AAPG INVESTMENT COMMITTEE
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October 23, 2006
Investment Committee Chairman George Bole called the meeting to order at 10:00 a.m.
Motion: R. Tillman moved, D. Howell, seconded to approve the minutes from the April 24, 2006 Investment Committee meeting was approved as submitted. Motion carried unanimously.
Motion: R. Tillman moved, T. Hollrah seconded to include a summation of recommendations from L. Thompson & Associates in the minutes. The motion was approved.
Business Plan: Richard Fritz reported AAPG was developing a comprehensive Business Plan for the first time in AAPG history. Every department, committee and division has been asked to complete a business plan. This plan is designed to cover purpose, current reality, goals with metrics and the action items. It will help departments, committees and divisions review their major goals and select the top three and focus on accomplishing those goals. The Investment Committee will also be asked to complete a business plan.
Accelerated Development Program: A part of the Business Plan is an accelerated development program. AAPG needs to take advantage of opportunities developing worldwide. The EC has approved, in concept, the idea of taking about two million dollars out of the portfolio over a three to five year period and taking advantage of these opportunities. The EC may be asking up to $250,000 from the general fund this year in order to expand the London office, possibly set up an office in Bahrain and Russia, etc. Seed money is needed to fund and start some of these ventures. David Lange stated that typically when funds are withdrawn from any portfolio, we keep the asset allocation in place and withdraw a little from each asset class.
AAPG has taken over as secretariat of the Geo Conference in Bahrain. It takes place every two years on even years. The first year will make us $150,000 to $160,000 and this amount will increase with each conference. The EC is considering opening an office in Bahrain and the approximate cost for this is $200-250K. We believe that Saudi Aramco would support short courses we offer from the Bahrain office. The short courses should yield about $80,000 per year. There is a main causeway between Saudi Arabia and Bahrain and Aramco has sent many people over to the GEO meeting. This is not a contractual agreement with Aramco.
Fundraising Program: We are moving into the five phases of the Fundraising program. Within the trustees and campaign committee, a group of about fifteen people, they have raised over a million dollars. We will start focusing on the Corporate Fundraising campaign and we are targeting six to seven million dollars. Jack Threet has built a powerful committee.
Alan Bergin reported the financial markets did not get off to a great start in the third quarter but they certainly made up for lost ground during the period. At one point in July, the DJIA was close to a new low for the year. By the end of the quarter, the same index finished short of a new record high.
Large Cap versus Small Cap: A large sell off in the small cap market in July allowed the large cap market to outperform for the quarter. Small cap has still outperformed for the nine months of 2006 but the gap between small and large is shrinking.
Growth versus Value: For the first nine months of 2006, value stocks have trampled growth stocks. Over the past ten years, large cap value has returned twice as much as large cap growth and small cap value has returned three times as much as small cap growth.
Domestic versus International Market: International markets have been outperforming domestic, and LTA expects this trend to continue even though the US market happened to do better this past quarter.
Alan stated that if the committee wishes to make any changes in the Hedge fund team LTA would recommend you consider rethinking what the role of the Austin Capital All Seasons fund is in this portfolio. LTA’s recommendation might be to remove the Austin Capital fund and transfer the allocation to Private Advisors.
Motion: Terry Hollrah moved and John Brock seconded to reallocate the entire amount in the Austin Capital All Seasons Hedge funds into the Private Advisors Stable Value fund. Motion carried unanimously.
Motion: D. Howell moved and J. Brock seconded to eliminate Laudus Rosenberg Small Cap fund and split that allocation evenly between the Dodge and Cox Stock Fund and Renaissance. Motion carried unanimously.
Alan Bergin talked about asset allocation, whether the Committee would like to have a higher fixed income asset allocation or if it would like to consider International fixed income or the hedge funds and possibly increasing the allocations to that Private Advisors Stable Value Fund. Private Advisors are viewed as a fixed income alternative fund and is a very debt orientated fund. LTA views it as a substitute for fixed income that should give the portfolio higher than fixed income returns, but the same risk as a fixed income security. LTA thinks it could have a good role in the portfolio.
Alan Bergin stated he does not think it is necessary to increase the allocation to fixed income. The Total Return Fund is at a 10% allocation, and this is an appropriate allocation. Pimco Total Return is a bond fund and is spread among different bond sectors, and includes treasuries, mortgages and some small percentages of international bonds. It is a very diverse fixed income fund. If the Committee wanted more diversification it could increase the allocation to the Private Advisors Stable Value Fund.
Private Advisors Sable Value Fund is a debt orientated Hedge Fund that has a lot of strategies that either involves fixed income securities or they have some programs where they are lending money out to high quality companies. CSFB is similar to an index but technically it is not an index. It is a grouping of other hedge funds. The reason the Private Advisors fund is in there is purely for risk diversification, and it is not there to increase the return of the portfolio.
The total portfolio return against the policy index is somewhat disappointing as some active managers have under performed their policy index. However, if you look at the absolute return levels of the policy index it is well ahead of where various combinations of the equity and bond markets would have been or have been.
LTA thinks a three year average return of over 12% is good. Looking at the projected five year number of 8.5% it appears the three year average return report appears to be good. The three small cap managers are CRM Mid Cap Value, Laudus Rosenberg and Kalmar. As a team they have all under performed. Part of the story has to do with real estate. None of these have real estate exposure but it has become a major part of the index. LTA believes we should review rebuilding the small cap allocation. Laudus Rosenberg is the fund we have the most concerns about with them losing 2.17% when the markets did well.
The committee requested that for the next meeting LTA develop a pie chart which shows the different large caps verses small caps. It was also requested that for the next meeting there is a chart showing the three and five year numbers for international funds. LTA stated the three to five year numbers can’t be added into the report because the Committee did not actually own them that long but a separate report can be created to show the long term numbers.
Current allocations in Domestic funds are 30% in large cap and 20% in small cap for a total of 50%. Allocations in International Equity funds (Julius Baer and Dodge & Cox) are currently 28% and the actual allocation is 31%. When you are dealing with 13 million dollars there is only so much asset classes you can fit in here and actually find managers that will take the allocation you want to give them. It was mentioned by a committee member that if it meant the Committee has to consolidate in order to get dollar amounts up where it would be considered by another manager they would not personally be against that option.
At the next meeting LTA will have some recommendations on mid and small cap alternatives. The goal is 7½% on our rate of return and this will be noted as the target rate on the handouts at the next Investment Committee meeting. Our total return rate is currently 8.57% which is above our 7.50% target return.
Alan commented on the termination of Morgan Stanley REIT in December 2003. At that time LTA became negative on REIT market and looking back it was the wrong decision to make, but they still feel justified in their REIT position. They were looking at securities that were highly valued verses the underlying value of the properties. That was the main reason they were negative on REITS. Real estate properties valuations took off and shot through the roof and that premium has backed down to it historical average of 3% to 6%. However, it is strictly based on the fact that property values have been growing quicker than the REIT market. LTA is not comfortable with the current REIT valuations. We think the valuations are stretched—a lot of institutional money has been poured into private real estate. Big endowments such as Yale & Harvard buying properties and in some cases buying REITS and taking them private and what is happening is you are getting a lot of money chasing these reviews around the country and it is increasing the valuations across all sectors. We think it is an artificial evaluation. We think the under valuated property is way overvalued.
Agenda item for the April meeting: Discuss several new funds that have come on the market in the last year that are international or global REITS.
Lange advised the follow up to the previous discussions with the committee on the status of the GeoVe$t program. He stated the master trust agreement will need to be terminated as the IRS will not issue a favorable determination letter based on the most recent filing. The GeoVe$t master trust was under review because the program was started in 2001 and had not grown or received any new member companies in it. It was setup as a master trust program for other AAPG member companies to be able to participate in. Because the number of member firms did not reach the minimum threshold, the IRS has advised they are not going to provide a favorable determination letter for the program going forward. When the program was setup it was established that it would grow to at least thirty member companies and as of today it only has ten member companies in the program including the AAPG employees 401k plan which is about half the asset value of the GeoVe$t plan.
Lange advised that the AAPG Pension Committee has had proposals and discussions with other service providers, and that allGeoVe$t member firms have been advised via letter dated September 29th that they will need to develop their own retirement programs. The list of service providers includes: ADP, Fidelity, Milliman,USA, One American and UBS Financial. The goal of the committee is to be able to terminate the Master Trust Agreement on March 31, 2007, and this was so stated in the letters to each of the GeoVe$t members firms.
AAPG also sent letters to the GeoVe$t participants on October 17, 2006 advising them that AAPG had selected ADP as its service provider. The master trust won’t be terminated until all GeoVe$t plan participants move their assets from the current trust to another service providers program.
The committee decided to hold the next meeting on April 30, 2007 with the meeting in the afternoon following a luncheon at noon.
J. McGhay moved to adjourn the meeting. J. Brock seconded the motion. The motion passed and the meeting was adjourned at approximately 1 PM.