Minutes of the Archives Partnership Trust Board
Investment Committee Meeting
10:00am, July 17, 2013
Cultural Education Center, Room 11G, Albany, NY
Investment Committee Members Present
Barbara Brinkley, Board Treasurer and Committee Chair; Stephen Pagano, Board Chair; and Harold N. Iselin (all attending telephonically)
Christine W. Ward, Assistant Commissioner for the State Archives and Trust Executive Officer; 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 10:03am, 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, reviewing the Executive Summary page of the Portfolio Review, reported that as of June 30, 2013:
- The account value was $3,580,258.
- The broad portfolio composition was 7.81% in cash equivalents (cash and fixed income or securities that will mature in the next six months), 72.04% in equities (stock mutual funds and stock index exchange traded funds), 16.43% in fixed income (remainder of CDs, and the bond funds), and 3.73% in multi-asset holdings (e.g., mutual funds that are composed of multiple asset classes); leaving the stock to bond ratio at about 75% to 25%.
- Performance of the Trust’s portfolio vs selected benchmarks for the 2nd quarter 2013, year-to-date, and since 12/31/2006 respectively:
- 1.11%, 7.40%. and 4.31% for the Trust’s Portfolio
- 0.58%, 7.33%, and 5.00% for the Blended Benchmark Portfolio (33% BarcAgg; 33% MSCI; 34% Russ2000).
- -2.33%, -2.44%, and 5.23% for Barclays Capital Aggregate Bond Index
- 2.92%, 13.84% and 4.17% for S&P 500 Composite Total Return
- 0.01%, 0.03%, and 0.90% for 3-month yield T-Bill
- Activity Summary: the account’s value was $3,580,258, an increase of $62,586 for the quarter, with a net flow of $23,432 (deposits) and total earnings of $39,153 ($11,398 earned income and $27,756 change in market value).
Mr. Murray said equities continue to have a pretty strong year and despite a little downturn in May and June, have come roaring back in July. The 2nd quarter’s 1.11% return was relatively flat in terms of the markets; bonds were down sharply based on an increase in long-term interest rates. He reminded the Committee that it is not fair to compare the Trust’s portfolio to the S&P 500, since the Trust is not fully invested in the market and not fully invested for growth, but rather growth, income, and protection of capital. Therefore the better comparison is the Blended Benchmark Portfolio (one third each bonds, international stocks, and U.S. stocks), and the Trust’s portfolio is tracking that fairly well.
Ms. Brinkley asked how the mutual funds that hold both equities and bonds are counted in the portfolio. Mr. Murray said he counts the Capital Income Builder mutual fund (a multi-asset holding) as equities, as historically the fund is weighted about 70%-75% in equities. Ms. Brinkley then suggested that the overall portfolio’s allocation to equities is likely less than 75% and Mr. Murray agreed.
Mr. Murray said for a conservative portfolio, it is performing well year-to-date. The big story in the second quarter was interest rates, exampled by the 10-year Treasury bond now yielding about 2.5% (up from 1.6-1.7% in April/May and has been well under 2.0% for the last 12 months). When interest rates rise, the price of existing bonds falls. He said it was not surprising that rates would move at some point, but the recent rise is not likely the start of a trend of meaningful increases, and anticipates rates staying the 2.5% to 3.0% range for 10-year bonds. The interest rate increase does not appear to be enough to derail the economic recovery or the stock market.
The Trust’s portfolio has been well defended against a rise in interest rates, having consciously focused bond investments in short-term bonds, with the bulk of that in the Vanguard Short-Term Bond Index Fund. Short-term bonds will be less volatile in a rising interest rate environment than long-term bonds.
Ms. Brinkley asked Mr. Murray to comment on how international sectors or sectors with lower-quality bonds have moved relative to the Treasuries. Mr. Murray said the bonds impacted the most by the recent interest rate increase were the very high-quality, long-term bonds such as Treasuries, foreign government bonds, and AA- and AAA-rated corporate bonds. There was relatively little downside in high yield bonds due to a sense of confidence in the economy in that companies will be able to pay and the decline in price in high-yield securities was offset by the much higher coupons and the interest rates those bonds are paying. The worst place to be invested when interest rates rise is long-term, low-interest bearing, and high-quality securities such as Treasuries. Capital World Bond Fund and the Vanguard GNMA, as low-interest bearing, high-quality holdings had the portfolio’s largest declines in the quarter, but as the overall exposure within the portfolio is small, these holdings still have a place in the portfolio for diversity and quality.
A rise in interest rates will accompany an economic recovery, and the Federal Reserve is trying to be a stabilizing force – making sure rates don’t jump too high so as to result in inflation, nor too quickly so as to derail the economic recovery.
Mutual Funds - Growth and Reasonable Safety
Mr. Murray reference the Morningstar report on the Trust’s mutual funds and ETFs, which shows the trend that the US stock market is leading the way, with small-cap and mid-cap funds being the portfolio’s top performers (YTD returns of 16.17% to 21.46%); large-cap funds is where the portfolio is over-weighted which he feels is appropriate is still working (YTD returns of 12.98% to 15.45%); the European and foreign funds are holding their own (YTD returns of 6.43% to 10.62%); and the bond funds discussed previously (YTD returns of -5.7% to -0.74%).
Over the last few years the focus on domestic, overweighting in stocks, overweighting in US stocks, keeping bonds short-term have all served the portfolio well. The bond funds being in a little in the red does not concern him given their allocation within the portfolio, but if it were to continue then he will reevaluate.
Review of Bond Performance
Mr. Murray reported no bonds had been called.
Mr. Murray noted the $50,000 GE Money Bank CD that matured on May 7, 2013, was an item on the prior meeting’s agenda and the Committee had previously approved the reinvestment of the proceeds.
Bond Ratings/Investment Changes
Currently, there are no individual bonds in the portfolio.
Fulfillment of Bond/CD Safety and Yield Goals
Mr. Murray said that the FDIC-insured CDs continue to fulfill safety and yield. It is important to have some bond and fixed income exposure, as the stock market could correct 10-20% at any time and this layer of protection is good for the portfolio.
Cash Available vs. Cash Flow Needs
Mr. Murray noted of the approximately $280,000 in cash that as most of it was earmarked to meet commitments (as noted on the agenda) he would leave it as cash.
Cash Needs and Projections
Mr. Murray asked Ms. Rydberg to introduce the discussion concerning cash needs and projections. Ms. Rydberg explained that while the portfolio was performing well, the lack of a significant laddered maturities of CDs and bonds in turn means there is not cash automatically becoming available to adequately fund annual withdrawals starting with Fiscal Year 2014/15; therefore the Committee needed to be prepared with what strategies they might employ to raise cash. Mr. Murray said the laddered CD/bond approach had been abandoned in recent years because the yields were so low investments were directed either to equities or the Vanguard Bond Fund; since we don’t have CDs/bonds paying off on a scheduled basis in order to get the withdrawals, either shares will have to be sold and/or dividends be paid as cash rather than automatically reinvested. The bond mutual funds pay dividends monthly generating approximately $8,000 annually and the equity mutual funds pay dividends quarterly generating approximately $41,000 annually. Mr. Murray repeated that this is not a red flag that the portfolio is not performing or meeting expectations, rather the predictability of the cash flow has changed because the investments have changed. He said he would lean toward selling off shares of an appropriate investment allowing for a rebalancing of the portfolio and continue the automatic reinvestment of dividends, as the cash could sit in a low interest bearing investment for up to a year until withdrawn vs. allowing the dividends to be reinvested and compounding at a rate of return the funds are investing at; he is optimistic that the funds can outperform a money market over the course of a year. Ms. Brinkley suggested that as bonds are likely to trend in the 2.5%-3% yield range for the foreseeable future, it might make sense to take the bond mutual fund dividends as cash combined with selling shares. Mr. Murray agreed that this was a reasonable strategy, given that the 2nd quarter’s bond fund dividends could have been paid as cash as opposed to being reinvested in an investment that lost value; also if interest rates continue to rise, there will be some pressure on bond funds. Mr. Pagano concurred with the strategy given where bonds are headed long term and that equities are performing well
Ms. Ward noted that if the Committee wishes to have dividends paid as cash, they will first have to recommend that the Board amend the Investment Policy and Guidelines which currently state that mutual fund dividends and capital gains are to be automatically reinvested. Ms. Rydberg suggested the options might be to either delete the statement or change it such that the Investment Committee would have the discretion to decide whether mutual fund dividends and capital gains are to be automatically reinvested or paid as cash. Committee members and Mr. Murray all liked the idea of the Committee having the discretion to make the decision.
A motion to recommend that the Board amend the Investment Policy and Guidelines, Section 15, to allow the Investment Committee the discretion to decide whether equity mutual fund and/or bond mutual fund dividends and/or capital gains be automatically reinvested or paid as cash was made by Ms. Brinkley, seconded by Mr. Pagano, and unanimously passed.
Resolved, that the Investment Committee recommends to the Archives Partnership Trust Board that the Board amend the Investment Policy and Guidelines, Section 15, to allow the Investment Committee the discretion to decide whether equity mutual fund and/or bond mutual fund dividends and/or capital gains be automatically reinvested or paid as cash.
Mr. Murray asked for clarification that while the change to the Investment Policy is awaited, should all dividends continue to be automatically reinvested. Ms. Ward confirmed that the automatic reinvestment of dividend should continue; that Committee decisions to have any dividends paid as cash could be made immediately upon the Board’s approval to amend the Investment Policy and Guidelines, which would be presented at the Board’s October 15, 2013 meeting.
Endowment Balance and Quality
Mr. Murray said balance and quality had been addressed throughout the meeting and asked if Committee members had any other questions or concerns; and none were raised.
Ms. Brinkley noted the Investment Committee was next scheduled to meet at 10:00am on October 16, 2013.
A motion to adjourn the meeting was made by Ms. Brinkley, seconded by Mr. Pagano, and unanimously passed. Ms. Brinkley adjourned the meeting at 10:43am and thanked all for their participation.
Jill A. Rydberg
July 18, 2013