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October 3, 2003
The meeting of the AAPG Committee on Investments (herein after referred to as "Committee") convened at 10:00 a.m., October 3, 2003, in Tulsa, Oklahoma.
The following were in attendance: Chair, Pierce Pratt; Committee Members: John Brock, Jim McGhay, Terry Hollrah, George Bole, and Dick Howell. Also in attendance were: AAPG Executive Director, Rick Fritz, and AAPG Employees Pension Committee Members: David Lange, Pat Hurd, Larry Nation, Anne Payne, and Brian Haws. Other attendees by telephone included Investment Advisor Larry Thompson of Larry Thompson and Associates and Terry OHare.
Pierce Pratt, Committee Chairman, welcomed everyone to the meeting. He advised the committee that Larry Thompson and Terry OHare had planned to be physically present; however, their flight was changed due to low fog at the Tulsa airport. Upon their flights return to Dallas, they will join the meeting via telephone.
Pierce asked the committee if there were any questions or comments regarding the minutes from the previous meeting held on April 7, 2003.
2. Bole moved/ Brock seconded: to approve the minutes from the April 7, 2003 meeting. The motion carried.
3. Julius Baer International Fund Review
Pierce Pratt advised the committee the funds investment in the American Century International Fund should be replaced as the history and performance of the fund has not been attractive.
Pierce Pratt led the discussions with the committee on the review of information on the Julius Baer International Fund as provided by Larry Thompson of Thompson and Associates.
Pierce commented that he was very familiar with the Julius Baer fund and stated he believes it is a better choice for the Associations Portfolio than is the American Century Fund. The return for the American Century Fund has been below the MSCI World Ex-US Growth index for the past 5 years.
Hollrah moved/McGhay seconded: to replace the American Century International Fund with an investment in the Julius Baer International Fund. The motion carried unanimously.
4. Hedge Funds Review
As Mr. Thompson was not yet available for a conference call, Pierce Pratt asked the committee to review the handout information on hedge funds.
Lange commented the committee voted to accept hedge funds as part of the portfolios asset allocation at the last committee meeting. (The allocation percentage is 5 %.) However, the investment was never made in the hedge funds as the committee wished to have more information on hedge funds before committing funds to this asset class.
Lange advised the committee of the investments made by the Foundation in hedge funds which are also the same funds which Larry Thompson is recommending to the Investment Committee. The Foundation invested in two hedge funds in August, 2003 including a long/short fund and an absolute return fund.
Lange also commented on some of the particular issues related to investment in hedge funds. This includes the fact that hedge funds are not as liquid as purchasing shares of mutual funds as there are set periods when you can purchase and sell the funds. In the case of Austin Capital All Seasons Funds, contributions are accepted monthly, and redemptions are available quarterly with 45 days notice. There is a minimum investment for this fund and it is $500,000.
John Brock advised that he has experience with hedge funds specifically with Majesty Funds. John commented that the return on the fund has been solid at about 5% annually. John commented that it would be best to stay away from investments in those hedge funds which have holdings in real estate or oil & gas.
Pierce commented that we should discuss hedge funds in greater detail when Larry Thompson phones in from Dallas.
5. GeoVest Master Trust Review
Pierce advised the committee that it would be helpful for the GeoVest program if a new committee under a separate structure could be formed.
Lange asked the committee to review the GeoVest memo sent to them prior to the meeting. He stated the GeoVest Master Trust agreement has become very time consuming, and that it needed day-to-day attention for the program to reach its objectives. The GeoVest program has not grown much since its inception two years ago, and there are many legal, financial, and marketing issues which need to be addressed on a regular basis.
Lange asked the committee to consider the formation of a new GeoVest committee separate from the Investment Committee which would be solely responsible for managing the affairs of the GeoVest Master Trust agreement and program.
John Brock moved, and George Bole seconded a motion to form a GeoVest committee which would be charged with handling the affairs of the GeoVest Master Trust agreement and development program. The motion carried.
Larry Thompson and Terry OHare joined the meeting via teleconference from Dallas, TX.
6. Investment Fund Managers
Mr. Thompson started his discussions by reviewing the performance of the funds managers as of September 30, 2003. A handout listing all of the fund managers which makeup the portfolio was provided by Thompson and Associates.
Larry stated that the recent run-up in the stock market was concentrated primarily in the lower quality firms based on credit worthiness. For the first 6 months, Larry noted the C/D firms were up 35%, the A+/A firms up 12%, and the B+/B firms were up 15%.
After the thorough review of the fund managers, the performance of Montag & Caldwell was discussed. Montag & Caldwell has underperformed both the Russell 1000 and S&P 500 for the past year.
Larry stated that Montag & Caldwells is focused on growth and its portfolio is comprised of firms that are in the higher credit quality classifications. Therefore, it is reasonable to expect this fund manager would not perform to the same levels as the two indexes.
7. Real Estate Investment Trust
Larry stated the most recent run-up in the pricing for real estate trusts has been beyond what anyone could have expected. He has been surprised by the results of REITS over the past several months. He commented further that REITS yields have gotten lower the past few months due to the run-up in pricing.
Larry suggested to the committee they not add any more to this asset class or consider a reduction in allocation to REITS.
Based on the general conversation regarding REITS value the committee decided to sell the entire position in REITS.
John Brock moved and George Bole seconded to sell all of the Morgan Stanley US Real Estate position. The motion carried.
8. Hedge Funds Discussion- Continued
Larry commented that hedge funds function and purpose within any portfolio allocation is to mitigate risk and not to enhance performance.
Larry described the two types of hedge funds: long/short and absolute return. He suggested that long/short funds may have some comparison to the market, particularly those that have a long bias. However, absolute return funds have no correlation to the financial markets since they are involved in M&A, and other event driven strategies.
Larry reviewed the hedge fund information in the handout including the performance summary data for both the Austin Capital All Seasons fund and the Private Advisors- Stable value fund. The Austin Capital fund is a long/short fund and the Private Advisors is an absolute return fund.
Piece stated that he was very comfortable with the portfolios fixed income and equity allocations. He stated that he felt a 5% allocation to the hedge funds was appropriate and it should be funded.
Larry Thompson stated that a 5% allocation would not be enough for the Private Advisors Fund as their minimum account value is $1,000,000.
Jim McGhay moved /Dick Howell seconded that $650K of the proceeds of the REITS sale be moved to purchase Austin Capital All Seasons Fund. The motion carried.
9. Committee Chairman Discussion
Pierce Pratt stated this was his last year as chairman of the Investment committee. Pierce feels it is important for the next chairman of the committee to have some tenure on the committee, as knowledge and experience of the policies and fund managers and investments and is important.
Pierce stated that he would provide his recommendations in a letter to Pat Gratton as he will be the association President at the time of the chairman change, and the President selects the Chairman.
10. Next Meeting
The next regular meeting was set for Monday, May 3, 2004 in Tulsa.
With no further business, Terry Hollrah moved and George Bole seconded a motion to adjourn. The motion carried.
The meeting was adjourned at approximately 1:30 p.m.
David E. Lange,