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Minutes of the Archives Partnership Trust Board
Investment Committee Meeting
10:00am, January 18, 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)

Staff Present

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

Others Present

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

Investment Committee Members Excused

Rosemary Vietor

Call to Order

Ms. Brinkley called the meeting of the Investment Committee to order at 10:03am, noting the presence of a quorum. Ms. Ward asked if the discussion items relating to the Investment Guidelines could be moved to the top of the agenda as she may need to leave the meeting early.  The Committee agreed.

Other Business

Investment Guidelines: New York Prudent Management of Institutional Funds Act

The first item was a resolution to approve recommending to the full Board that it approve amending the Investment Guidelines as concerns the New York Prudent Management of Institutional Funds Act (NYPMIFA).  Ms. Brinkley invited Ms. Ward to take the Committee through the proposed changes.  Ms. Ward noted as had first been presented at the November 3, 2011, Investment Committee meeting, that the proposed amendments bring Investment Guidelines into compliance with the requirements of NYPMIFA, a September 2010 law that allows an institution to dip into an endowment’s principle.  Ms. Ward said the language suggested to be incorporated into the Guidelines come directly from the NYPMIFA statute, with assistance from excellent NYPMIFA resources provided by the New York State Attorney General’s Charity Bureau and Nixon Peabody LLP Attorneys at Law, and that she had discussions with both Mr. Iselin and Trust Counsel, Scott Fein.  She added that while NYPMIFA broadens the spending powers of non-profit organizations, it has been the Trust’s practice to not dip into endowment principal.  NYPMIFA requires written approval from donors of endowment gifts made prior to September 2010, for a non-profit to spend above the historic dollar value.  To spend from the principal for donations made after September 17, 2010, donors need not be consulted, but the donor agreement must include a statement noting that this may occur.  Ms. Brinkley noted a correction was needed in Paragraph 10 to change the reference to “see Section 5.b. above” to “see Section 9.b. above.”

The motion to approve the resolution recommending that the Board approve amending the Investment Guides was made by Mr. Pagano, seconded by Mr. Iselin, and unanimously passed.  (See Attachment I)

Investment Guidelines: Bond Funds-Discussion

Ms. Brinkley read the proposed resolution, edited in part by Mr. Murray, requiring that bond funds at purchase must hold at least 75% at investment grade.  She noted she had done further research following the bond fund discussion at the November 3, 2011, meeting, and raised the following issues:

  • Allowing bond funds to hold up to 25% below investment grade would allow for the purchase of bond funds rated B, C, and D, which are ranked by Moody’s and S&P as speculative, very speculative, and default.
  • Allowing for bond funds to hold below investment grade (below BBB/Baa) credits does not set a floor for credit quality.  She cited the existing Investment Guidelines being very clear on credit quality and do not allow purchase of individual bonds rated below A.
  • Ms. Brinkley questioned, “Do we mean for our bond fund investments to speculate on return OF principal (instead of return ON principal)? Do we mean to take more principal risk with our fixed income than we do with our equities”?
  • Bond funds have perpetual life and therefore do not ever mature.
  • Similar or better returns are available on bond funds holding 100% at investment grade, so that returns can be achieved with less risk.
  • If the Committee approves recommending bond funds with less than 100% holdings at investment grade, she noted that in the absence of specific position limits, the Committee would need to rely on its own discernment and judgment regarding bond fund purchases; a task to which she was confident the Committee would rise.
  • The one bond fund currently in the portfolio holding less than 100% at investment grade is Capital World Bond Fund, which currently represents 3.8% of the portfolio.  Its potential 25% exposure to below investment grade bonds, seems tolerable as that is equivalent to just under 1% exposure in the portfolio overall.  But is our guideline sufficiently restrictive to avoid significant expansion of this risky position?

Ms. Brinkley wanted these considerations on the record.  At the same time, however, if the rest of the Committee were to vote for the recommendation as written, she would make the decision unanimous.  She then asked the Committee for their thoughts.

Mr. Murray said his reasons for allowing bond funds with below investment grade holdings would be to broaden the portfolio to gain exposure unavailable through individual bonds, but added that it is more important to get a return of the Trust’s money rather than a return on the Trust’s money.  He noted that in the current challenging market for fixed income investments, he is looking for alternatives with a little better return.  This is why Capital World Bond Fund was purchased in 2008, when in a low interest environment and wanting to make a shift out of equities it provided a diversified investment vehicle.  With interest rates at historic lows, he is looking for other conservative areas in which to invest.  He agreed that bond funds are not as predictable as individual bonds and would need to be monitored.  He added that Janney holds such bond funds in many accounts, waiting until the rate environment improves for individual issues; and that they are considered a short-term rather than a “buy and hold” investment.

Mr. Iselin asked how much yield we might be giving up for better security.  Ms. Brinkley said we may not need to give up yield, as she found comparable or better yields in bond funds with 100% investment grade holdings.  Mr. Murray concurred that there are many bond funds available that meet the 100% at investment grade criteria.  Mr. Pagano, citing Ms. Brinkley’s research findings and strong position, said he would be willing to draw the line at bond funds with 100% at investment grade.  Mr. Hanna agreed to that level as well, noting it is important in challenging times to keep the Trust sound. 

Mr. Murray noted that at the end of 2012 Capital World Bond Fund held only about 8% below investment grade, but can go as high as 25%. Discussion ensued concerning grandfathering in Capital World Bond Fund and the Committee agreed to keep it.  Going forward, new bond fund purchases should meet the 100% investment grade criteria. 

The motion to approve the resolution recommending that the Board approve amending the Investment Guides was made by Mr. Iselin, seconded by Mr. Pagano, and unanimously passed. 

Resolved, That the Archives Partnership Trust Board’s Investment Committee, at its January 18, 2012, meeting approved recommending to the Board that the Trust’s Investment Guidelines, Section 6.c. as concerns bonds as permitted investments be amended as follows (in the next two paragraphs bolded text indicates language proposed to be added Trust Investment Policy and Guidelines):

c)  Bonds:

i.  Individual Bonds:  Corporate, municipal, or state bonds rated A or better by Moody’s and Standard & Poor’s rating services or United States Government bonds.  If after purchase a bond’s rating falls, the Investment Committee will discuss whether the bond’s yield, in conjunction with its new rating, warrants retention or should be sold.

ii.  Bond Funds:  Bond funds that invest in a diversified portfolio of U.S. Government, high grade corporate, and investment-grade international dollar-denominated issues are permitted.  Bond funds purchased after February 2, 2012, must hold 100.00% of assets at investment grade (rated Baa / BBB or better by Moody’s and Standard & Poor’s rating services) at the time of purchase.  If after purchase a bond fund’s assets at investment grade fall below 100.00%, the Investment Committee will discuss whether the bond fund’s yield and credit quality warrants retention or should be sold.

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 December 31, 2011:

  • Portfolio Composition:  the composition was 17.28% in cash equivalents, 58.97% in equities, 20.28% in fixed income, and 3.47% in multi-asset holdings (e.g., mutual funds that are composed of multiple asset classes). 
  • Performance of the Trust’s portfolio vs selected benchmarks:

4th Qtr 2011

YTD

Since

12/31/2006

Trust’s Portfolio

5.81%

-2.23%

1.86%

Selected Benchmarks:

   Blended Benchmark Portfolio

    (55% S&P; 35% bonds; 10% cash)

6.91%

4.51%

2.69%

   Barclays Capital Aggregate Bond Index

1.12%

7.84%

6.50%

   S&P 500 Composite Total Return

11.81%

2.12%

-0.25%

   3-month yield T-Bill

0.00%

0.06%

1.15%

  • Activity Summary:  the account’s value was $3,275,359 an increase of $208,276 for the quarter, with a net flow of $29,690 (all deposits, no withdrawals), and total earnings of $178,585 ($28,623 earned income and $149,962 change in market value) the result of market declines.

Mr. Murray reported that the fourth quarter had been a strong one with the Trust’s portfolio up 5.81% for the quarter, but down 2.23% for the year; and noted that many well-diversified portfolios posted negative returns for 2011.  He noted there was a flight to safety, with quality being the overall winner in 2011 as reflected in the gains in the Dow (8%) and S&P 500 (2.12%); while NASDAQ, small- and mid-cap areas, EAFE, and emerging markets all posted negative returns for the year.  Mr. Murray said 2011 was a challenging year for investors, with money going to large U.S. companies.  He said that the Trust had reduced its international exposure, noting that about half of the portfolio’s losses came from its global funds.  He anticipates the markets will continue their up and down trend, with investors still looking at quality U.S. companies, although the international front is starting to quiet down.  He said with the Trust’s portfolio at about 63% equities and 37% cash/bonds, there will be much to discuss at the April meeting with several bonds maturing.  He noted the portfolio has gained about $60,000 since January 1, 2012, with the strength of the markets.

Mutual Funds - Growth and Reasonable Safety

Mr. Murray noted that Trust’s mutual funds are still meeting quality and safety standards, with most performing comparable to their peer groups.  

Review of Bond Performance 

Bonds/CDs Called

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

Bonds/CDs Matured/Maturing

Mr. Murray noted that $375,000 in CDs and bonds is maturing during 2012.  While it is a challenging time for fixed income investments, he recommended maintaining a fixed income allocation.  He expects a laddered approach of 3- to 4-year CDs and high grade corporate bonds will ensure a return of our money.

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. 

Cash Available vs. Cash Flow Needs

As noted in the agenda, at December 31, 2011, there was $232,892 in cash, with commitments of $275.108.  It is expected that earnings between now and the end of the fiscal year will cover some of the balance of the commitments.  Ms. Rydberg said she anticipated having enough cash to carry the Trust until the CDs mature in May.

Endowment Balance and Quality

Ms. Brinkley, noting the December move to reduce international exposure had been fruitful, asked if it might be a good idea to reduce it even further.  Mr. Murray reported with about 13% international exposure in the two global funds in the portfolio and 3% in emerging markets, the portfolio still has a sizeable exposure to foreign markets.  With smart U.S. companies taking advantage of historically low interest rates, the Federal Reserve having no plans to raise interest rates until at least mid-way through 2013, and attractive dividend yields on common stocks of U.S. companies (in many cases higher than what can be found in bonds), he recommended reducing the two global funds (Capital World Growth & Income Fund and New Perspectives Fund) from 13% to 10% and putting the proceeds again into American Mutual Fund.  He is comfortable retaining the portfolio’s emerging markets position, although it is volatile.

A motion to approve a resolution directing that Janney Montgomery Scott reduce the Capital World Growth & Income Fund and New Perspectives Fund holdings from 13% of the portfolio to 10% and put the proceeds into American Mutual Fund was made by Ms. Brinkley, seconded by Mr. Pagano, and unanimously passed. 

Resolved, That the Archives Partnership Trust Board’s Investment Committee, at its January 18, 2012, meeting approved directing Janney Montgomery Scott to reduce the Capital World Growth & Income Fund and New Perspectives Fund holdings from 13% of the portfolio to 10% and put the proceeds into American Mutual Fund.

Conclusion

A motion to adjourn the meeting was made by Mr. Pagano, seconded by Mr. Hanna, and unanimously passed. Ms. Brinkley adjourned the meeting at 11:18am and thanked all for their participation.

Jill A. Rydberg

Assistant Treasurer

January 28, 2012