Retirement Board - Regular Meeting

Treasurer salas on.

Yep, he's on the go ahead and you are.

Oh, I'm just going to have my college and oh, it's all right, you can zoom in. All right, I'm going to call to order the April 23rd Montgomery County employees retirement board meeting. No presence of retirement board member. And I'm going to have him lead us in the pledge. Do we have any public comment? No public comment. Okay. I'd like to make a motion to approve the January 20th. I feel like that's the date I messed up. It was. January 22nd, right? 2026 meeting. Is there a second?

Second.

Second by Commissioner McKeisha. Any board comment? Hearing none. Meeting minutes approved. All right. Coming up.

Take a poll.

Oh, I didn't take a vote. Oh, is there a vote to approve that? Yes.

Hi. Sorry.

They usually write it all out. All right. Motion carries. All right.

Hello. Good morning. Good afternoon, almost. Great to see you. Does everybody have a book? Great. So I'm going to start on the executive summary. How long would you like today to be? I know that's like the million dollar question. I think last time we hit executive summary, we adjourned.

Did you ever see that? Well, can you do 12 minutes or up to swap?

What time is it now? Not 12 minutes, but 12 o'clock.

12 o'clock.

You good on that?

Okay.

Yeah.

I was going to say, did you ever see that name, that tune?

I talk very fast. I can knock it out in a few minutes. It's funny because you have the book in front of you, but it almost feels so outdated. We've only been 23 days into the quarter and the markets have changed so much. So I'll start with the executive summary on the next slide. And you can see, just a reminder, what a fabulous year we had last year. You can see the market value, 652, closed at 752. However, first time in a while, we lost a little bit of traction for the first quarter. Market value went from 752 million to 743 million, which equates to just a little bit under 1%. Given all that happened and you'll see, especially in March, it's not a bad outcome. You know, the theme that I'm going to talk about today and every time I come is the value of diversification. the value of asset allocation and not chasing what we think is going to do well over the short term. And it's really paid off. And as we stand here today, I'm happy to report, which again, this presentation feels so outdated, that your market value is back up to $781 million. So that's about an estimated 5% so far for the month of April. So that puts you about positive 4% year to date, which is so interesting to see. So why don't I just skip the commentary and let's drive right into the market slide, I believe, next one, and then I'll summarize it. But you're familiar with this chart. It usually shows the quarter and the year to date. Today, I included the month of March because that's really when we saw a significant pullback. So just to look at this, the blue bar is the month of March. And you can see there was no place to hide is when the war started at February 28th. And you can see every asset class was negative except for commodities. Oil was up 78%. So really nothing did well. You can see dramatically international emerging market hit correction territory. They were down over 10%. But the good news is if you look at the quarter to date or year to date, which is the gray bar, you can barely see it except for large caps. Large caps down 4.2%. But if you go down the line, small cap positive 0.9, international 0.7. So you can see pretty much flat quarter. And then the good news is when you look at the one-year number, which is the dark bar, really strong gains because we came into the year strong. 2025 was a really strong year. So the good news is that your numbers still look good. And then again, we fast forward to today. We're back up to positive numbers. S&P has hit its eighth straight record in 2026. So again, just reminding you to stay the course, stay diversified, continue to focus on your strategic asset allocation. If we move to the next slide, I'll spend one moment on fixed income. Lots of volatility. And the key themes were when you see the stock market declining, what we saw was the short end of the curve. So like the two year rising dramatically. And I have a bunch of slides in here if you're interested later on. We entered the year thinking the Federal Reserve was going to cut rates two times. And that's really what was the positive momentum that we had, right? Inflation was maybe coming down. Things were looking good. When you have Federal Reserve cuts, it really helps the markets and the economy. However, that reversed course. And if you can see the 331 is in the blue here on the yield curve. And we started with that darker line below. So the short end of the curve went up. The long end of the curve also went up, which impacts mortgage rates, you know, the 10 year. So fixed incomes had a difficult month and a difficult quarter. When you think back to. you know, your risk management perspective, fixed income is supposed to be your buffer. Think back to 2022, fixed income, you know, investment grade bonds lost about 13%. So it was a challenging month for fixed income as well. And when you look at spreads, which is just really the extra yield that investors want to take on additional risks for investment, you know, for high yield emerging market debt, they bumped up a little bit, not a lot. There are still all time highs, which just shows there's still risk appetite. And as we sit here today, I think the focus and why the markets have done so well is that, you know, we still have uncertainty about the conflict, but folks have moved on to fundamentals. We've moved on. Some have moved on to earnings. We're still expecting double digit earnings for most companies. So there's lots of enthusiasm, I would say is probably the best word in the market. But, you know, we take it day by day and see how the volatility continues to roll. So if I just fast forward, I'm just going to go to keep going. These are all interesting slides about inflation, about the Fed. Let's just one more. One more, sorry. I'll just end my comments in here and try to summarize it from our perspective. So first, when we think about shocks, this is geopolitical shock, right? So we've had four shocks in the last six years. We've had COVID, Russia's invasion of Ukraine. We had Tariffs Liberation Day, and now we have this conflict. If we look at where we stood from an economic perspective before entering the shock, markets were pretty strong. Economy was pretty strong. Growth was starting to slow, but we had a strong consumer. Even artificial intelligence was viewed that was going to be very productive. So that strong support that we started has really been the backbone of of of things. But what we're seeing now is the concern with commodity shortages. If you think about not only does oil flow through the reconstructive hormones, we look at fertilizer, plastics, aluminum, you know, aluminum is responsible for microchips and things like that that are really important. to the economy. So the longer that stays closed, the harder that we're going to see the impact or the greater the impact to inflation and slower growth. And that's really the two key themes. But I think it's important when you think about market reaction support bullet point, when you look back in the S&P's history and you look at all these geopolitical shifts, Within one year, the market tends to be strong. So they tend to kind of push through market environments, even though it's volatile and the uncertainty tends to weigh on the market. So at the end of the day, I'll just wrap this up. You know, we're keenly focused on inflation and slower growth battle being said. You know, when you look at all those asset classes and what's been doing well, we talked about international emerging markets were the star performers when S&P has been a star performer for a while. When we look at your asset allocation, you exposure to all these asset classes, even different asset classes than fixed income and alternatives. You have a hedge fund. That wasn't valued as of in this booklet, but that was positive in the first quarter when, again, you saw just about every asset class was negative. So that's exactly the job that that hedge fund takes is to be uncorrelated with a lot of other asset classes. So that benefited you. So if we can set one more slide, our point of view, and then I'll wrap this up with showing you the portfolio is we do feel like there's risk for inflation to continue higher. Again, a lot's going to depend on the longevity of this conflict, but we still remain positive so far on risk assets and commodities. You do have commodity exposure in one of your funds. We're not expecting a recession. Risks have risen, but we're not there. And again, when you look at equity markets, there's still a lot of positives beneath the surface, you know, with tax cuts and consumers may continue to spend given the recent refunds. Again, I mentioned double digit earnings within the S&P 500. And again, a strong, robust economy. With consumer spending, we just got a report that it's up. But, you know, we're also starting to see in the lower income segments that borrowing is rising. And you guys all know this. So there could be defaults that we're seeing in the future. Really, it's going to be, you know, how long are we going to have these gasoline prices, which is a larger percentage of income. for your lower income consumers. So that's going to be an impact that we're looking at as well. But active management is important. You have a lot of passive in your equities, which has served you well. We've talked about active management within that, but again, your exposure has served you well. So it's always an option. Emerging markets are very interesting, low valuations there and lots of opportunity. And then finally, within fixed income, we saw that yield curve, the short run rising, we have positions to take advantage of that. So one of the benefits, you know, we're not changing your strategic asset allocation, but one of the benefits that we have is because we're overseeing, we're the fiduciary, we're overseeing the managers within the funds. They can make active changes within the portfolios instantaneously to take advantage of opportunities. Are there oil exporting countries that we could take advantage of? There's certainly reactions in the fixed income market that we feel are well overdone that we're taking positions on. So that's the kind of beauty of us allowing to do that beneath the surface.

So with all that being said, I'm going to jump right into portfolio.

Unless there's any questions on the economy or outlook, I tried to hit the relevant points. So if you fast forward finally to one more slide.

One more. Just a quick question. How are we invested in commodities?

Yeah, so great question. So you have a dynamic asset allocation fund. That is a fund. It's benchmarked to the S&P 500 just for kind of that's the opportunity set that we're looking. But what that fund, it allows SEI to take a shorter term, you know, your strategic asset allocation, you know, your exposure to different funds is for the long term. But within some of these funds, we're very active. So the dynamic asset allocation fund, we have exposure to a commodities index. So that is exposure to, you know, precious metals. We saw gold do phenomenal. It's agriculture, oil. So there's exposure to that. There's exposure to the yield curve where we continue to think that it will be rising and the short end will come down. We've exposure to emerging market currencies, more long currencies that we think will do well. And we're short currencies that we don't think emerging currencies. economies won't do as strongly. So we are able to be very nimble in that fund and we make trades based upon our outlook for about nine to 12 months. So that's like what's an active management plan. Again, you'll see it's done phenomenally well, but you'll see unfortunately the first quarter didn't do well because that short-term, that trade on the yield curve didn't do well. We also have inflation expectations there. So you have some inflation exposure as well. We have positions in there that we think inflation will continue to be stubbornly high. So those types of trades allow us to kind of take some of that short-term positioning within the market. So this is just a snapshot of where the portfolio ended. $743 million at the end of the quarter. Again, back to $781. That number's not in the book, but this is the number I quoted you. And then just if you want to flip to the next two slides, just shows the portfolio. You can see negative numbers. 0.99% the year to date. If you just glance at March, you can see negative across the board in every asset class, especially your Vanguard International Fund that was down over 8%. So it was a tough quarter internationally. But the good news from a quarter perspective, you're only down less than 1%. And if you look at your one-year numbers, you're still strong 14.5%. and again year to date you're now positive you're about back of envelope four four percent um and you can see here i won't read all the numbers if you flip to the next slide just shows a little bit more emerging market debt has been a key contributor uh 15 for your one year but down slightly um on the quarter your special situation collective fund that's your hedge fund that is buffering a little bit within your um portfolio And then your dynamic asset allocation fund is the one that I just spoke about. Down slightly for the quarter, but our positioning, we would hope to pay off in the future given a number of our exposures, especially commodities and yield curve positioning.

So there you have it. What do I have here? $1,155. Very talented.

Any questions that I answer everything or anything else I could...

Does anyone have any questions, comments?

I do think in the future, we'll look at the asset allocation. We like to officially look at it once a year just to make strategically, we feel that you're in the right allocation. Again, we did talk about active management and large cap before, and we talked about private equity. Those were two areas we talked about last year. We didn't make any changes, but you have a very sound diversified asset allocation. So it served you well in a number of different market segments that we've been experiencing.

Okay, great.

Have you heard of a potential rate drop?

That's the latest. The latest is that there could, so if there's a chart in there, it's almost by like weeks. And, you know, we entered the year two cuts, Fed rate cuts at the end of March. We were actually looking for a Fed raise. to raise rates because inflation was going to be high. Now there's conversation back on the table about a cut by the end of the year. So I think a lot, again, really is going to play out when this trade opens. You know, it was interesting, is this a pass-through event, meaning that it won't affect inflation longer term some of these geopolitical you know by the time the fed can't cut their way out of getting us out of the street right so if they do cut it's really going to be because the impact of everything else when we look at supply chain disruption remember supply chain disruption during covet and that's really when we saw inflation spike so the more the longer this goes on you know u.s is in good shape because we're an exporter but areas like china india who get majority of their oil and fertilizer and aluminum and plastics, if that continues to back up and then if infrastructure is shut down because they have nowhere to store the oil, they can't flip the switch overnight. So I think the longer this stays on, you could start to see some damage, inflation accelerating damage to growth. And then that would really, I think, move the Fed's hand. But now one cut is back on the table right now or priced into the market, I should say. But it's day by day how you look at it.

When you first showed us this a year ago, you were talking about how there's better prospects for international equity and that kind of thing. And obviously that has shown to be the case. What's the forecast at this point for you?

Well, we don't forecast the good news is for you guys as our fiduciary partner with you. We don't forecast what asset class is going to do well. You have exposure to all of these asset classes and that has served you well. So when one asset class doesn't do as strongly, you have protection and you're not, so you're only down less than 1% because you have experience with the board. That being said, we are very favorable on emerging markets. Valuations are low, great opportunities. Emerging markets are up, I think, 12% year to date in 2026. And when I talked to you before about that, US S&P 500 large cap has been the winner. I think it's been eight out of the last 10 years. And, you know, they're still they're still because the U.S. is so strong because we are an oil exporter. We we we are benefiting from the price of oil right now. But that doesn't mean it doesn't always correlate into the U.S. equity is going to be the best. And again, we're not the U.S. S&P 500. So only about like four or five percent small cap, which has been a lag or for a while. It's up like 12 percent. So for year to date. So I would say. What we like right now are emerging markets because the valuations are, and there's some great opportunities, even international, but the good news is you have exposure across the board. And then even within fixed income, what has served the retirement plan exceedingly well is high yield, which is our lower rated corporate bond and emerging market debt. they have provided double digit returns for the retirement plan last year. You know, if spreads continue to widen out a little bit, they may not do as well, but that diversification, they're a little riskier, but that diversification beyond just corporate investment grade bonds is benefiting you as well. And then, like I said, you have exposure to alternatives and their job is to really provide that risk management and move in different directions than these classic lessons. So does that answer your question?

Yeah.

Not a straight answer, right?

No, it's pretty, pretty straight. Yeah. I think. Yeah. And what percentage of ours is an alternative?

You have a low percent when SCI just, if you could go back to the portfolio page, when SCI was just 10% of the portfolio, it's a shame we had like less than 1%. Go one more, one more slide down. Keep going. No, the other way. One more. Sorry, it would be helpful if I could read. I don't have my glasses. So your alternatives are 5.7%. So you have special sets and structured credit. Like I said, before we did this transition and a year and a half ago, I think it was less than 1%, which was unfortunate because we had real estate in areas that really benefited. when the portfolio got hit in 2022, but it was such a small percentage. So we service other public plans, some very close to you, that have a higher percentage. Alternatives play a very important role, but understanding they're not as transparent, they're a little more expensive. so you know i i think when we looked at the asset allocation you know a year or two ago we looked at that um somewhere up to 10 15 of the portfolio which is what you might see typically especially with a plan of this size and assets you guys are you know 777 million which is you would definitely see a higher percentage alternatives but it's certainly something we can i think my goal was to continue to educate you you know we talked about private equity

I'm also curious about the private credit system and that loan.

Yeah, so the good news is you don't have exposure to private credit. Private credit, as you have heard, has taken off. The concerns, what you're hearing now, is that the retail sector has gotten involved. And private credit, like an alternative, you can't get that liquidity anymore. And you they have you can only get about 5%. So a retail investor that's locked up that hears that these and also the transparency, some of these loans aren't valued very often. So the concern is I see that you're giving me an NAD, but it's not accurate. And number two, I can only get 5% of my portfolio. So not only am I concerned about the value, now I can't get my money out. So you started to see a flea of especially retail investors try to get out and they have these gates. So it's causing a lot of concern in the marketplace. You know, many, like I said, we were getting pressure to create a private credit asset class and we didn't do it. Our CFO was like, no, it's... It mainly insurance companies invest in a lot of it. And then the exporters are software companies, which is a large percent of the private credit. That's how that has all started. So you're going to it's in the papers like every day. You're probably going to continue to see about it. It's just a matter of containing that run. So once people are fear and they run, but the irony is because it's locked up and it's illiquid and you can only get 5%, there's only so much you can get. So the run would have to be limited. But I think it'll be interesting to see how fixed income markets in general react to all this when you have on stabilization in the marketplace and you start to see defaults and the more companies are hit, it's kind of all correlated, right? The more companies are hit and they can't get low borrowing and cheap and then assets continue to decline, it could, we're nowhere near the subprime markets that we were before, but that's kind of the fear in the background that some of these values aren't what they appear to be. And that's alternatives in general, you know, they're not valued daily. So there's always been a concern about that, you know, and we can talk more about how we go through that process at SEI, but that's bigger, the bigger issue.

Thanks.

Okay. Great.

Anyone else?

Okay.

Bobby, okay. All right. You're okay with yesterday's value, right? Salary bonus.

I know, I know. We're a little punch drunk.

It's all good, it's all good.

All right, I'd like to make a motion to adjourn the retirement board meeting for April 23rd. Is there a second?

Second.

Second. If I control a heart, any board comment? Hearing none, all in favor?

Aye.

Aye. Motion carries. Thank you. Thank you very much. Enjoy, enjoy. It's beautiful. If you're punch drunk and you haven't been outside, it's gorgeous out. Oh, nice.