Minutes of the Archives Partnership Trust Board
Investment Committee Meeting
9:00am, October 25, 2012
Cultural Education Center, Room 11G, Albany, NY
Investment Committee Members Present
Barbara Brinkley, Board Treasurer and Committee Chair; Harold N. Iselin, Stephen Pagano, and Rosemary Vietor (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
John Hanna, Jr., Board Chair
Call to Order
Ms. Brinkley called the meeting of the Investment Committee to order at 9:04am, noting the presence of a quorum. She invited Mr. Murray to begin with his report.
Review of Portfolio Performance for the Last Quarter and Investment Distribution as a Result of Market Performance
Mr. Murray noted that no portfolio changes have been made since the last meeting; and that while the account holds a fair amount of cash, it is earmarked for commitments. Reviewing the Executive Summary page he reported that as of September 30, 2012:
- Portfolio Composition was 8.67% in cash equivalents (cash and fixed income or securities that will mature in the next six months), 65.32% in equities (stock mutual funds and stock index exchange traded funds), 22.37% in fixed income (remainder of laddered bonds and CDs, and the bond funds), and 3.64% in multi-asset holdings (e.g., mutual funds that are composed of multiple asset classes).
- Performance of the Trust’s portfolio vs selected benchmarks for the 3rd quarter 2012, year-to-date, and since 12/31/2006 respectively:
- 4.24%, 9.75%, and 3.28% for the Trust’s Portfolio
- 4.57%, 10.76%, and 4.10% for the Blended Benchmark Portfolio (33% BarcAgg; 35% MSCI; 34% Russ2000). Mr. Murray noted the Trust’s portfolio is probably a bit more conservative than the blended benchmark portfolio.
- 1.59%, 3.99%, and 6.35% for Barclays Capital Aggregate Bond Index
- 6.35%, 16.43%, and 2.46% for S&P 500 Composite Total Return
- 0.03%, 0.09%, and 1.01% for 3-month yield T-Bill
- Activity Summary: the account’s value was $3,446,166, an increase of $161,756 for the quarter, with a net flow of $22,206 (deposits), and total earnings of $139,550 ($11,069 earned income and $128,481 change in market value).
Mr. Murray said the portfolio’s composition is in line with where it has been most of this year. He added the 3rd quarter was good, having captured some of the upside due to the European Central banks stepping up and being the lender of last resort to hopefully provide relief. The portfolio runs a conservative allocation, yet has captured a good amount of the upside of the market given the low risk profile. The markets have done so well this year not only because of the calmness on the European front, but mostly that low interest rates continue to fuel investors looking for good quality, dividend-paying stocks.
Ms. Brinkley asked about the impact of the October pull-back in the markets. Mr. Murray said that while there has been a bit of a sell-off, the portfolio has not given up much of its gains and is holding nicely in spite of the October volatility. He noted that volatility is expected to continue through at least the end of the year given the elections, the economy, and the fiscal cliff. The backdrop of low interest rates sets a good floor on the market, creating a demand for high quality, dividend-paying companies and this portfolio has migrated money to that in the last several years, therefore the downside is reasonably protected so far.
Ms. Brinkley asked what sectors performed best last quarter and what ones look good for the coming quarters. Mr. Murray said probably the best sectors last quarter were technology (e.g., Apple, Google, new technology), consumer staples (e.g., Johnson & Johnson, Proctor & Gamble, Kimberly Clark), pharmaceuticals (e.g., Eli Lilly, Merck, Pfizer), and telecommunications. He anticipates good investments going forward will be dividend paying, stable companies with stable cash flows and sectors that address every day essential needs like consumer staples; as well as pharmaceuticals, telecommunications (e.g., Verizon, AT&T), and utilities (from an income rather than a growth standpoint). He added that according to some analysts he follows, international markets may also do well as Europe may be bottoming out; so while not an area the Trust would want to overload on, it is an area that value-oriented investors are looking at again.
Mr. Murray, referring to the Quick View report that provides a snapshot of the portfolio’s allocation by category, noted that about 40.0% of the portfolio is concentrated in large cap stocks and has been over-weighted here for some time since it is a conservative portfolio. With maturing bonds, investors are losing 4.0% to 5.0% as available replacements only offer 2% yields. Therefore investors are looking for better returns and more income in large blue chip companies (e.g., Johnson & Johnson, Proctor & Gamble, IBM) offering higher yields. These blue chip companies can be found inside Fundamental Investors, American Mutual Fund, and Growth Fund of America within the Trust’s portfolio. The Trust’s global position is good at 11.0%. The portfolio’s small- and mid-cap holdings have not performed quite as well this year but offer good opportunities over time. Over the next year or two, the large cap stocks will likely attract the most attention and assets. American Funds, the portfolio’s primary manager continues to perform well for the Trust; they are value-driven and research-driven, not a growth manager or super aggressive, but long-term, consistent managers.
Ms. Brinkley said she has been reading about some well-known fund managers going to allocations in precious metals. Mr. Murray said that is a bearish move to be more protective and defensive and is probably due to uncertainty in the markets. He added the federal government keeps printing money and increasing the money supply and at some point that will cause rampant inflation, and as gold is an inflationary asset and tends to do well if inflation spikes. The problem he has with gold is that investors don’t get paid while they are waiting; at least with even short-term bonds, investors are making something on their money. Ms. Brinkley said there are precious metal funds that combine bullion and mining shares that do pay dividends. Mr. Murray said the miners (Newmont Mining has a dividend yield of over 2.5%) do tend to track the commodity. He said moving into metals is an aggressive hedging strategy defending against uncertainty. Generally, he has not used metals in conservative portfolios like the Trust’s, where if a more defensive position is desired, he has generally advised buying more bonds. Janney did recently issue a report on the miners and gold mining stocks as being an overlooked area right now in the precious metals. He said there is a bit of a disconnect between mining shares and the price of gold on a historic basis, as the mining stocks have been underperforming the commodity over the last couple of years and the Janney analysts lay out a case where there could be a catch up coming. So a more conservative angle Janney has introduced in some accounts is buying mining indexes. He has some information on this that he will share with the Committee.
Mr. Murray anticipates the markets won’t be significantly impacted by the November elections, as the after-election and long-term focus needs to be the economy, and that interest rates will remain low for a while. If interest rates were higher, he might recommend selling some equities to buy bonds. As they are not, the portfolio’s 70.0% in equities is good for now, but he also wouldn’t push equities any higher. He added that as the annual cash withdrawals (thereby reducing the fixed income side of the portfolio) take place over the next few months; the allocations will need to be revisited to consider rebalancing the account.
Mutual Funds - Growth and Reasonable Safety
Mr. Murray suggested the best way to look at the mutual funds is to look at the Morningstar report that gives a sense of the individual holdings and their performance for the year-to-date (YTD,) as well as 12-month, and 3-, 5-, and 10-year periods.
Mr. Murray highlighted:
- Smallcap World Fund is up 18.08% YTD primarily due to a bounce back in the European markets. About 50.0% of this fund consists of companies outside the U.S.
- Growth Fund of America is up 16.92% YTD and its top holdings are Apple and Google.
- New Perspectives and Capital World Growth & Income, up 15.67% and 14.73% respectively YTD, also benefiting from the European markets bounce back.
- Risk has been rewarded with the above funds
- Those funds with a more conservative slant (American Mutual, Capital Income Builder, and Fundamental Investors) have had good returns, not home runs, but are keeping pace with the markets.
- Vanguard Short-Term Bond Index Fund (our CD replacement rather than buying a lot of CDs at only 1.0% or less), is doing what it is expected to do; and the Vanguard GNMA is performing well. The bond funds are needed in the portfolio to keep the non-stock market money in something more solid and conservative, as well as on the shorter end of the market so we are not subject to a lot of price volatility.
He summarized that everything is positive across the board, and is what a well-diversified portfolio looks like this year.
Review of Bond Performance
Mr. Murray reported that no bonds had been called during the quarter.
Mr. Murray noted that the Committee had previously discussed the $25,000 IBM Corporation bond maturing in November, and had agreed the proceeds should go to cash, so no reinvestment discussion is needed at this time. He added that in January the Committee can plan to discuss reinvesting the proceeds of the $50,000 GE Company Note maturing in February, which has a 5.0% yield, a rate unlikely to be found come February.
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. He added that yield goals will be more challenging going forward.
Cash Available vs. Cash Flow Needs
As noted in the agenda, at September 30, 2012, there was $287,985 in cash, with commitments of $267,091, leaving $20,894 available for potential investing.
Endowment Balance and Quality
Mr. Murray said he was comfortable with the current allocation and therefore did not recommend any changes at this time; that all signs point to the current allocation (being over weighted in equities) as okay for now and staying the course. The goal is to participate in some of the market’s upside but be protected from the downside. He anticipates the market may flatten out for the rest of the calendar year.
There was discussion of year-end tax strategies and the fiscal cliff (year-end expiration of the Bush tax cuts which made for favorable treatment of dividends and capital gains). If the tax cuts are left to expire, the capital gains rate and the tax on stock dividends could increase substantially next year, and may be why the markets have pulled back. However, Janney is optimistic that either the tax cuts will be extended or some compromise will be reached.
Ms. Brinkley noted the Investment Committee was next scheduled to meet at 10:00am on January 16, 2013.
A motion to adjourn the meeting was made by Ms. Vietor, seconded by Mr. Pagano, and unanimously passed. Ms. Brinkley adjourned the meeting at 9:40 am and thanked all for their participation.
Jill A. Rydberg
November 14, 2012