Minutes of the Archives Partnership Trust Board
Investment Committee Meeting
10:00am, June 6, 2012
Cultural Education Center, Room 11G, Albany, NY
Investment Committee Members Present
Barbara Brinkley, Board Treasurer and Committee Chair; John Hanna, Jr., Board Chair; Harold N. Iselin and Stephen Pagano (all attending telephonically)
Christine W. Ward, Assistant Commissioner for the State Archives and Trust Executive Officer; Robert Bullock, Trust President; and Jill Rydberg, Board Assistant Treasurer and Administrative Officer/Director of Prospect Research
Paul Murray, First Vice President, Investments, Janney Montgomery Scott LLC (attending telephonically)
Investment Committee Members Excused
Call to Order
Ms. Brinkley called the meeting of the Investment Committee to order at 10:05am, noting the presence of a quorum. She noted the purpose of the meeting was to discuss how to invest the relative abundance of cash on hand.
Ms. Brinkley first asked Ms. Rydberg to remind the Committee how much cash was available. Ms. Rydberg reported that there was about $249,000 in cash, with only about $35,000 of that available for investment due to current fiscal year commitments; and combined with CDs of $95,000 and $55,000 maturing in June and July respectively totaled $185,000 available for investment. Mr. Murray noted cash was being held in the money market, as it is a suitable place to hold cash as there are not many alternative investments for short-term (6-12 months) liquid funds.
Mr. Murray gave a snapshot of where the portfolio stands, reporting:
- The portfolio is still relatively heavy on equities at about 65-70.0%, with pure fixed income exposure at about 28.0%. He feels the portfolio is near its limit for equities.
- After taking a hit along with everyone else, the market has stabilized a bit this week.
- Treasury rates are at historic lows: the 10-year Treasury, which typically sets the tone for the rest of the bond market, at 1.6%, and the 5-year Treasury, setting the tone for short term investments, at 0.7%. He said there are investors who are willing to accept these rates in exchange for safety.
Mr. Murray noted that there are higher yielding investments available but they come with risks. He presented three possible strategies (or a blend of these strategies) for reinvesting the excess cash:
- An ultra conservative strategy – a no-risk, laddered approach of FDIC-insured CDs not exceeding 4 years, for preservation of capital. Ms. Brinkley asked if it was fair to characterize this as opportunity cost. Mr. Murray said yes, but there would not be principal risk if held to maturity. He countered that should rates not improve, we risk losing the opportunity of the current rates of 0.8%, 1.1%. or 1.3%. Mr. Hanna asked about the downside. Mr. Murray said the only downside would be if interest rates were to suddenly skyrocket we’d be stuck with low returns; and if the holdings were sold, they would be sold at a loss of principal. He anticipates the chances of interest rates spiking are low; with a flat rate environment likely continuing for the next couple of years. He looks at this strategy as a money preserving proposition.
- A conservative strategy – bond funds offering better yields than CDs. The portfolio’s Vanguard Short Term Bond Fund Index (VBSIX) has done its job well, giving a good steady return without a lot of risk, and has been a good short-term vehicle. However, with about $300,000 in this fund, for the sake of diversity he would suggest looking at other complementary funds with similar style and objectives that have the potential for higher returns such as PIMCO Low Duration and PIMCO Investment Grade. He said PIMCO is one of the largest and most well-respected bond fund managers in the industry. He said that PIMCO Low Duration is an apples-to-apples comparison to VBISX, and has consistently outperformed it. Ms. Brinkley noted she had researched PIMCO Low Duration in more depth and learned it allows some below investment grade (B) bonds, so does not meet the Trust’s current Investment Policy and Guidelines. Mr. Murray noted it does allow for a small (10-15%) non-investment grade holdings. Ms. Brinkley looked at the Vanguard Ginnie Mae fund and said it had comparable returns and holds only 100% investment grade bonds. Mr. Murray agreed that was in line with other Ginnie Mae funds and that one reason he had overlooked Ginnie Mae funds is that they are the next step above Treasury bonds and are priced high right now. So one short-term risk is if interest rates go up, Ginnie Mae funds would suffer a decline in price. Ms. Brinkley asked what the SEC yield was. Mr. Murray said SEC yield is the annualized dividend based on the most current monthly payment. Ms. Brinkley noted the Vanguard Ginnie Mae’s SEC yield of 2.69% falls in between the yields for PIMCO Low Duration and PIMCO Investment Grade of 2.1% and 3.49% respectively.
- A moderate option – look to some income-oriented exchange traded funds (ETFs) as the stock market offers the opportunities for higher yields than do bonds. Mr. Murray said many investors are looking to the stock market for income opportunities, but it comes with the uncertainty and risk of the market. He noted ETFs will therefore participate in the downside as well as the upside. The ETFs offer a little higher return for additional risk, but are attractive because they are liquid. Mr. Murray reviewed three ETFs that could serve as a mildly conservative way to add more equities:
- SDY S&P Dividend ETF: invests in companies that have consistently increased their dividends for 25 consecutive years or more; with a current price of $54.20 and a dividend yield of 3.25%
- DVY iShares Dow Jones Select Dividend: invests in companies with strong dividends history; with a current price of $54.90 and a dividend yield of 3.43%
- XLU Utilities Select Sector SPDR: invests primarily in electric or natural gas utility companies (about 30 different companies); with a current price of $36.03 and a dividend yield of 3.85%. For a little better yield, utilities tend to be very predictable and relatively conservative. He added that utilities have attracted investors over the last couple of years as people look for safe higher yields, but if interest rates were to rise (historically, utilities are sensitive to interest rates more than anything else), investors would sell utilities and go back to the safety of bonds.
Mr. Pagano said that in some ways all the options seem relatively conservative compared to equities and how they have been performing in recent weeks, so he is comfortable with any of the three strategies as none are paying great dividends or interest rates.
Mr. Murray again cautioned that the portfolio in his opinion is near the limit of exposure to equities and said that he leaned toward a blend of the ultra conservative and conservative strategies. Mr. Hanna said he liked the utility ETF’s return and that it didn’t seem like it should be particularly volatile. Ms. Brinkley then asked Mr. Murray for a proposal given that what she had been hearing regarding investment and operational concerns is a need for laddered maturities and an interest in picking up additional yield through a bond fund and/or an ETF, so likely a blend of the three strategies. The Committee concurred with a blend of the three strategies.
Mr. Murray then proposed a blend of the three strategies to include: $40,000 in a 3-year CD at about 1.1%, $40,000 in a 4-year CD at about 1.3%, $40,000 in the Select Sector SPDR Trust SBI Utilities ETF, and $65,000 in the Vanguard Ginnie Mae (VFIJX). He added that such a blend offers a laddered approach yet the core remains a fixed income component, and serves as a prudent approach. He noted this proposal results in a weighted average yield of about 2.5%.
A motion to approve a resolution directing that Janney Montgomery Scott use about $185,000 in cash to purchase $40,000 in a 3-year CD at about 1.1%, $40,000 in a 4-year CD at about 1.3%, $40,000 in the Select Sector SPDR Trust SBI Utilities ETF and $65,000 in the Vanguard Ginnie Mae (VFIJX) was made by Mr. Hanna, seconded by Mr. Iselin, and unanimously passed.
Resolved, That the Archives Partnership Trust Board’s Investment Committee, at its June 6, 2012, meeting approved directing Janney Montgomery Scott to use about $185,000 in cash to purchase $40,000 in a 3-year CD at about 1.1%, $40,000 in a 4-year CD at about 1.3%, $40,000 in the Select Sector SPDR Trust SBI Utilities ETF and $65,000 in the Vanguard Ginnie Mae (VFIJX)
Mr. Murray recommended moving forward immediately with the implementation since there is sufficient cash on hand, and simply replenish the cash with that from the June and July maturities. The Committee concurred with immediate implementation of the agreed-to investments.
A motion to adjourn the meeting was made by Mr. Pagano, seconded by Mr. Hanna, and unanimously passed. Ms. Brinkley adjourned the meeting at 10:59am and thanked all for their participation.
Jill A. Rydberg
June 18, 2012