Archives Partnership Trust Audit Committee Meeting: April 28, 2011

Investment Committee Members Present

John Hanna, Jr., Board Chair; Harold N. Iselin; and Stephen Pagano (all attending telephonically)

Staff Present

Christine W. Ward, Assistant Commissioner for the State Archives and Trust Executive Officer; Robert Bullock, President; and Jill Rydberg, Board Assistant Treasurer and Administrative Officer/Director of Prospect Research

Others Present

Paul Murray, First Vice President, Investments, Janney Montgomery Scott LLC (attending telephonically)

Investment Committee Members Excused

Rosemary S. Vietor

Call to Order

Mr. Hanna called the meeting of the Investment Committee to order at 9:33am, noting the presence of a quorum.  As Mr. Iselin would need to leave the meeting early, it was agreed to first address the resolution to amend the prior meeting’s minutes and discuss how to invest the proceeds of a CD maturing in June 2011 vs. cash needs, and then continue with Mr. Murray’s report on the portfolio.

Resolution:  Approve Correction to the Minutes of the January 19, 2011, Investment Committee Meeting

The first item was a resolution to approve correcting the minutes of the January 19, 2011, Investment Committee meeting to correctly reflect the actual discussion and action taken concerning the investment transaction recommended by Mr. Murray and approved by the Committee (this is not a change to the decision made).  The minutes had listed purchasing only the iShares S&P Smallcap 600, but the actual discussion and decision was to purchase both the iShares S&P Smallcap 600 and SPD S&P Midcap 400.  The motion to correct the minutes was made by Mr. Iselin, seconded by Mr. Pagano, and unanimously passed. 

Resolved, that the minutes of the January 19, 2001, Investment Committee Meeting now correctly reflect the actual discussion and action taken concerning the investment transaction recommended by Mr. Murray and approved by the Committee, and read as follows:

“Mr. Murray suggested that index funds could be an area in which to increase exposure for the Trust’s portfolio.  Mr. Hanna asked Mr. Murray if he would recommend selling the balance of the Washington Mutual Fund holding, and if so, where to invest the proceeds.

Mr. Iselin joined the meeting at 11:15am, and Mr. Hanna apprised him of the discussion on the table.  Mr. Hanna asked the Committee for their thoughts on selling Washington Mutual Fund.  Mr. Iselin said he would like to hear recommendations from Mr. Murray, and advised needing to be extra conservative, yet fixing holdings that aren’t working.  Mr. Murray said he would recommend moving the proceeds of Washington Mutual Fund along with the nearly $30,000 of cash to more aggressive small- or mid-cap index funds, such as the iShares S&P Smallcap 600 Growth and the SPDR S&P Midcap 400, as the portfolio currently has only about 15% allocated to small- or mid-cap assets (as noted on the Asset Allocation section of the report). 

Mrs. Vietor asked about Janney Montgomery Scott’s view on the economy, if Janney had a model portfolio, and the goal of the Trust’s portfolio.  Mr. Murray said Janney is cautiously optimistic that the worst is behind us and that the market appears to continue heading in a positive direction, although the pace probably will slow down after two recovery years; that Janney does not put out a single model portfolio due to having a range of clients with varying needs; and that the goal of the Trust’s portfolio was to provide cash flow and income to meet withdrawal needs and provide for growth over time. He added that once the committed cash was withdrawn, the allocation would be closer to 70% equities and 30% fixed income.

Mr. Hanna asked for a motion regarding Mr. Murray’s recommendation.  A motion to approve a resolution directing Janney Montgomery Scott, LLC, to sell the balance of the Washington Mutual Fund and use the proceeds along with the approximate $30,000 from cash and purchase additional shares of iShares S&P Smallcap 600 Growth and SPDR S&P Midcap 400 was made by Mr. Iselin, seconded by Mrs. Vietor, and unanimously passed.

Resolved: That the Archives Partnership Trust Board’s Investment Committee directs Janney Montgomery Scott, LLC to sell the balance of the Washington Mutual Fund and use the proceeds along with the approximate $30,000 from cash and purchase additional shares of iShares S&P Smallcap 600 Growth and SPDR S&P Midcap 400.”

Cash Available vs. Cash Flow Needs

As noted in the agenda, at March 31, 2011, there was $88,146 in cash, plus a $95,000 CD maturing in June 2011.  Mr. Hanna asked Mr. Murray what he would recommend doing with the cash and CD proceeds.  Mr. Murray said that as the account at the end of the quarter was about 66% invested in equities – about as heavy in equities as the account has ever been – from a prudent investor standpoint he would advise keeping a disciplined eye on asset allocation and despite the low rate environment, would suggest rolling it out for a 2- or 3-year period to keep some money away from the market and keep the fixed income component of the portfolio intact. This heavy equities allocation was intentional to offset little to no return in fixed income markets, and that has served the account well over the last couple of years. While there may still money to be made in equity markets, there is still market risk that he would not want to take in this type of portfolio; and with all things being equal he recommended keeping the funds in fixed income and away from the stock market.  The fixed income returns that are available aren’t great, with little difference in yield between fully insured CDs or high quality (AA/AAA) corporate bonds (so he would typically default to the CD with the insurance); a 2-year issue is about 0.9%, a 3-year issue is 1.35%. When cash is paying only 0.10%, a 1.35% CD rate looks better and it may be best to tread water until hopefully there is a better investment climate.  He is hesitant to go shorter than 2 years as the portfolio already has a number of issues (totaling $375,000) maturing in 2012 and he would advise keeping a bit of a ladder in the investments; but would not go out 5 years (at 2.20%).  Mrs. Ward asked Mr. Murray and the Committee to keep in mind that the Trust would need to withdraw $137,900 later in the fiscal year to fulfill budget commitments.  Mrs. Rydberg asked what interest would be realized between now and March 31, 2012.  Mr. Murray answered approximately $25,000 to $30,000, and added that the earliest holding to mature in 2012 is not until May 2012, so would not be in time to meet the current fiscal year’s commitments.  Mr. Iselin asked Mr. Murray for his recommendation regarding the soon to mature $95,000 CD.  Mr. Murray said given the current cash level and projected earnings, along with the pending cash commitments, he would recommend using no more than $50,000 of the proceeds of the maturing CD for reinvestment in a 3-year FDIC-insured, bank-issued CD.  As he anticipates it unlikely that the market will have meaningfully higher fixed income returns through 2012, a 3-year issue will hopefully bring us to a time of higher rates.  Mr. Pagano asked what Mr. Murray’s recommendations might be for the holdings maturing in 2012.  Mr. Murray said that if the Committee was having the same conversation a year from now, he would make the same recommendation as the present one concerning the Wachovia CD.  He explained that the original philosophy ten years ago was to build a 2- to 7-year timeframe of laddered investments, but market conditions in more recent years had led to a shorter maturity ladder, as the Committee has been reluctant to invest beyond a 3- to 4-year maturity range.

A motion to direct Janney Montgomery Scott to invest, upon maturation of the Wachovia Bank $95,000 CD on June 20, 2011, $50,000 in a 3-year FDIC-insured CD was made by Mr. Iselin, seconded by Mr. Pagano, and unanimously passed.

Resolved, that upon maturation of the Wachovia Bank $95,000 CD on June 20, 2011, Janney Montgomery Scott is directed to invest $50,000 in a 3-year FDIC-insured, bank-issued CD.

Mr. Iselin excused himself from the meeting at this time.

Review of Portfolio Performance for the Last Quarter and Investment Distribution as a Result of Market Performance

Mr. Murray, reviewing the Executive Summary page reported that as of March 31, 2011:

  • Portfolio Composition:  the composition was 5.23% in cash equivalents, 62.89% in equities, 28.53% in fixed assets, and 3.35% in multi-asset holdings (e.g., mutual funds that are composed of multiple asset classes).  
  • Performance:  for the first quarter 2011 and since inception was 3.55% and 3.59% respectively compared to the following selected benchmarks:  3.34% and 2.90% for a blended benchmark portfolio; 0.42% and 5.90% for the Barclays Capital Aggregate Bond Index; 5.92% and 0.57% for the S&P 500 Composite Total Return; and 0.03% and 1.35% for a 3-month yield T-Bill. 
  • Activity Summary:  the account’s value was $3,405,377 a decrease for the quarter of $116,928, with a net flow (withdrawals vs. deposits) of -$234.492, and total earnings of $117,563 ($10,512 earned income and $107,051 change in market value).  Mrs. Ward noted that withdrawals (pursuant to the Board-approved budgets) had taken place during the quarter.

Mr. Hanna asked Mr. Murray to review the blended benchmark portfolio, as Mr. Pagano is new to the Committee.  Mr. Murray explained that since it is not entirely fair to compare the Trust’s portfolio to the performance of the S&P 500 which is all equities, he created the blended benchmark (55% S&P, 35% bonds, 10% cash) as a base representation of a balanced portfolio.  He added that the account was not designed to keep pace with the market in the big years; that while we certainly want to capture upside –and the account has been doing that– it is necessary with asset allocation to be mindful of the downside.  While the portfolio performance report was for the quarter ending March 31, 2011, he noted that April’s performance has been strong with about a $70,000 increase in portfolio value, or a total year to date return of 5.83%.

Mr. Pagano asked when the portfolio might be rebalanced.  Mr. Murray suggested rebalancing when the fixed income opportunities are better than those in equity markets, and noted that the account has gone heavier in equities in recent times due to low fixed income rate environment.  He would prefer to take money off the table and put more into safe, conservative 4-5% yield investments, but they are just not available at present.  Mr. Hanna commented on other reports he had heard that the market will slow down in the second half of 2011.  Mr. Murray said that concurs with reports he is seeing and that he anticipates the pace of recovery will probably slow down over the summer, but will still likely do better than the 2-3% that can be found in fixed income markets; and that until interest rates rise, investors will be optimistic on equities.  Mr. Pagano noted that this philosophy would not have helped in 2008 and asked if the Trust should set an allocation goal for the portfolio.  Mr. Murray said that it would be prudent for the Committee at some point to take money off the table and put it in the bank.  Mr. Bullock asked about the global markets.  Mr. Murray said while volatile, there are still opportunities in emerging markets (and the Trust has some exposure here), US markets have been doing well as investors have been putting more money into more stable domestic markets as a safe haven.  Referencing the Morningstar Report on the Trust’s mutual funds and ETFs he distributed earlier in the morning, he noted the small- and mid-cap issues were performing best, and said that while some foreign markets are starting to come back a little, the growth has still been in the US small- and mid-cap markets.  In a portfolio like the Trust’s, he is comfortable with 15.0% in small-cap, mid-cap, and emerging markets, and would not increase those positions.

Mutual Funds - Growth and Reasonable Safety

Mr. Murray noted that Trust’s mutual funds are still meeting quality and safety standards, have become even more diversified over the last year (adding small-cap, mid-cap, and emerging market positions), and most are performing comparable to or better than their peer groups.  The core holdings are in American Funds Group (large cap style of disciplined, patient investing) and the current market is a type in which they shine; and the remaining mutual funds and ETFs compliment the core holdings.  Again referencing the Morningstar report, the funds held by the Trust are 3- to 5-star rated funds.  He said that Trust’s largest holding, Fundamental Investors, a large cap fund (big company, high quality, US blue chip issues) is up 6.6% for the reporting period, but as of today is up 9.11% year to date.  Such performance reflects investors looking for safe haven alternatives to go to with their cash for more income.  Eventually that demand will wane and stocks will flatten out, so the Committee will need to discuss whether to take money off the table, lock up the profit, and protect more of the portfolio. 

Mr. Pagano asked whether the Trust had established target allocation goals.  Mr. Hanna said firm goals had not been set to allow for some flexibility.  Mr. Murray likes the idea of having targets, but with some flexibility, that would keep allocations in a comfortable range, and he questioned whether the Trust’s Investment Guidelines include specific allocations goals.  Mrs. Ward said staff would check the Guidelines and let the Committee know.

Review of Bond Performance 

Bonds/CDs Called

Mr. Murray reported that no bonds been called during the quarter.

Bonds/CDs Matured/Maturing

Mr. Murray noted that the Wachovia $95,000 CD maturing on June 20, 2011, had been discussed earlier in the meeting.

Bond Ratings/Investment Changes

Mr. Murray reported that no bond ratings had been downgraded during the quarter. 

Fulfillment of Bond/CD Safety and Yield Goals

Mr. Murray said that the bonds currently held continue to fulfill safety goals (FDIC-insured CDs or investment grade corporate bonds rated A or better) and yield goals. 

Endowment Balance and Quality

Having discussed balance and quality throughout the meeting, the Committee agreed to spend time discussing portfolio allocation goals and capital preservation at the next meeting scheduled for July 20, 2011. 

Mr. Murray, concerning the earlier agreed to investment, said that he would:

  • send an email in advance informing the Committee of the exact investment to be made, and
  • if market conditions changed significantly between now and June 20, 2011, warranting a different course of action, he would alert the Committee.


Mr. Hanna adjourned the meeting at 10:26am.

Respectfully submitted,

Jill A. Rydberg

Assistant Treasurer

May 10, 2011