Planning Commission - Regular Meeting

Yeah, I think it's just, yeah. Okay. Well, we're back again to hear from our quarterly report from Meridian about our portfolio. So we will turn it over to, I'm not sure which of you is going to start.

Yeah, I'll start today. I'll start today. Yeah. Did I get too many... where we get to report such good news, so we're glad. We're always glad to be here. Yay, for the good ones. This is even better. Let's just flip over in the booklet there to the first page behind the cover page. This is a snapshot of the portfolio at the end of June. You started one year ago with $18.7 million, and at the end of the first quarter, you had right about $19 million, and you're finished with $21 million. So it crossed over the $20 million. I'm sorry, Tyler's not here to celebrate that. You don't have very many quarters. I can't remember very many where the plan was up 9% in one quarter. It was a pretty remarkable recovery. If you recall, we were kind of flat down just a little bit in the first quarter, and the stock market was down 4% year-to-date through the first quarter. And now I had a surge. The stock market was up 15% just for the quarter. So, of course, that's where your returns have come from. Three-year long-term average return of 11%, even rolling back to 10 years, 8.3%. So if you recall, your actuarial assumption is six and a half. So to be able to outpace that over 10 years, the markets really helped the plan over that period of time. As far as asset allocation goes, we're pretty much where we've been. We've been kind of peddled to the metal on stocks at 74%, almost 75% in stocks toward the upper end of your allowed range of 80%. So that's where your performance is coming from. On page two... performance and percentage numbers, if you look up at the top, fixed income being bonds, you know, they haven't added a lot of value to the portfolio yet this year, but with interest rates where they are that we'll share with you in a minute, they're going to be a significant contributor going forward. But even over the last year, up between 3 and 4 percent just in the bond portion of the portfolio and 5 percent over the last three years. And then common stocks, it's like we dropped a K there somehow. Somewhere between our office and here, the K fell off there. Common stocks, you can see that up 11%. ETF equities, which are your small cap. Foreign stocks had a big quarter up almost over 14% there. And then the chart that we provide quarterly at the bottom showing how much money that you had in the plan, that you put in the plan, $6.5 million. So the remainder, up to $21 million is market gain. So it shows you why you're doing what you're doing and why you haven't invested the way that you do. We've been repositioning the portfolio pretty aggressively over really the last nine months, but kind of accelerated that pace in the second quarter. And just trying to position the stock portion of the portfolio where we think the market will take us over the next 18 months to two years. And I'm going to turn this part over to Marshall, and we'll talk about some things in the market.

Yeah. This is something we don't usually bring to these meetings, but... Like Pat said, there's just so much activity this quarter, we thought at least we weren't talking about. Remember last quarter, the market was a lot more volatile, although the returns were basically flat. A lot happened, especially in February and March. One of the things that we talked about was that, for us, the volatility is exciting because it allows us to... a lot of times gives us opportunities to buy stocks that we've kind of had on our wish list for a while. And so you can see this long list of mostly new stocks that you haven't owned before. And they're really positioned around some core themes that we think are going to continue for decades ahead. Those themes are semiconductors, which are related to AI, robotic surgery, that's what Intuitive Surgical does, the GLP-1 drugs. We bought Eli Lilly and Novo Nordisk, initiated a position in Microsoft, which is one of the biggest companies in the world. clearly involved in the AI theme, along with a lot of others, like Uber and NVIDIA and Broadcom, which are also semiconductor chip companies. So to fund all those, you can see a lot of the things we sold down below. Some are what I would call old economy stocks, like oil. It was nice to own oil stocks in the first quarter. But when we saw that kind of moving behind us, that was an obvious candidate for us to sell and buy something that we thought had a longer runway. Air Products and Chemicals falls into that category as well. They deliver gases and things all over the world, along with some others that we trim to fund these new positions. So beyond that, we have a few charts that really want to highlight some key themes going on in the broader marketplace that we think are important. That's small cap performance, international performance, AI, and interest rates and inflation. So what this first chart shows on page four is the first half performance of small cap US stocks relative to large cap US stocks. Gold bar is telling you is that small cap stocks in the US outperformed large cap stocks by 12%. That's something we haven't seen in a really long time. In fact, you can see over the last four years, small caps have been a real drag relative to large caps in the portfolio. As you know, our stance is to stay diversified and own different size companies and different companies in different locations. So great to see that paying off for you with small caps being a leader in your portfolio year to day. Page five breaks down kind of some international performance by country. If you remember about this time last year, due to some new legislation, we were forced to sell the emerging market stocks that you did own because you weren't allowed to own investments in China anymore. And so far this year, it's been really helpful. I'd like to make a few extra notes about that. So, you know, China makes up a large portion of the emerging market, so if you don't own it, That means you have to own more of what else is in the emerging markets basket. The two largest countries in the emerging market baskets that you own now are Taiwan and South Korea. And together, those make up over 60% of your emerging markets exposure. So quite a bit more concentrated. But the good news is your emerging markets performance is up 34% this year. And that's because Taiwan, the country ETF, is up 63% and South Korea is up 86%. And that's solely due to, I shouldn't say solely, largely due to Samsung being located in South Korea. It's up a ton this year. And Taiwan's semiconductors in Taiwan, obviously, driving those country returns. So the performance has been great so far. I'd just like to highlight that it may be a little bit more volatile than what we previously did, but we'll take the upside volatility any day. This next chart just shows business spending on computers and data center hardware. It's an annualized rate. And you can just see the ramp. We're getting a lot of questions in client meetings around AI and questions about whether or not it's a bubble. We just don't think it is. And you're seeing it in real economic data like this. In the 90s, that bubble was driven by speculation. We're not seeing that right now. You're seeing actual spending and that spending showing up in economic numbers and stock earnings growth. So you own a lot of stocks related to this theme. I don't know how much technology flexibility y'all have, but the amount we've learned just using AI in our company over the last 12 months is really hard to describe. And we're just scratching the surface, I think. It's got a long runway. It'd be interesting to see what new tools and workflows and things like that that we're able to layer on to our business and in turn kind of help us think about the investment implications too. Just a year ago, we've been talking about one year ago, everybody was just, what is AI?

Things are progressing so quickly. It's just revolutionary. And you kind of hate to commit too much to any particular area because things really can change on a basis, but a day-to-day basis. But now AI tools are being embedded in just about everything, product that we use and service that we use and software and those kinds of things. The money's being spent on that and the earnings will follow, so we think it's a really, really long term revolution and certainly stock ideas, but in these companies and in society as a whole.

Do you guys anticipate, I guess, what I would call is a pay to play, pay to use, AI more? I mean, a lot of it for just everyday people, you can go out and use a free version, right? But as they build more and have more capacity and have to support that, do you think there's going to be more people having to pay to actually use it?

Yeah, absolutely. Especially the more complicated it gets. It seems to be. That was one of the questions a year ago, is how are these companies going to make money? So the use of tokens. We're using Claude, which is more sophisticated models for a lot of things that we do. And we're a paid subscriber. But only up to a point, they'll make you stop. I'm on that one as well. Yeah, do you? Yeah.

I'll tell you, if you want to buy more, you can.

Or don't come back until 2.30 to see if you need more or something like that.

You've used your allotment.

Yeah. Still more to come on that, because not everybody is just going to be able to charge for AI, but today they are. The big benefit to society over the long term is increased productivity, being able to do what we already do so much better. Do you have anything to add to that?

Not really, no. I think there will always be a free tier, but I think the major use cases, like most other things, software, I think most of the value is going to come from kind of the enterprise level where businesses are using it and allowing their employees to use it for different use cases.

Yeah.

If you go to chart 7, one thing Pat just mentioned is earnings. And we talked about the AI spend and it showing up in the economy and in earnings. Well, here's just some data for you. Looking at 12-month forward earnings growth of large-cap U.S. stocks at 32%. That's really, really impressive. And what that green line shows is that over time, Although it deviates some, the stock market follows earnings. The economy is really complex, but the stocks that make up a large portion of the economy are already seeing the benefits from AI spending and everything else. And it's not just technology. A couple of the stocks that you own that are being treated like AI stocks or Generac. They provide generators, but now they're being hired to build these huge diesel generators that are bigger than the size of this room for these data centers. One that we don't own, Caterpillar, all of their equipment is being used to do the construction on all these data centers. So you're seeing it in multiple different industries, not just the tech stocks, but everything that's associated with the AI build out today.

Well, we want to make a couple of comments about what's going on with interest rates in the bond market. Inflation and interest rates are directly linked. A higher rate of inflation, you're going to see higher interest rates. And this inflation that we're seeing, this is a measure of producer prices, producer price index, the headline. which is the actual number, the real number, and then the core means excluding food and energy. So two different measures there. But you can see inflation hasn't just been going up over the last year, year and a half. It's been going up over the last three years. And it's especially being embedded in the industrial and production side of our economy. There are things like gasoline prices and fuel prices or whatever, but it's become remarkably a low concentration of energy products used in producing that. It used to be heavy, heavy oil users, not really quite that much. We can't really pin it on that. You can't really pin it all on tariffs because those have been kind of modest. Now some of that's being refunded. It's actually scarcity. And so inflation is going up. And you're seeing that everywhere, really. As a consumer, you're seeing that as well, restaurants and things like that. So we don't really see that subsiding anytime soon we think we think inflation really could become a problem even more so than it is and with that come some challenges and but one of the opportunities it presents is that interest rates will be higher and so you have this about a fourth of your portfolio you turn the last page this is a level interest about if your fourth of your portfolio is invested in bonds and you know four years ago we were getting two percent interest rates And now we're getting between four and five. In some cases, Marshall just bought a bond this morning that was yielding over 5%, a corporate bond. So that portion of your portfolio that really hasn't helped a lot in the last bit, especially this year, is really going to have a meaningful impact on the returns. If we can get 4% or 5% out of the fixed portion, and then the stock market even be average or even below average, you're going to exceed your actuarial rate of return. This is just two measures, the 10-year treasury yield, which is a good benchmark at 4.5%. So the 10-year affects everything, mortgages, We've got almost three whole generations that think mortgage rates ought to be below 3%, and now they're above 6%, mostly 6.5% around there, and that's normal. If you kind of look back through history, that's not too high, not too low. So we think interest rates are going to remain elevated right now. That 4.55% today is 4.6%. In the back, we've got the whole portfolio. If you have any questions about that or anything else, we'll be glad to address that.

We always like the good reports.

We come every quarter, but we like to come more these types of quarters.

Did I read that, is the SEC proposing some changes in reporting or required reporting by companies to go away from quarterly to something else or? That's the extent of what I, you know, that high level. And is that going to have an impact for you guys, I guess?

That is true that it's been mentioned and maybe even more so mentioned, but there's a huge pushback on that. You know, the investing community and really most people think companies need to be able to

Yeah, I would think, yeah, in between there. Much more comforting for us, too.

You know, one of the reasons I kind of initiate that thought is that the gathering of information is so onerous, or the filing requirements are so onerous. But, you know, AI is going to help that, you know, the gathering of data in order to make the reporting easier. So it could happen, but I kind of doubt it.

From my understanding, most of the pressure or the talk is... politically based. And their argument is that fewer and fewer companies are becoming public companies. And they think part of the reason is because of what Pat mentioned, how much time and resources it takes to do the quarterly reporting. So ultimately, I don't think anything will come of it. We think companies having to report more often is probably better for the marketplace. But we'll certainly see how it plays out.

Anybody else have any questions? All right. I'm filling in as chairperson today.

Good for you. Thank you so much for your time. Thank you guys for coming.

I'm glad we hung out.

We barely made it. We barely made it. We were kind of coming in on two wheels today.

That's okay. We'll share the good news. All right. So I'll take a motion to adjourn again.

I'll make a motion. I'll second.

All those in favor? Aye.

All right.