AAPG Committee on Investments
October 14, 2002
AAPG Headquarters
Tulsa, Oklahoma
The meeting of the AAPG Committee on Investments (herein after referred to as "Committee") convened at 10:00 a.m., October 14, 2002, in Tulsa, Oklahoma.
The following were in attendance: Chair, Pierce Pratt; Committee Members: John Brock, Jim McGhay, Terry O’Hare, Terry Hollrah, George Bole, Dick Howell. Also attending were: AAPG Executive Director, Rick Fritz, AAPG Employee’s Pension Committee Members: David Lange, Chair; Pat Hurd, Larry Nation, Anne Payne, and Brian Haws. Other attendees included the new Investment Advisor Larry Thompson of Larry Thompson and Associates.
1. Welcome
Pierce Pratt, Committee Chairman, welcomed everyone to the meeting. He advised the committee that most of the meeting would be devoted to reviewing the investment policies and the portfolio review and asset allocation issues.
He then asked Rick Fritz to introduce David Lange and provide an update on the association activities.
2. Introduction of David Lange
Rick Fritz introduced David Lange as the new Business Director replacing Don O’Nesky who retired. David noted he was pleased to be involved with the AAPG Investment Committee, and had served in a similar capacity with another major trade organization.
3. AAPG Review
Rick Fritz advised this past year was a difficult one for AAPG. Along with the 9/11 tragedy and the Enron scandal, AAPG had a write down on books and did not have an international meeting leading to a loss for the year of $141K.
Rick advised the future looks very good with the continued development of AAPEX in Houston, and the development of International conventions with good business models and locations. Also, with the addition of Jack Thomas as GeoScience Director, and Brenda Cunningham as Outreach Director, AAPG is now at full staff.
Rick reviewed the Membership Enhancement and Development Program including the current contest in process, and explained to the committee the newly developed Pyramid of AAPG member benefits.
4. Bole moved/ McGhay seconded: to approve the minutes from the May 6, 2002 meeting. The motion carried.
5. Portfolio Performance Evaluation
Pierce Pratt turned the meeting over to Mr. Larry Thompson of Thompson and Associates. Thompson and Associates was selected as the new investment advisor for the three funds AAPG Operating Fund, AAPG Employees Pension Fund, and the AAPG Foundation Fund.
Mr. Thompson explained the contents of his handout evaluation which included a Market Review of the 3rd Quarter, 2002 as well as the quarterly results of the association and pension investments compared to Policy Indices. For the quarter ended 9/30/02, association investments were down 8.42%, and pension funds declined 8.64% compared to index of -8.92%.
Mr. Thompson also reviewed the target allocation of the current investments and advised the fund values are slightly out of balance with target allocations. Pierce advised that the current asset allocation balances are entirely the result of market conditions and dynamics with the decline of the equity funds and the growth of the fixed income.
Larry Thompson advised this report is completed on a quarterly basis and is completed on an expanded basis annually with scatter plots. He also advised monthly flash reports could be forwarded to the committee members via e-mail, and a listing of e-mail addresses was prepared for this purpose.
6. Investment Policy Review
Mr. Thompson advised that the committee should consider revising the operating and pension funds investment policies. He believes selected policy language needs to be changed so as to allow for clearer understanding and to be certain there is no issues with staying in compliance of the policy.
He also advised that it would be helpful for the pension fund to have a separate investment policy from the association as be certain the proper ERISA language is captured. Pat Hurd advised that the GeoVest program needs to be considered, and it was decided that a separate policy would be appropriate for this program.
A motion was made by Bole/ McGhay seconded and approved that the investment policy would be revised. The draft will be prepared by the subcommittee of Pratt Pierce, Rick Fritz, David Lange, and Larry Thompson after which the draft will be presented to the Investment Committee for review and approval.
Terry Hollrah asked if we could provide the committee with an understanding of the changes being made in the current policy. Larry Thompson stated that he could summarize the changes by category.
Pierce Pratt asked Mr. Thompson what he expected we should accomplish in the remainder of the meeting, and he advised that we should develop the asset allocations or the portfolio structure. After this is accomplished, a review of investment managers is done to select those that fit the guidelines and required rate-of-return with the least amount of risk.
Mr. Thompson reviewed the Asset Allocation Study handout and advised the importance of building a portfolio where asset classes do not move always move in-step with one another. His review included an explanation of return assumptions which are NOT based on historical data, but on current market conditions, using a five-year time horizon.
Mr. Thompson also reviewed the Asset Class Correlation and provided an explanation of Equity REITS, Long/Short Hedge, and Absolute Return Hedge.
He also described the return goal as listed on page 7 of the handout, and made special emphasis on the fact that inflation and expenses needed to be included in the development of a realistic return objective.
After more discussion on asset classes and return goal expectations, the investment committee decided upon the following portfolio:
Min.
Max.
Target
Large Cap 25 50 30 Small/Mid Cap 10 25 15 International Equity 10 20 10 Fixed Income 35 50 40 REITS 0 10 0 Long/Short Hedge 0 10 0 5% from Hedge Absolute Hedge 0 10 0 to be determined. A motion was made by Pierce Pratt, seconded by John Brock and passed to accept the asset allocations as listed with additional information to be provided by Larry Thompson on REITS and the two Hedge funds.
Mr. Thompson also stated that he would provide additional information as to the expected rate of return of the selected asset allocation selection.
Mr. Thompson advised the next step would be to select the appropriate fund managers in each asset class. A booklet listing of the fund managers which Thompson and Associates recommends will be sent via e-mail to the committee members for their review and consideration.
As the committee is not scheduled to meet as a group until April, 2003, Pierce Pratt advised the committee should meet via conference call in January, 2003 to review and select fund managers for the portfolio.
8. Additional New Business
a. The issue of contingency planning for significant events such as the 9/11 tragedy was introduced by Rick Fritz. Rick stated he would like the committee’s opinion on having a contingency plan should there be another catastrophic event, as this would likely negatively impact the financial markets.
Larry Thompson advised that none of his present clients have such a provision. He also noted that the market did recover from its 9/11 values within two months, and that other economic conditions have impacted the market the past couple of years.
The committee discussed this issue and it was decided that should any catastrophic event occur in the future the investment committee chairman, Pierce Pratt, along with Rick Fritz and David Lange will determine if the committee should meet via conference call to make decisions regarding the investment portfolio.
b. Pierece Pratt stated that Mr. George Bole was selected as the Vice Chairman of the Investment Committee.
9. Next Meeting
The next regular meeting was set for Monday, April 7, 2003 in Tulsa.
A conference call date will be established in January to review the investment manager recommendations of Thompson & Associates.
10. Adjournment
The meeting was adjourned at 1:30 p.m.
Respectfully submitted,
David E. Lange
Business Director