and emerging market equities we're at about 8.4 percent.

D

Overweight, so we're within the confines of the current ips. But we need to keep that in mind.

D

Because we are largely redeeming alternatives: money right, there's, private reit, money.

D

So we have to think about how we're going to deploy that and still operate within the current.

D

Confines of the investment policy statement to stay within the previously approved ranges.

D

So with that said, if you look at page 9 and 10 we'll talk about the termination.

D

Recommendations so for the investment managers, the first two you see there are etfs.

D

You see pacer benchmark data and infrastructure, real estate, sector, etf and then real estate select.

D

Sector spider funds, so those are two etfs again to simplify trading rebalancing. It would be.

D

My recommendation to terminate those and then related to my comments around the hedge funds.

D

Recommendation to terminate graham absolute return fund to circle back to the liquidity dynamics of.

D

That fund I spoken with. Graham they require 30 days. Liquidity liquidity is provided quarterly.

D

So long story short: if we get those redemption documents in before the end of may, we should.

D

Expect proceeds by sometime in early july and I have been told that they intend to fully pay out.

D

Immediately so we won't have a dynamic like hatteras or morgan stanley, that portable apple, we.

D

Should expect all that money to come back in short order, but given that it won't come back until.

D

July, much like we did with private reits last time I said: let's get the redemption docs in.

D

Let's circle back at this meeting on where the funds are going to be allocated.

D

We should do the same thing with graham, since we're not going to see the money come back for.

D

Three and a half months- and we have a meeting in late june, then at that time we can circle back.

D

And say: hey: we expect this money in two weeks or so so, where do we want it to go and we'll have.

D

A better picture of how things are allocated at that point. So if the board does decide to.

D

Move forward with it, we don't have to make a decision about where that money's going to go.

D

Because it won't be coming into early july, yes, sir, if I may you you used in this segment.

C

The term wells fargo are these actually with them. I thought we had moved away from wells.

D

uh No, no sir! Well, they had sold off their custodian business.

D

They had, they have entered into agreement with principal.

D

For principal to buy the wells, fargo custodian business that deal has not closed.

D

It's my understanding that that will be folded under principle in q3 or q4 this year. So later,.

D

On as we look at the next steps and as we talked about before custody evaluation, once we tackle.

D

Implementation asset allocation, which you know in my head, are our higher priorities. Then we're going.

D

To circle back to that and have that next on the list, when would you suggest we get started on that.

C

Anticipating a closing date as you've just indicated. Well, it's my understanding that.

D

Necessarily the team or the client service team that works with the county is not going.

D

To change there may be some branding changes or some back office changes.

D

But I would it's my hope that there would be no interruption of of service.

D

So immediately after we start or get through the asset allocation investment policy, that's.

D

The next thing on the list so hopefully july august, where we hit that on the head. Thank you.

C

You're welcome and can you describe on your page nine and ten with your reasoning. You went over.

A

Graham absolute return on on nine where's, the uh is the data attached for their poor performance.

A

In graham, yes, I'm sorry, dr bridges, so that's found on in the previous section, I believe on page five.

D

So, graham there is in blue their net of.

D

Net returns and then the benchmark millennium's in green and the benchmark is in gray. So you can see.

D

Fairly, consistently short-term intermediate longer term since inception that may 31st 2016.

D

uh Well, south of the benchmark there, so high fees, poor performance generally.

D

A reason to consider moving on and are these the same measures that you're using for um when you're.

A

Using the reasons on pacer and the real estate select and the spdr fund, so with those two funds.

D

Dr bridget, their etfs uh-huh. So if you recall in the past the rebalancing trading, pasta process.

D

Flows through morgan stanley yeah, um so it's going to be our recommendation like we did with.

D

Everything else to liquidate those because they're an etf vehicle and move into a mutual fund vehicle.

D

That's similar in spirit, but also with the private reit money and I'll speak to this in just a couple.

D

Of minutes to be a pretty sizable reduction in the fees based on those, so similar exposures.

D

Because we have to keep them in the alternative bucket, just a different vehicle and lower cost.

B

Thank you, you're welcome and then trading through.

B

Wells and yes, yes, I'm sorry, thank you. Yes, since it'll be mutual funds. That would happen.

D

Exclusively through wells fargo so again bringing more things under their umbrella.

D

Okay, so on page 10 now and talked about some of the terminations, but the money has to go somewhere.

D

Right so, as far as additions be my recommendation to consider two new investments, both being mutual.

D

Funds, the first, the fidelity real estate index fund. So again, a lot of this money is coming out.

D

Of real estate, which is an alternative, we need to keep it into a quote: unquote, alternative right now,.

D

So fidelity real estate index fund is essentially a passive mutual fund that invests in the stocks.

D

Of companies that own and operate real estate assets at the same time, I would like the board.

D

To consider the latter manager there conan steers global infrastructure fund. So even though we're.

D

Taking money a lot, there are a lot of money out of real estate and we know the structural headwinds.

D

Around real estate, a lot of our clients have taken a look at infrastructure. You know it provides a.

D

Similar exposures, but these are companies that own and operate infrastructure assets so like.

D

Transportation assets like rail toll road utility grids, power grids, electricity grids.

D

Contracted assets like broadcast tower satellite networks and cohen and steers specifically.

D

Was one of the first movers in sort of that real asset, real estate infrastructure space? They.

D

Launched this fund, particularly, they were one of the first ones- to launch this mutual fund. They use.

D

A framework that takes into account what's going on from macroeconomic or the economy perspective.

D

And try to marry it with a bond fundamental on bottom fundamental analysis, meaning.

D

That they also take a deep dive into the companies that they're that they're buying.

D

They largely and I provided a manager memo as a part of board docs, and it is in the back of.

D

This book, they largely have done very, very well relative to their peer group relative to their.

D

Benchmark our research group did a deep dive into the global listed infrastructure space less than.

D

A year ago and conan steers was their top pick in that space is particularly for our clients.

D

That are reducing the real estate exposure a little bit once still one sort of exposure to say.

D

Inflation sensitive type assets assets that we'll do a little bit better if inflation picks up.

D

Where we believe infrastructure is one of them and we have about, I would say more.

D

Than a dozen clients invested in the fund right now, with an amount upwards of about 75 million.

A

So just break for a second in the back of your book, there's a loose leaf on cohen and steers if.

A

You haven't seen it in the in board docks and they are a managed fund. Is that correct? Yes, so that.

D

Is an actively managed fund within the global listed infrastructure, space and you'll notice.

D

That on the real estate side, we're proposing an index fund, but there are no passively managed.

D

Listed infrastructure managers out there right now, there's a couple of etfs that are rather expensive.

D

But on the listed infrastructure side really the whole opportunity set is active managers. Well, I'm.

C

Kind of going the other way on this, why would we not be more inclined to do a managed fund.

C

Where they can adjust the sales as they go along as opposed to an index fund.

C

And there you are on the real on the real estate side yeah. I think what we so a couple of things.

D

The real estate universe is very small, it might only be a hundred or so companies of eligible.

D

Real estate or reit companies to invest in and when you think about active managers.

D

The lower the opportunity set the less opportunity they have to you know, buy and sell securities that.

D

Will do relatively well if you have a bigger opportunity set, then you have more opportunities.

D

So historically, like a small cap value manager, who can pick from 2000 stocks, tends to do quite well.

D

Because of that big opportunity set. But when you have such a small one and the relative.

D

Performance of those stocks isn't all that great. It's hard for managers to outperform.

D

The benchmark net of their fees, so a lot of active managers in this space are.

D

Probably charging in the neighborhood of 80 90 basis points. So for those reasons we generally.

D

Propose a more passive approach in the read space. You lobbed me a soft one. Why go there at all.

D

Trying to remember what I said if there's a playback, it sounds to me like those dollars.

C

Would work harder for us over in the in the uh cohen in steers? So I think that you know that's.

D

A that's a terrific point. I think it's more of a matter of diversification. You know, as we'll see.

D

In just the next page, we're talking about eight million dollars in potential proceeds from the.

D

Private reits and the two etfs and the proposals essentially to split that between the index and.

D

Cohen and steer so it's more of a diversification standpoint. Do we want cohen and steers managing.

D

Seven percent of the fund, as we stand here today, and you know also to your point- I'd mention that.

D

We're tackling this implementation first because of the confines of the current investment policy.

D

Statement when that changes, we're going to circle back to implementation right because we'll have.

D

Different confines different objectives, different constraints, so the managers as they stand here.

D

Today they could look different in the next six to nine to 12 months, but we have to be.

D

Cognizant under the really the confines and the current statement as it relates to these.

D

Recommendations well, if their universe on the on the index fund, if their universe is so small.

C

Why wouldn't we go out and search for a specific like american tower, or I don't know, I'm.

C

Just throwing out a name there, three or four of those for the same dollars.

D

uh I would argue that uh our firm- and I I don't want to put words in anybody's mouth.

D

But likely the board doesn't have the knowledge or records and knowledge to do you know, income.

D

Statement, financial modeling analysis on individual securities, so I think you do.

D

No, I know, admittedly, I do not that's not something we do, we don't. We don't buy and.

D

Sell individual securities, it's just investment manager due diligence, so that would largely be.

D

My reasoning, it would be a fiduciary risk, I think, to hold individual securities like that.

C

Okay, so do you have a statement about the fidelity real estate index fund.

D

Yes, so historically, we just provided the memos um for the active manager recommendations, but I.

D

Could certainly speak to it. So that's a fun thing. That's okay! I just wonder if there's.

A

Anything in writing. Oh no! I'm sorry is there any any. I'm just didn't know if I was missing it. No.

A

Okay, no, we didn't happy to provide more color if you'd like it's helpful to me, to have more.

A

Information, so I understand what their performance is and some of the reasons to make those decisions.

C

Well, and also so, you could see how and I'm not slamming you folks, I think, you're doing a good job.

C

But you'd like to know what does lipper think of them, what does morningstar think of them and so on.

A

Yes, that's helpful information right, especially when we're making the decisions.

A

About adding them to our portfolio the more information for me, the better understood.

C

Do you have a symbol for that? It's f s: r n x, foxtrot, sierra romeo x-ray.

D

There's an n before that started again uh nick before oh uh foxtrot, romeo.

D

Fs, wait! No! I'm sorry! F s r n x, that's on page 11.! Is it tough actually, thank you.

A

I've cheated the next page, yes and then the conan steers is also on that page of.

D

A

And are there fees associated with uh chap, with uh page 10 as well yeah? Yes, dr bridget, if we can move.

D

To page 11 I I can speak to those basically how this proposed rebalancing would impact.

D

uh The current level of the fees, if that would be okay, sure.

D

So the the rebalancing, as you can see here and there's a lot of data on this.

D

Page because there's a lot of investments, but if you specifically focus on the alternative section.

D

About maybe call it two-thirds of the way down the page. uh First, let me speak to the actual.

D

Proposal and then I'll circle back to the fees, so it would be a full liquidation.

D

Of the pacer benchmark data and infrastructure, real estate sector fund again that etf.

D

A full liquidation of the real estate select spider. Excuse me, select sector spider fund.

D

Let me circle back to the the two purchases in black there right now we're expecting about.

D

6.6 million dollars you see that below that last 4 million. That would be the private reit.

D

Redemptions again, hopefully the black creek money comes back. This is taking that into account. So if.

D

We assume for a second that this can play out the current fees for the private reits and the etfs.

D

In aggregate or around 140 000, if you recall, the private reit management fees were quite quite high.

D

For the purchases of the fidelity fund, that has an expense ratio of just seven basis points so.

D

0.07 percent the conan steers fund is 94 basis points so 0.94. So then in aggregate.

D

The fees for those two would be about 40 000, based on that eight million dollar aggregate allocation.

D

Which, therefore, would be about a hundred thousand dollars less than where the money is coming from.

D

Questions around that I do want to make one other comment about this proposal before.

D

The board considers it.

A

Questions or comments thus far. No, don't look at me everybody's. Looking, it's getting ready.

D

So quickly, um if, when I I'd like the board to consider this proposal, however,.

D

It almost needs to be qualified to some degree, because we don't know for certain that the.

D

Private re money is coming back, so what you can see here again is three essentially redemptions.

D

Four purchases, but then at the bottom, having some funds go into cash for upcoming capital calls and.

D

You know liquidity benefit payment needs so for consideration if it would be appropriate.

D

I think something along the lines of raising say a minimum of 950 000 that goes to cash and then the.

D

Remaining proceeds that we see come in is split evenly between those two funds, as I've outlined.

D

Here so I'm hoping that it's eight million dollars split evenly, but I don't know, as we sit here today,.

D

And if it doesn't end up being the case, then we can circle back on this in april.

D

Questions around those dynamics.

B

So we currently haven't received a 6.5 million dollars yet.

B

No, that should be coming in really two to three business days into april.

B

Okay, so I think the um on page, 12 um pat, is looking for a for the board to.

A

Approve the proposed rebalance, as outlined on page 11, if the board's ready to do that.

C

Do you want a motion before discussion or vice versa? Oh you can have discussion. Okay,.

C

I'm fine with going ahead with available funding for cohen and steers.

C

I would like to put off a decision on the other one right until we have a little more date about.

C

What's going on the quality of it and all that kind of stuff that we've already talked about.

C

So half of half of the position or half of the steps I would like to postpone.

C

First step I'm fine with if the, if the dollars are there or when those dollars come in the only.

D

Comment I would make to that. Mr walters is that you know if, if we do do the four million dollar.

D

Purchase then the rest of the money either has to go somewhere or it has to sit in cash, and it can't.

D

Go into equities right now, because we'll breach policy can't go wrong with cash for a month or two.

D

Sometimes there's an opportunity cost, but uh no I'm not seeing it.

D

Past couple days, but you know that that's certainly a worthy um consideration.

A

So I think uh the board certainly will take a motion to accept that.

A

If you'd like to do is a motion.

C

I would move to accept the purchase of the cohn and steers subject to available funds.

C

And to defer a decision on the other one until we have a little more evaluation.

A

There's a motion on the floor: is there a second I'll? Second, any discussion, all those in favor.

A

Aye all right, any opposed no motion carries a juvenile, yes, okay, great okay uh and then.

A

The next is to recommend that the board vote to terminate the graham absolute return fund.

C

I will move to terminate said fund. We have a mission to approve. Is there a second I'll.

B

Second, it any discussion, all those in favor aye, any opposed motion carries. Thank you.

A

Okay; okay, thank you all so we'll switch gears here if you hop behind, exhibit 3.

D

Based on the feedback in our discussions previously around asset allocation, namely.

D

Portfolio, construction and the amount of alternatives in the fund.

D

That would be helpful to begin this discussion more with a high level framework and then work.

D

Our way into a little bit more granularity at the next meeting. But if you look at page.

D

14, what we had or what I asked our team to do was really go run through all the.

D

Kaffirs for the maryland county pension funds and pull their respective target allocations.

D

Across the board here, so you can see in that top row. We've broken things down across a number of.

D

Key groupings so those first two rows are really traditional assets: right, equities, fixed income.

D

The latter three more alternatives. You see: private equity credit there in the middle.

D

Hedge funds and then real assets with things like real estate infrastructure commodities.

D

Things of that nature, so you know we think these. These sorts of references are important. It's.

D

It's also important to keep in mind that shouldn't drive the decision making process.

D

Right, every fund and county is unique in their goals and constraints and objectives, but it's a.

D

Certainly helpful reference point, so I'd just like to draw your attention to the bottom there, where.

D

We're showing the average and then the county's pension fund. You can see the split between your.

D

Traditionals of 53 27, the average across the rest of the county so about 80 percent, traditional 20.

D

Percent in in the latter, three alternatives type bucket, whereas from a policy perspective right now,.

D

The sheriff's fund is looking at almost a two to one so 67 um to traditional. You know predominantly.

D

In equities, as you would expect, but then 33 across the other alternatives buckets so right now again.

D

Just a helpful reference tool, you know many times we get the question, you know what are, what are our.

D

Peers doing what are what are other counties in the maryland marketplace doing but again shouldn't.

D

Drive decisions but a helpful reference tool as we move forward here and think about asset allocation.

D

So we look on page 15 just shifting years now and as we begin to think about.

D

Alternatives certainly important to to start from the top right, not just look at alternatives to.

D

First, but what are we trying to do? How are we trying to build the portfolio, as you can see here,.

D

Called portfolio construction, you know how we're trying to build the mouse trap if you will to get.

D

To where we need to be so, the key takeaway there is up in up in black. You know we're trying to hit.

D

That target rate of return while minimizing risk, so you know what's risk. We think there are two.

D

Major components to it, one volatility, certainly to avoid the risk of having to sell something at the.

D

Wrong time, particularly, if you have negative cash flows right, you can have to sell something at the.

D

Wrong time and then the value that's permanently impaired, whatever you sold can't then recover and.

D

Related to that tracking error are essentially deviations from your assumed rate return.

D

So, to the extent that you can minimize those annual or long-term returns around.

D

You know your actuarial assumption. What that will lead to is a more smoother.

D

Or more stable asset base, therefore more stable, funded ratios and then hopefully, more stability.

D

From a budgetary perspective, because things are coming in more in line with what's expected, so if.

D

You're, looking page 16 to talk dig a little bit deeper into this uh asset allocation discussion.

D

You know when we think about using different asset classes, so anything outside of equities.

D

And fixed income, one of the things we want to think about again is you know how to build.

D

This mouse trap but say we just have a two house: asset portfolio of equities and fixed income and.

D

We want to also include xyz right in a perfect world, we have a portfolio of say four or five.

D

Asset classes, they all have high expected returns, but they don't move in lockstep with each other.

D

Right, they have low correlations they march to the beat of their own drum and at the end of.

D

The day that gives you more opportunity to sell, high and buy low and, at the end of the.

D

Day, that's the name of the game, that's how you really accrue the benefits of diversification.

D

So with that said, when we think about sort of building that mouse trap.

D

This bottom chart is really illustrating the benefits of that diversification, so you can see.

D

Up above the dotted line in the top right, it's called the efficient frontier, but the key takeaway.

D

Here is that the hole or the total portfolio can be greater than the sum of the individual pieces.

D

So you see all the individual pieces there from left to right in circles and the respective risk.

D

And return characteristics, but when you put the pieces together, if they're not moving in lockstep.

D

If they provide diversification, giving you more opportunity to sell high and buy low, then this.

D

Dotted line represented of your portfolio, your return expectation again can be better.

D

Than the sum of the individual components, so that's the key reason why you would want to.

D

Consider adding additional asset classes say to justice straight equity and fixed income portfolio.

D

Now, on page 17, the past couple pages have been more quantitatively focused, but internally we.

D

Think about things more qualitatively as well, so it's not just as simple as hey. You know, outside.

D

Equities and fixed income- let's: let's look at xyz right. You know we think real estate's, a good idea.

D

We think infrastructure is a good idea. We really want to know what again, what are we trying to do.

D

Here, what are we trying to accomplish? So we see asset classes and it's kind of falling into two.

D

Main buckets here, you see the first one on the left with the green header there, the growth engine.

D

If you have a portfolio that has an assume rate return of seven and a quarter percent you're going.

D

To need a lot of growth engine type assets, things like equities, other asset classes, high listed here.

D

High yield private equity, private credit and a large allocation of that, because, in order.

D

To hit that seven and a quarter return, you need asset classes that have return expectations of 8.

D

9 or even 10, plus percent, but at the same time there are periods in the short term.

D

Where these assets tend not to do well, so there's some cyclicality around that around their returns.

D

And we believe, that's largely driven by what's going on with inflation.

D

The inflationary environment, whether we're in sort of a rising inflationary environment.

D

Or, what's called a deflationary environment when we go into economic recession, economic contraction.

D

Interest rates tend to fall, so those are two environments where equities tend not to do well.

D

So if you look on the right here, we believe most investors should have quote unquote. Insurance.

D

Around those periods, where inequities don't do well inflationary and deflation are now the latter.

D

Deflation is very well understood. You know over the past 40 50 years, when the economy turns down.

D

Rates tend to come down. Bond prices tend to go up cash in that insurance; use it for liquidity.

D

Needs benefit payments or rebalance, hopefully back into equities when they become cheap.

D

Inflation's a little bit of a different animal and we'll spend more time on this.

D

In just a minute here, we certainly believe it's not as well understood. There's really no.

D

Perfect solution to getting inflation protection like there is on the high quality bond side of.

D

Amid an economic recession- and secondly, we haven't seen it for 40 some odd years right and we'll talk.

D

More about that distinct period in the mid, 60s and and 70s here just shortly, but the reason why.

D

We call it insurance is that most of these asset classes have lower expected returns than equities.

D

Right so we think about that as an opportunity cost right if you're going to buy insurance. Think.

D

About that, as paying premiums for the right to own insurance in the form of a lower expected return,.

D

So when you buy insurance right, your cash flow negative until you need it right. So if we come.

D

Into a period where equities are doing poorly and it's either deflationary or inflationary holding.

D

A small allocation in those buckets and cashing it in when you need it most again for liquidity needs.

D

Benefit payments, hopefully rebalancing but again to mitigate or hopefully remove, the possibility.

D

Of having to sell sort of these growth engine assets at the wrong time,.

D

Any questions or comments around that: okay.

D

So I want to spend a couple quick minutes on this idea of inflation. Again, I think it's it's! It's not.

D

um As well understood amongst investors than the deflationary environment, so if you look at page 18.

D

What we've done here is over the past 100 or so years, and let me make a quick comment. We look.

D

On that x-axis for the date, the latest date there is 2018, but given the the frequency of every four.

D

Years, the last data point is actually at the end of 2020.. That's just why we don't see that.

D

Because it doesn't fall into the frequency and if we showed every year, it'd be unreadable so with.

D

That said, what we're showing here is how equities have done amid these different environments, so in.

D

Blue is when inflation is above two percent and rising orange above two, but falling.

D

Gray below to rising and then yellow below to and falling. So if you look all the way.

D

To the right there, the poorest environments for equities, blue and yellow when inflation has been.

D

Above to and rising or below to and falling think about that as moving away from sort of a price.

D

Stability or stable price environment right so that two percent is sort of the fed's goal.

D

So, if we're moving further above two percent equities have not historically done well.

D

Or if we're below two percent and moving further away from it equities have not done well the best.

D

Periods are those orange and gray bars with, regardless of whether or above or below it.

D

We're moving back closer to that two percent. That sort of you know stable inflationary type.

D

Of environment, so that's when equities tend to do well. So circling back to my previous point in blue.

D

And yellow blue is an inflationary environment and yellow is a deflationary environment and what.

D

Could have been what kind of insurance could potentially protect the portfolio around that.

D

So, just on page 19, before we talk about the type of assets that could be helpful, I wanted to dig.

D

Deeper into that inflationary environment right, the mid 60s 70s type period, so this is a similar.

D

Same exercise as the previous page, but we're only showing two of those lines here, because inflation.

D

Was above two percent for that entire period, the only time equities actually gained in that.

D

Period was in orange, so inflation was above two percent and falling. So moving back to two percent.

D

When it was above, two and rising equities did quite quite poorly over that whole 15-year.

D

Period they ended up underwater and at some point during their year an investor would have lost 50.

D

Of their money so again just to really illustrate the importance in thinking about holding. You know.

D

Quote unquote: insurance type assets now equities are the per inequities and equity like assets.

D

Should be the predominant allocation within the portfolio, but these things are cyclical.

D

And we need to think about them from again sort of this insurance type of perspective.

D

What can help mitigate any downside risk if we enter an environment either recessionary or you.

D

Know a lot of people are talking about inflation, potentially picking up in the coming years, so.

D

What kind of assets should we be looking at and in what relative allocations within the portfolio and.

D

Those will be just topics for discussion at future meetings. Questions around that before we continue.

C

All right so on page 20 we will talk about again digging deeper a little bit more deeply into how.

D

You can quote unquote hedge or buy inflation insurance and again it's not well understood.

D

um I think by most investors, so what we're showing here you can see on this x-axis we're working from.

D

Left to right at the bottom, a number of asset classes, the first four are traditional assets.

D

Equities us international, fixed income and cash and the numbers of the bars there are showing.

D

What's called you know, inflation, beta or inflation sensitivity so in a period of high inflation.

D

If you have a number higher than one, history would suggest a return multiple higher than one.

D

Right or an excess of one, and if it's below one and positive it means these assets tend.

D

To do well when inflation's or inflation is rising, but doesn't keep pace with inflation.

D

So if you think about it from a traditional perspective, probably no surprise that fixed income.

D

Really doesn't do all that good. The third barred over from the left was when inflation ticks up.

D

Rates usually go up, bond prices go down. Cash is a little bit of a better story, because there's no.

D

Interest rate risk holding such short-term cash, so the fed at least historically raises rates amid.

D

An inflationary period and cash can provide at least some protection around that.

D

But if you work your way from left to right, starting with cash, you see commodities real estate.

D

Treasury inflation protected securities, natural resource equities and reits. These.

D

Would be considered inflation sensitive type assets but notice the wide dispersion around.

D

Their sensitivity to inflation commodities very very high natural resource equity is really the.

D

Second here, but real estate tips reits, they are sensitive to inflation, but not nearly as much as.

D

Commodities and natural resource equities. So when we think about an inflationary insurance, we think.

D

A lot, similarly to the total portfolio, we want a diversified, total portfolio because there's no one.

D

Simple solution, and similarly, with inflation, given there's no one straightforward solution, we think a.

D

Diversified approach with some of these assets makes a lot of sense for investors to consider.

D

When that type of environment is of concern, you look on page 21. Excuse me a secondary benefit.

D

To holding these assets is diversification right, so if we want to add new asset classes, we want to.

D

Make sure they're not moving in lockstep with what we already hold so across all these inflationary.

D

Sensitive assets, you can see the blue numbers there, that's the correlation with u.s equities,.

D

Red with fixed income, those numbers can range from one to negative one, the lower they are.

D

Means the more diversification that they are: providing: you'll notice for commodities tips and.

D

Real estate, very good diversification relative to equities and relative to fixed income for natural.

D

Resource equities and reits again, these are stocks of companies that own and operate those types of.

D

Types of assets, so they trade as equities, so they tend to have the volatility of equity. So don't.

D

Provide as much diversification as those other asset classes, but then, as you would expect very.

D

Low correlations, almost across the board outside of tips which are fixed income securities, relative.

D

To fixed income for those inflation assets, either just above zero or below zero negative, so there is.

D

The secondary benefit of not just providing you inflation insurance, but diversification across.

D

Just equities and fixed income themselves so to wrap up this discussion on page 22.

D

One of the things that we want to be cognizant of is certainly how these fit in the total portfolio.

D

But you know how would things look like in isolation, so there's a lot of a lot of data.

D

Points on this page we're just showing the risk and return characteristics over the past 40 plus.

D

Odd years for the exact asset classes, we showed on a couple of the previous pages, so I want to.

D

Point your attention to the right here. You can see reits up there in pink natural resources, equities.

D

And lighter blue and commodities in purple in that grouping to the right. So we have a number of those.

D

Assets that provide similar returns to equities, namely reits. You know natural resource equities,.

D

Commodities have been below that, but they've had the volatility or risk of equities and then, if you.

D

Work your way over to the left, namely the blue diamond for real estate and the orange diamond.

D

For tips, these are inflationary, sensitive assets that have provided returns less than equities.

D

But the volatility of tips so again there's no real one, perfect solution. So what I boxed up.

D

Here again, is this basket right, a diversified, sort of inflationary insurance, type portfolio approach.

D

That's just an equal weighted average of all those five asset classes and you can see a return closer.

D

To equities than fixed income, but with volatility closer to fixed income. So again I wanted to spend.

D

A few minutes around this inflationary insurance type of idea, because, as we move forward here and.

D

Talk about it at a more granular level on the asset classes, it's important to keep in mind. You.

D

Know what are we trying to accomplish, not just at the total portfolio level, but with each of these.

D

Individual asset classes, you know what are the role that roles that they were playing. What do we.

D

Expect of them in different environments and are they going to help us as we build this mousetrap.

D

So with that said, let me pause again for any questions before uh continuing.

D

Okay, all right, so the rest of this discussion, I think, will be more.

D

More straightforward than some of those other dynamics. So if you look on page 23.

D

We talked about role in the portfolio, so these are key considerations around alternatives.

D

We're going to talk here in a second about liquidity fees and then the importance of.

D

Manager selection within those asset classes. So if you move to page 24, you start with liquidity.

D

And this is a real dynamic depending on the investment vehicle you use so in blue here.

D

We're showing private vehicles or unlisted funds in gray to the right public vehicles.

D

Listed funds we're just going to focus on the blue here since we're talking about alternatives.

D

So there are two different type of vehicles: one called an open end fund.

D

So this operates in perpetuity. The liquidity is not as good as just say, a public vehicle, but it.

D

Is liquid, it could have monthly quarterly or maybe semi semi-annual liquidity about 12 percent of the.

D

Assets in the fund right now are in those types of vehicles between the hedge funds, the private.

D

And the private reits so that's going to come down, namely when we get those funds back in april from.

D

The private reit managers and then in early july, from one of the hedge funds. But from the closed.

D

End fund perspective: this is a very different dynamic, so right now about nine percent of the.

D

Fund is invested in private equity, private credit, private, real estate and private infrastructure.

D

And that is likely to grow over time, regardless of what we do and I'm gonna explain that in a second.

D

But the important thing around the closed end fund is you, as the investor do not control the.

D

Size and the timing of those cash flows, like you, do with an open-ended fund. You make a commitment.

D

A dollar amount commitment to the manager and they call that money over time and invest it.

D

And then they return it to you as they see fit. So thinking about those dynamics, if you look at page.

D

25 specifically, that bottom row, which illustrates exactly the timeline I just touched on briefly.

D

What these managers will do again, these are closed. End funds is, they will fundraise, so maybe a firm.

D

Raises a private equity fund every couple of years they'll go to their existing investor base.

D

That was a part of previous funds and maybe new investors and try to raise commitments.

D

In some aggregate amount, maybe a billion dollar fund, two billion dollar fund, so they'll do that.

D

For a period of a year, then, you can see the next part of that puzzle. There and investment.

D

Period once they've called you know all or most of the capital to begin to, invest it so invest in.

D

Companies try to improve them from an operational or business type perspective from a four to five.

D

Year period and then you move into what's called the harvest period, just a fancy way of saying.

D

Trying to realize the gains or hopefully the gains from buying those assets and then returning the.

D

Money to the underlying investors, and so money tends to be called from the investors very early.

D

On in those first four or five years and doesn't get returned in in earnest until say years, seven.

D

Eight nine ten eleven, but then this last piece of the puzzle here extension one to two years so.

D

These funds typically have a term of about 11 to 12 years per the subscription agreement, but then.

D

The managers at their discretion can extend the life of the fund, maybe one two or three years so.

D

All told you can have a closed end fund commitment or investment. That's around for 12 to 15 years.

D

And if you think about a lot of the commitments that have been made, it's my understanding that.

D

Many of them been made in sort of 2017-2018. Those are funds that are going to be around.

D

Until 2030, so for quite a while, and just to get back to my point that they're going to grow, it's.

D

Because those commitments have been so early, not a ton of the money has been called yet. So, as that's.

D

Continued to be called it's going to be it's going to outweigh the money. That's returned to you.

D

So it's going to grow over time today, it's 9 of the fund at the end of the year might be.

D

Closer to 10 might go up to 11 and 12 in the coming years, so that is a key consideration.

D

As we shift gears in just a couple minutes to talk about asset allocation, how do we.

D

How do we manage that right? How do we think about that moving forward? Do we still want it.

D

To be a part of the puzzle and if not, we have to manage the migration from it, because it's going to.

D

Take time to do that, so is your recommendation at marquette not to use close in funds? No, it's.

D

Not and I'm sorry I should I should have chosen my words a little bit more carefully. I think.

D

um It's not our recommendation. My my goal here is just to make sure that the board completely.

D

Understands the dynamics around this, the the risks around liquidity, because it can be done.

D

Thoughtfully and done well and and hopefully I'm not speaking out a term. But I think for.

D

For those of you on the opeb board have seen that in the past that has been done successfully and.

D

Thoughtfully and been very helpful- and I think it could be here as well, but it's going to take time.

D

Because the underlying managers, we can't do anything about it right now, they're kind of.

D

In place, we have to wait for it to wind up, but over time to the extent the board would like to.

D

Continue to make allocations to that area, which would likely be our recommendation, would just.

D

Depend on the sizing we make newer commitments to other funds, not necessarily the ones that are.

D

Being used now, managers that we think are sort of the the best in breed in the private markets.

C

I think for us, the moral of the story is now that we know better. We shouldn't go there.

A

And I guess that's that's helpful information because I think before we enter into a fund these.

A

Are kind of the this is the information we need to know in terms of just um kind of the logistics.

A

Rather than just you know on the rebalancing page for me that says, I'm you know take you.

A

Know this asset- and you know subtract from here and add to here and we're kind of tr credit and.

A

Debiting, but these this level of logistics- I don't think we've seen before so I think it's helpful to.

A

Look at that kind of logistics as part of the the material that we get well and you'll also.

C

Remember that when we were getting our quarterly reports from our previous advisor, there was a.

C

Big chunk, which couldn't be reported on because they had no way to determine evaluation. It took.

C

Forever so this isn't like opening the paper and seeing what the price of xyz is. We didn't know.

C

And I think that alone would carry the day that, let's not do this anymore and to the extent that.

C

We're doing it now, I think our problem is, do we put in for liquidation or let these things age out.

C

Simply because we've already boarded that ship and it has sailed- or we can just remain cognizant- that.

E

We have this uncalled money that is sitting there, that we really haven't seen that level of detail.

E

On so on our balance sheets and rebalancing, we just see okay, we're gonna. Typically, they would.

E

Tell us we're gonna take one percent. Whatever I'm making up the number we're gonna take one.

E

Percent rebalance it over here terminate this one and then out of that one percent might be.

E

You know I'm making up the number, obviously a million dollars, but only 200 000 is going to.

E

Be called so now we have the opportunity cost of 800 thousand sitting there for two or three years.

E

So as long as we're, not overweight in opportunity cost so to to be clear, the the funds that are in.

D

There now they are set, there's largely nothing that we can do about it. Okay. So when we talk about.

D

Rebalancing it's it's! Not the private market funds. They're gonna have to continue to play out over.

D

Time, but to your point sergeant uh moving forward. If you make a commitment of a million dollars and.

D

There are a lot of unfunded commitments in the current ones. It doesn't just sit in cash. The.

D

Manager doesn't call the money immediately, they give you a notice of about 10 days and then you.

D

Figure out where the money is coming from largely it's from existing cash, because any other sort.

D

Of rebalancing or execution would require board approval. So that's why we carry typically two-ish.

D

Two and a half million dollars in cash just to mitigate that risk of not having it be there. When.

D

The amount money is so, are you saying that money in this example has not already migrated over.

C

And is looking for application or it's on our books, but is obligated to migrate the latter so.

D

You have on you've made venom. I apologize, I don't have the data in front of me, but commitments to.

D

Probably about 12 dozen closed end funds. I think I think the on the current allocation again is about.

D

um Nine percent of the total fund, which works out to about eight ish, seven or eight million.

D

Dollars, but from an unfunded commitment perspective it's higher than what those.

D

Managers have already called because again you didn't commit until two or three years ago, so they.

D

Just started calling that money, so could that be one of the things we look at as next steps.

D

So that what you're describing the list of the 12 that the board would have that information as well.

A

That would be a part of our our normal quarterly performance report, but I'm happy to provide at.

D

The next meeting, if you like dr bridget, one more question, then if it's on our books is obligated.

C

But it hasn't been called yet. Is that a means by which we can withdraw from the call.

C

No okay! So how? If you it's a legal, binding agreement, uh if you were to.

D

Not make a capital call, then it's likely you'd forfeit your interest in the partnership. So.

D

Including the hundreds and thousands of dollars you've already um had called and they're counting.

C

On that being available, someday, yes, okay, so should we have an um in our ips, the ceiling of which we.

E

I don't think we do. I you, I I think you do. You know it's been a couple years and I know we're.

E

Going to revisit it down the road with you guys, but I just want to we've never had this in-depth.

E

Conversation about uncalled right and those are and we're we're going to get into this.

D

In just a few short slides that really the the tools of resources and you'll see this in the.

D

Performance report moving forward where we'll list all the closed end funds. The current values.

D

The what they've called what the commitments are and therefore the the difference of the two was.

D

What's left unfunded and then we'll show you the performance on the individual funds in aggregate.

D

And you can compare that to public markets and say well, these are illiquid private market funds.

D

Would we have been better off just leaving it in the public market, so that'll be a part of our.

D

uh Regularly uh quarterly performance report. But if you would like us to.

D

Put together something just on a quick spreadsheet for more granularity happy to to do that and pass.

D

It out uh prior to the next meeting or bring it to the next meeting, whatever the course is fit.

A

Yeah, I just think it's helpful information if we have it for the next meeting, whichever format.

A

It flows, I think it's helpful, but but yes could there not be a trap in that. So if the.

C

Investment period could be four to five years, theoretically, holding it up against the public.

C

Market doesn't work because the public market is doing its thing right now, where the other thing.

C

May not be fully committed correct, so you largely do not want to compare these types of investments.

D

To the public market until they're, eight nine year, eight nine ten years old, to give you a good.

D

Sense of that you know not only to mr walters, by which point it's too late. Well, I mean now.

D

It's largely um for the current allocations. You know. Okay, we will keep monitoring them.

D

And you'll be able to see that information about how they've been doing relative to public markets.

D

Okay, so let's skip to page 26 and we'll talk briefly about fees and manager selection before.

D

Beginning to wrap up so I think we've discussed this regularly in the past. As far as private.

D

Markets, typically, management fees, uh two percent for direct funds; those are most of the funds.

D

In the in the plan right now, direct meaning that these companies are, these firms are.

D

Investing directly in portfolio companies and deals uh about half a percent to a percent.

D

For fund of funds, you do have a couple of those meaning that you allocate to investment manager.

D

They commit the money to direct funds underneath that, so you do have both levels.

D

Of fees for the fund of funds and the underlying, and then there are the incentive fees so typically.

D

Again, 20 of profits are shared above, what's called a hurdle or a target rate of return. Typically 8.

D

Or a direct fund similar for a fund of funds, but the incentive fee for the fund of funds is much.

D

Smaller for that, but again the underlying fees are within the underlying funds that.

D

That fundament fund of funds managers can be committing to excuse me. So when you think about.

D

Again, you know, why would you do this to some comments earlier? It really goes back to the.

D

Role in the portfolio right, we would expect or hope for once you make this decision a return.

D

Premium relative to public markets over the long term to compensate you for the illiquidity.

D

Of that sort of investment and then secondarily related to that, if it doesn't fall in the growth.

D

Engine bucket and falls into the insurance bucket, then that diversification, so those.

D

Are the two main reasons just to sort of tie everything together that investors.

D

Consider these and finally for manager selection, the big takeaway here. This is a pretty neat chart.

D

Put together by j.p morgan, where it's showing all the managers that fall under these respective.

D

Asset class universe on the x or horizontal axis there and you can see for those first three rows.

D

The orange line is the median return, the the dispersion isn't all that great meaning that.

D

Choosing to allocate those asset classes are really going to be the biggest driver.

D

Of your outcome, whereas the individual manager returns how they deviate from one another, more.

D

Of a marginal impact where it sort of flipped on its head is, if you look everything right to.

D

Core real estate, their non-core, real estate, private equity, venture hedge funds,.

D

Look at those ranges right. The manager dispersion is incredibly wide. Many many multiples.

D

Of what the traditional asset classes are so again, the key takeaway here is, if you choose to.

D

Maintain those sorts of allocations that it's very important to have access be able to commit.

D

Capital to the really the the best performing managers, because the best performing managers.

D

Tend to be persistent so in the public markets, there's some cyclicality around how managers.

D

Do because they can be in and out of favor, depending on, what's broadly going on in markets.

D

But on the private side, it's generally the same guys who have access to the same deal the same.

D

Deals coming their way, the same deals and company deals that they're reviewing and sort of have.

D

You know first dibs at those best deals, so the manager performance tends to persist. So it's very.

D

Important to have access and be able to select those top performing managers, as you can see,.

D

Based on this dispersion in those asset classes, what would be an example of non-core real estate.

D

So there's really three major components to real estate to be core, so you know.

D

Well-Established high-lease properties like in the office space apartment space.

D

Industrial space retail space, when you look at non-core, there's two differences number one.

D

It could be the type of property so more, like hotels, senior assistant living medical offices.

D

Things of that nature, but then also the life cycle of the property itself.

D

So buying just a piece of land that doesn't have a building on it or buying a building.

D

That's just been built and has no occupancy, so those are the two risk components which.

D

Which make that a more aggressive than just your regular core real estate? Thank you, you're! Well,.

D

So we'll wrap or we'll we'll spend a couple quick minutes on the next slide.

D

Talking about asset allocation tools and resources and then wrap up with next steps.

D

So, on page 29 again since we're on a you, know, sort of total portfolio high level here and we're going.

D

To look at doing an asset allocation study in the next couple of months, I just wanted to give you.

D

Some quick context on some of the uh charts, graphs and and data that we'll be providing to. Hopefully.

D

Help in the decision making process so the rest of these charts in this deck are more illustrative. So.

D

One of the things we'll do based on the conversations and discussions, particularly.

D

Related to alternatives is, you know, put together a few portfolio options. You know, based on relative.

D

Equities, fixed incomes, alternatives to the extent the board would like to continue.

D

But then show you the base case outlook there at the bottom below over the next 10 years.

D

What's a base case return what's a base case, risk or volatility, but related to that we're.

D

Also highly concerned about the range of outcomes right because I can tell you almost without you.

D

Know with complete certainty that the base case is not going to come to come to fruition to the base.

D

Basis point over the next 10 years, so we look at that range of outcomes. Where are the risks.

D

So, on page 30, it's a similar type of exercise, but looking at the distribution of returns, not just.

D

The base case, so when anything below 50, there is more of a worst case type scenario above 50.

D

Best case type scenario, but again we're keenly focused on that downside, because that's where.

D

Risk tolerance, risk constraints, risk management tended to really come out in these discussions.

D

You know: can we live with this in 10 years? If the worst case scenario is looking like.

D

We're going to be xyz lower than the assumed rate of return, because that obviously has big.

D

Implications from an asset perspective, a funded ratio perspective and then a budgetary perspective.

D

To the extent that those returns come in south of the assumed rate of return related to that.

D

On page 31, we will work with our counterparts at bolton to gather projected cash flows and.

D

Liabilities, so we can show you the range of outcomes as it relates to the funded ratio too.

D

So not just looking at returns, but you know make it more unique and specific to this fund.

D

And show you again the range of outcomes between, in a a very poor scenario, a really good scenario.

D

In that base case again, we find the former being very highly conducive to those discussions around.

D

Risk tolerance and risk management from a strategic sort of policy perspective.

D

And then, finally, on page 32, a lot of those previous charts and datas and graphs are around 10.

D

Years but historically, when we have poor markets, they tend to be happen in bursts sort of one two.

D

Three years and then things recover, so we have the ability to look at how these various portfolios.

D

Would have done in the financial crisis in black monday of 1987, where an interest rate increases.

D

Like we saw in 1981 in 1994 or even simulated going forward, you know what would things look.

D

Like if rates moved up by one percent a year, what would things look like if equities did.

D

Poorly for the next three years so again just an additional risk management tool to help the board.

D

Make a decision as it relates to the investment policy statement, but specifically asset allocation.

D

Questions around uh any of that, I will wrap up on the next two pages before we hit next steps.

C

um Back on yes, sir page 30, yes, sir, what is our target returned for? What we're shooting for to.

C

Meet all of our future obligations: seven and a quarter seven and a quarter yeah, and this.

D

Is illustrative too so not specific to this fund, but just answer your question: seven and a quarter.

C

Am I misreading the bottom chart on page 29 that we're nowhere near the target.

D

This is I'm sorry, this is illustrative, this isn't the fund. This isn't the sheriff's fund itself.

D

This is just to give you a sense of when we get into the june time frame. You know what are.

D

The sort of exhibits and data and analysis that we'll be providing, but since we don't, we haven't.

D

Fully had the discussions around asset allocation and alternatives, we didn't prepare it. So I just.

D

Sourced this from a previous client presentation to show you the type of analysis, but this is not.

D

For the specific fund, current is not applicable to us. Yes, sir, this.

D

Is a sample just a sample? Yes, thank you doctor. Thank you much better words, though,.

B

Start my heart again and I'm going god, it looks like the same numbers from the prior presentation.

B

Now I know oh well, yeah, that's right! That's right! Thank you. Our business is all about scale.

D

So I think these next two pages will be instructive on 33 and 34. Getting back to.

D

Some of those conversations around closed end funds and how do we manage them so in internally.

D

We have, as you look at page 33, that header there what's called a private market commitment model.

D

So what we have the ability to do is take your unique characteristics. The market value return.

D

Cash flows and the previous commitments you have made and then look at that historically.

D

You can see this graph here on the left and then projected in gray, going forward.

D

Specifically around the cash flows coming in and out of that specific part of the portfolio.

D

So this is instructive here, if you think in 2011 this is sort of the beginning of this respective.

D

Program so you know, those lighter blue bars are very negative because money is coming out of the.

D

Fund moving into the managers, and then you can see later on it sort of shifts right, more money.

D

Coming back in those top purple bars as money is being harvested and returned.

D

But the key dynamic. If you look on page 34 again to the extent that we'd like to continue with an.

D

Allocation of these asset classes, it's something that we'll have to run every year to say not just.

D

What the ultimate target is, but how do we get there? So if you look on this, this.

D

Blue line here on page 34, it's just an illustration of a again a sample of the.

D

Client that made a private equity allocation it increased early on, as you would expect.

D

As the managers called money and then it tailed off in the back half of the.

D

Exhibit because no new commitments were made, whereas the green one was essentially saying.

D

What would play out or how are you going to get to your target allocation so again, to the extent that.

D

They continue to be included. This is something we run every year to determine. What's called.

D

The pacing right so how many dollars each year should be committed to a certain asset class and.

D

Then from there the implementation so making up a number three million dollars. Do we want to commit.

D

That all to one fund or do we want to split it across two or three. So this is something internal.

D

That we're constantly doing, but I think it's it's important for the board to be cognizant of.

D

And if we do continue moving that direction, we're not just bringing these numbers, you.

D

Know: you've historically made million and a half million two million dollar commitments.

D

It should be xyz per year to get you where you want to be and then split it across. You know.

D

Xyz respective managers so again just a sample of the type of tools and resources that we'll provide.

D

So with that, we'll wrap up behind exhibit five and then happy to answer any comments or questions and.

D

Particularly around the the timeline moving forward here under next steps.

D

So in the april meeting, as I mentioned, the plan is to dig a little bit deeper in the current asset.

D

Classes, um you know, namely alternatives. You know what you're using now are we still comfortable.

D

With that talk about the relative merits and any possible new ones moving forward, if that.

D

Leaks into the june meeting we'll continue that discussion. We'll also have the performance report.

D

To to walk through it at that time, um if we have everything wrapped up, we can move into sort of the.

D

Asset allocation study- you know showing you the data analysis that I illustrated a few minutes.

D

Ago and then, subsequent to that, once we have our our long-term road map from an asset allocation.

D

Perspective we'll look at updating the investment policy statement, um just the target allocations.

D

And just ensuring everything's in line with best practices and then the circle back to the earlier.

D

Comments related to wells, fargo shift gears into that custody. Evaluation. Yes, sir, take take that.

C

Last topic off the table: yes, sir, go back one notch about growth allocation and then the next one was.

C

The investment policy did I hear those in the right order. The the growth allocation.

D

uh Maybe asset allocation? Oh I'm sorry! Yes, the the asset allocation. Yes, so that would be first.

D

Right because we need to know what that is before, we can incorporate it into the investment policy.

C

Why don't we let the investment policy drive what it should be um for the current.

D

Investment policy drive what it should be. No, I think the current investment policy is.

C

Kofi, so are you I'm sorry, I don't know that I'm completely following well.

C

What I'm coming at is, I think we ought to have the structure of the document in place.

C

And allocate to that rather than allocate to the old document and then rewrite the new one.

C

Oh, we won't be allocating to the old so like we talked about today, this has largely been around an.

D

Implementation based on the exist on the existing document, so when we look at asset allocation, we'll.

D

Look to it, you know immediately subsequent to that update the policy statement. So it's it's.

D

My hope say we were able to do the june asset allocation study that we would have a draft for.

D

You all to review at the next meeting. I wouldn't expect you to approve it based on just looking at.

D

It once, but hopefully we can use that time for feedback and discussion and then maybe at the.

D

Next meeting and then once that's in place that incorporates the asset allocation targets as well.

D

As any changes as it relates to best practices, and then we circle back to implementation, once more.

A

And so maybe it's the word study what you're thinking, because I think what you're talking about.

A

Is june meeting is really the asset allocation study. That's kind of the results of everything.

A

Correct and so we want to use that information to then start to review the investment policy.

A

Statement right exactly so: it's not rebalancing and re not taking any action based on the old.

E

Policy statement correct: it's just information nothing's going to be done until we have our new.

E

Statement, but to get there, we have to do the asset allocation study and then determine what the is.

E

Ips looks like from there and then we'll do rebalancing from there.

E

But correct: don't we have the data of how we're doing now incorporated in this document.

D

The data of how you're doing now yeah how we're spread out how we're allocated sure it's on page.

D

Way back, uh I'm going to say 11 or 11 or 12. Perhaps.

A

Age 11.. Thank you, dr bridget, so.

D

Right so the the so this page is showing the respective allocations across the various.

D

Asset classes in the managers, but then, if you look below in that bottom left-hand box,.

D

You can see the respective asset classes and then in blue. Those are the targets.

D

Based upon the current policy, so we're making any decision as it relates to the.

D

Current policy, because that's you know our road map as things stand here today,.

D

Which will hopefully, which my attention hopefully to update and change over the next several months.

D

And then we'll be working along the confines of whatever the board approves as it relates to that.

C

I'm still, I guess I'm still not grasping the notion that as we as we work toward the target.

C

Here in the bottom, maybe that's not the target. We want right and that's what the asset allocation.

D

Studies is is intended to answer by that time. Haven't we already made some of these shifts? Yes,.

D

All the ships have all of these shifts were have already been made, but within the confines of the.

D

Current policy and so there's a freeze except for what we talked about earlier, there's a freeze then.

C

On doing anything, pending a new investment policy document, not a freeze in the sense that they're.

D

You know when I come back in april, if there's other rebalancing to consider that can be under.

D

Consideration as long as it's within the confines of the current statement from what I saw of the.

C

Current statement, I don't think that um that reflects where I personally would want us to go.

D

Right and that that's why the the asset allocation study, I think, along with the eventual update of.

D

The document can be tailored to where the board in aggregate wants to go. Okay right, I'm sorry, I.

D

Feel, like I'm, not answering your question, but I feel like I'm not phrasing it properly so.

C

Don't worry about it? Okay, can we go back to your efficient frontier page? Please? Oh yes, sir! On page.

B

16. 16., thank you miss pratt. Thank you. Yes, sir.

C

So as we follow the ark out to the right.

C

Theoretically, we would reap a greater reward, but we're taking a greater risk to get there. Yes, sir,.

C

Conversely, if we stay at the lower left end of the ark, it's just the opposite. Yes, somewhere on.

C

That arc is an ideal spot where we would probably expect, but not necessarily get.

C

But expect the best return for the least risk, not the best return period and not the least.

C

Risk period, but where would you guesstimate that percentage stocks bonds should be at the.

C

Ideal point solely solely thinking from a stocks and bonds perspective solely from those two.

D

So that depends right. We have to take into consideration.

D

The assumed rate of return right, which is right now, seven and a quarter percent.

D

So we would argue uh that equities are a little overvalued relative, his to history and if we, when.

D

We do these studies it's more on a 10-year type basis, so it could be as high, particularly given.

D

Interest rates are so low, so fixed income is providing such subdued returns. That.

D

You know the appropriate mix based upon your target could be as high as like 85 15.

D

90 90 10, but if we're not concerned about that assumed rate of return, I'm not saying we're not.

D

But you know, with the the mix with the highest uh risk, adjusted return would would be much more.

D

Heavily weighted towards bonds than equities, but your return outlook would be very, very low.

C

Okay right, so I think it's a function of.

D

The investment objective, which is very clearly seven and a quarter.

D

Right so, unless the board is comfortable with having an allocation that is lower than that.

D

That would be less equities, more fixed income and a higher risk, adjusted return. But if you're not.

D

Hitting that actuarial, assume rate of return, then technically you're at an actuarial loss.

D

Right you're not making the money, they expect you to make. Therefore, your undead fund, your.

D

Unfunded liability goes up, your mortgage payment goes up and it hits your budget.

C

Well, I don't know that you advise these folks, but if we look on page 14, talbot county has a 65.

C

35 percentage they're doing nothing over there in alternatives, and I wonder how they're doing.

C

With that percentage, I don't have that in front of me. I'd be happy to try to dig it up. They are not.

D

A client of ours, but typically when you look up and down this page, mr walters, where you do not see.

D

uh So say the the um look at talbots see if there's any other good made calvert.

D

They tend to be, and please correct me if I'm wrong the smaller counties that can't necessarily access.

D

Some of the other investments that we talked about today so and these things are cyclical right over.

D

The past 10 years, 65 35, simple, straightforward, has done the best. By far that's largely been driven.

D

By a very strong environment for equities and interest rates that have continued to come down.

D

So if we look forward over the next 10 years and again remembering that things are very cyclical.

D

Can we expect you know 12 compounded for equities over the next 10 years, but I'd.

D

Argue no can we expect five percent from fixed income that we've seen over the past 10 years.

D

Well, I think I think, since we're an open-ended timeline here yeah, it would be interesting to know.

C

65 35 back 20 years or 25 years, how it has done because you're going to have those 00102 pullbacks.

C

Pretty much going to slam everybody sure and then you're going to have the v-shape.

C

What was 08 fairly short and then march of last year, fairly short.

C

It all smooths out one way or the other, but I'm just kind of curious how they're doing without.

C

All the bells and whistles tacked on to what appears to be their allocation.

C

Of 65-35 yeah and admittedly I don't know it because we don't work with them. I again, I would.

D

Suspect it's better than a lot of these other funds, because it's more simple approach has been.

D

Very helpful, particularly given rates, have come down so much so fixed income has done so well.

D

But we think about these things retroactively, but also prospectively right, the 10-year at one and a.

D

Half percent today, over the next 10 15 20 years I mean over the next 10 years, one and a half percent.

D

10 ranks gonna, give you one and a half percent right, so if rates rise over that time, even if.

D

Say four and a half percent over the next 20 years, you're looking at three percent right.

D

It's just a simple average, um but your points while taking and to the extent the board would.

D

Like to look at a more simplified portfolio, happy to provide the information around that, but also.

D

You know make you cognizant of the relative merits specifically around fixed income and the headwind.

D

That is going to provide given low rates. So it's it's going to be hard to hit seven and a quarter.

D

And that obviously has budgetary implications all right. Thank you. You're welcome.

A

A

Thank you. I know we were on next steps, so I think we were final anything else on next steps.

A

That was the last one: yeah okay, great.

A

Thank you very much. I appreciate it. Thank you. Thank you for your time, good questions.

A

uh And for old business we have, uh 4a is fiduciary insurance and uh catherine pratt.

A

I'll turn it over to you. Thank you, dr bridget, and this was in response. Mr walters had a question.

B

About our fiduciary insurance renewal, that was on the planned administrator report last meeting and.

B

Thank you to karen. She did a little digging to find out the history of our fiduciary insurance.

B

And we are with the broker our cmd riggs councilman, michaels and downs since 2009.

B

With a policy effective date of february 1609.

B

The insurance policy has remained with chubb since that time and the the premium increased in 2018.

B

Because we changed the limits of the coverage from a million to three.

B

And that results in an annual annual premium of the 17 909, which was just paid.

C

Was that jump by two million dollars was that dictated by anything or.

C

Recommended based on our exposure or what it was recommended by the plan um attorney.

B

Mary claire cheshire right and although we are with chubb, have we been able to.

C

Access the landscape to see if we can get similar coverage for a lower premium, so we haven't and.

B

I appreciate your question because we also hold fiduciary insurance with the other county trusts.

B

And we tend to look at them in isolated, buckets and just recently, dr bridget and jeanette, and I.

B

Are looking at a schedule for rfps, and one of the proposals is to look at all the fiduciary.

B

Insurance coverages together and consider going out for bid. Currently the sort plan is.

B

Under the threshold for the for the bidding process, but if we were to combine all the.

B

Coverages we would exceed the threshold kind of as a side question. Would that wrap anything that is.

C

Coverage for the library board, not typically yeah, could it.

A

We can check yeah to see okay, thank you, okay, they might be able to piggyback on our contract right.

A

Great anything else on this item for fiduciary insurance, good information, okay, great and we'll.

A

Keep you posted so as we're doing our schedule, uh we'll we'll circle back and let you know what the.

A

Outcome is, uh and 4b is marquette associates, catherine, yes, thank you. This is another follow-up.

B

Item we seem to um focus so much on fees this year and one of the questions came up about the.

B

Marquette contract and how marquette is paid and attached is the fees that have been agreed.

B

To with the marquette contract that was approved in november, and then this is the amount for all.

B

The trust combined, yes, this is all the trust combined. Yes, thank you. Thank you jeanette. So.

C

Is that is that bill proportionally laid off on each of the trusts? Yes, yes, based on the assets.

C

Okay, so where do we rank asset wise compared to our two trust? Colleagues, are we 80 percent.

C

Of that, the memory I think oppeb is the opposite 110 and we are oh 123. not too far off right, yeah.

B

So uh the sort plan is about 123 million ope is about 110 million and so and low sap is 6 million.

C

Okay, so we we share in that rough ratio. Okay, yes,.

C

Is? Is that a fixed number, or is that a.

C

Is it a percentage that's applied, or how? Where do we come up with that number.

B

Please a a fixed number meaning so that per the contract. It's a set dollar amount. So as the.

D

Relative allocations and percentages change, then there could be marginal changes in how the funds.

D

You know the proportional, you know charge. So if we have a lot of growth here and the other two don't.

C

We're going to share a bigger percent of the bill that that's my understanding. Yes, is that.

C

Correct, yes, sir, but does the bill change because it's based on asset growth, that's a fixed. It's a.

D

Fixed fee- okay, yes, yes, non-asset based all right, so that first number 235 we're good for that. Our.

C

Share of that for four years: yes, yes, sir, all right again, it could change marginally based on yeah. Yes,.

D

But that is that's a fixed fee, we're just dividing the pie differently. The pie hasn't changed.

D

Yes, all right. Thank you great. Thank you for the information, any other questions on this one.

A

Okay, great thank you committee reports, uh administrators report, karen.

F

Okay, we have one bill that was paid and that was from our plan attorney whiteford taylor.

F

And preston, the amount of the invoice was for twelve hundred dollars, and that was regarding.

F

uh The plan attorney responded to a former participants, ex-spouse's attorney regarding.

F

Which language to include in the qualified domestic relations order, which was presented.

F

To the plan coordinator and then the plan attorney reviewed some morgan.

F

Stanley documents in the contract- and there was a conference- call with the sort plan administrator.

F

That's it I'll move to approve a second. Thank you. We have a motion and a second to approve.

A

The administrator's report any questions hearing none all in favor any opposed.

A

Motion carries great, thank you and because we opened uh last week to the public, with social.

A

Distancing guidelines- public comments is back on our list. Is there any public comments for today.

A

Hearing none we'll move on to uh to uh number seven is closed session, so I need a.

A

Motion to go into closed session to discuss legal advice and then we will adjourn our open session.

A

uh Close the meeting uh to the public so that you have an opportunity to.

A

uh Consult I'll move to exit open session and go into closed session for the purpose of.

C

Discussing legal advice, thank you appreciate it. Is there a second second, any discussion.

A

All in favor any opposed motion carries. Then we go into uh adjourn the public meeting. Please.

A

Is there a motion to adjourn a move to adjourn the public meeting? Thank you, sir. Second, second.