Retirement Board - Regular Meeting

So, we'll call to order the October 29th uh employee Montgomery County employees retirement board meeting. Note the presence of all members of retirement board. I'm going to ask uh Dennis Santon to lead us in the pledge to the flag of the United States of America and to the stand indivisible and justice for allice. Okay. We don't have any public comment, do we? Okay.

All right. No public comment. Moving on to the approval of the minutes. I'd like to make a motion to approve the minutes from the last uh retirement board meeting on July 16th. Um is there a second? Second. Seconded by controller Hart. then I'll turn it over to our CFO.

Thank you. Uh just a few uh comments before we get started with the um presentation from SEI. We're on schedule to uh complete our contribution, the county's contribution to the pension plan. It's going to be a total of 32.5 million by the end of the year. That'll be 100% of the contri contribution that's required for 2025. And this will be our fifth year to to um contribute 100% to the plan.

Also, I just wanted to note real quick, I sent out a report uh via email and those that are in the room have a hard copy. Uh it's put out by the Marquette um group and basically it's it's pretty really good information. It's a comparison of county pension plans here in Pennsylvania. Um so it gives you some really good statistical information. Um, this was updated as of 2024. Um, and they do this every year. So, we'll continue to get this. But, uh, if you have any questions after you read through the information, just reach out. With that, I'm talking. Thank you. How are you?

I'm doing great. How are you guys today? Good to see you. Hello to the online. So if you could start the presentation kindly on the um the executive summary one more page please well good afternoon I'm happy to report good news today um seems like the markets nothing can shrug off a really strong market We're hitting new records today. Um, you can see on the executive summary here, we started the year at 652 million and we ended the quarter at 734 million and as of yesterday, the plan is up to 748 million. So, it's really been a fantastic year for the portfolio. The third quarter, the portfolio earned a 5.43% and year to date your performance is 13.54. And it's interesting, you know, we talked about your goals with cola and what's needed for the plan. You know, the volatile year that we entered into with liberation day. It's quite remarkable to see that return of 13.5% and even higher kind of given that the market is still rallying. Um last year you had 11.7%. So you beat the returns of last year and then uh 2023 it was 15%. So, as we continue to get rid of that 2022 year that was the strong negative year, this will certainly help in a number of measurements that you're looking forward to. You can see that the uh portfolio earned 87.8 million year to date through through um September 30th. And just to put things in perspective, I always like to give a highle summary of the asset classes. You can see equities here big responsibility as far as the g the earns earnings that you did for 13.5%.

Equities were up over 19%. And really we started you know we started strong gains despite you think of all the headwinds with um tariffs with geopolitical issues of the government shutdown. What we're seeing is strong corporate earnings uh or saw an aggress a federal reserve and start cutting rates in September and that really helped lead to this rally. A big part of the equity rally however was primarily focused on artificial intelligence. We've been talking about that just about every quarter when I meet with you. We see the magnificent seven book. Um I have a few slides in here if you're interested in just really expanding artificial intelligence and really the strength of that's taking place and really leading especially US equities. We did even see AI um have positive results in China in their artificial intelligence areas in those tech areas. And then for um a nice surprise for the quarter was small cap. small cap had been lagging but since the Federal Reserve cut rates that helps a lot of the smaller companies who are refinancing so we saw small caps have a strong quarter of up 12%. But when we do look deep beneath the surface it was really a lot of the riskier names um that did rally almost the junk rally low quality but your portfolio absolutely benefiting over 19%. Looking at fixed income positive markets, uh bond markets were volatile, interest rates were volatile, but we did see yields fall. We had a steepening of the yield curve. The shorter end of the curve steepened, and that again is due to the Fed reserve cutting. And then the longer end of the curve was really due to concerns about inflation and the debt. So we continued to see that ste steepening of the curve. Uh the good news is all three fixed income funds that the portfolio has in in their in their assets did very very well and I'll show you that when we look at the performance. And then finally your alternatives up over 8% 8.7% they continue to provide returns in in all markets your special sets and your

structured credit funds. As far as the portfolio governance we did um we updated your allocation last year. We did do a review in the spring. If you recall, there was a slight recommendation to diversify your US equity a little bit due to some of these high concentration names and we did recommend to shift duration a little bit in fixed income. Nothing was agreed upon at that meeting. So I'm still open to having more education, more dialogue and happy happy to discuss that. Any questions on the executive summary? Any more things? Do you mind moving to the market page? Great. Oh, thank you. Sorry, I'm looking at you and you're already there. Uh, so this you're familiar with this slide. This is the market performance overview. It gives a nice reference when we look at the returns of your portfolio. The blue bar is the quarter returns. The gray is year to date and the then the darker black or darker gray is your one year. But quite you know it's quite revealing when you look across all asset classes positive on a quarter of one year and year to date except for your long duration which you don't have exposure to. So really strong markets. Um a couple things to point out which I mentioned in my executive summary. We saw large cap did well this quarter but you saw small cap again up 12% leading the charge when you look at US equity. But what I think is noteworthy when you look at world equity xUS and emerging markets if your eye can focus on the light gray bar you'll see it's been really you know wonderful returns on a one-year bas or excuse me on a year-to- date basis emerging markets is up almost 28% and world equity is up over 25% and again when we met last time we discussed that US equity markets have been leading equity markets internationally and emerging for the last decade So we're really seeing a shift. You have exposure. That's why it's really

important to have diversification within your portfolio. Um we talked about you know this the dollar had declined which really helped um provide some of those gains when you equate them back into US dollar. You can see the return um just about double what US equity again. So we continue to reinforce diversification. That's another benefit for the portfolio. And then um you continue to look down. You can see fixed income across the board did well. High yield bonds and emerging market debt. Again, looking at the year-to-day returns, you can see they're making nice contributions. Emerging market almost 15% in their areas of fixed income. Um that that's nice to see that are also contributing to your return. And then finally, commodities. You do have exposure to some commodities. They had a nice return as well. So, looking at the next slide is just the fixed income review. I just touched on a few of these comments, but you can see the yield curve. And again, if you look at the blue, it's a little bit hard to read, but on the yield curve on the lefth hand side, you can see the the bright blue dipped down a little bit on the shorter end of the curve again with the Federal Reserve cutting. And you can see that the steepening continues as the 10-year and further out on the yield curve continues to remain high. And again, concerns about inflation and concerns about our debt keep that number high. And that feeds into you know mortgage rates and interest rates that consumers are are feeling the pinch and that is um still of a concern. But the good news is on the right hand side you can see that um due to increased risk appetite you can see uh investment grade high yield and emerging market debt their option adjusted spreads continue to go down and they're at historical heights. So it's kind of an incredible market where you have equity at all-time highs, you have spreads at all times lows. So, it's really um it's really a beneficial marketplace, but concerning to some about maybe an AI bubble. So, if we look at the next slide, you can see um I just have a few slides in here and if you have a minute, if you guys are tight on

time, I can skip them. You want me to skip them? Skip them. We're a little tight on time. Okay, let's let's move forward then. If if you have interest, you know, if you want to look back, it really just speaks to the uh concentration risk within the S&P and how artificial intelligence is leading. It's funny because Nvidia announced today their $5 trillion market cap and um they're up 55%. So it's just a very interesting perspective. So I'll just go to the final slide since so we can wrap it up so everyone can move on to their day.

There you go. So just looking ahead. Oh, back. One more with the blue the blue page. One more. One more. There you go. Thank you. I know I talk fast as I've um just looking ahead, you know, these are some of our thoughts and what we're looking out for as we oversee your portfolio. Economy continues to have a good um you know, seem ahead of it. We've seen strong corporate earnings. Consumers are spending. We're starting to see some cracks in lower income, but the wealth effect, those who have the assets continue to grow in their portfolios. So, um I think that's surprising a lot. and the AI investments that are being made are really uh really strengthening the markets. We do see increased fiscal spending and today the Fed is meeting in about probably a half an hour and the expectation is they will cut u interest rates bas 25 basis points. So the markets continue to like that and that's you know appreciated within the markets and that provides growth. Uh what we're looking out for is the Supreme Court is meeting I believe on November 5th. So they're going to weigh on the um legality of some of the tariffs. So we might see some market disruption depending on what the outcome is there. We still feel inflation is the last leg is still going to be persistently high. We saw it come in at 3% which is a little bit lower than what's expected but still still a driver still a concern. And then finally um accelerated productivity is really going to be key. you look at all the investment in artificial intelligence, all the market concentration and the rally, it's really starting to see the productivity is really what we're going to be looking for. And I think it was so interesting, you know, with Amazon, you know, announcing they're laying off 14,000 to 30,000 jobs. A lot of that is due to artificial intelligence. So, we started to see some of these big firms um you know, those of us who have college kids, we know that that's hurting them. But um it'll be very interesting to see the productivity because a lot of the earnings today are

based on upon future outlook and future investments. Um and then finally bond yields we think will remain elevated. I will end it there so we can look at the portfolio if you don't mind flipping through probably about four slides. Any questions on the outlook or the markets? Well, uh Kathy, I have one quick question. Could you hear me?

I can. Yes. So you you you um the the two things that you said that are kind of interesting. One is is that the AI sort of some are predicting it's a bubble or is it going to is there prediction of leveling off or um like what's what's the what's the thought on that? Uh when when you said about some are concerned that it might be an AI bubble.

Well there's a lot of things that factor into that Tom. there's you know some cyclicality like you see all these deals being made between Nvidia and Oracle and Open AI and a lot of the concerns it's very cycl cyclical so and there's a slide in there Nvidia is part you know made a deal with open AAI then a open AI turns around and buys Nvidia's chips so there's a lot of you know vendor financing they're calling it so the money keeps exchanging hands there's another deal with Oracle and open AI that are um

I think it was the 300 00 billion dollar deal and that's not going to occur until 2025 with you know improvements five to 10 years out. But that all being said, Oracle stock went up 30% when that announcement came out. So it's it's you know there between between the revenue and what's happening within these companies and the finances and a lot of it being projected on in the future. The concern really boils down Tom is that the valuations are so high um so that they're just priced for perfection and you're and a lot of that's baked into the market today. The bigger concern is that there's another side in there. You know, we looked at AI companies in the S&P 500 and since chat GPT was rolled out two years ago, they represent over 43% of the S&P 500. So if you really look at these remarkable gains that the US large cap equity market is producing, you see um it's very isolated and concentrated. So if you were to take out those names, you definitely would not see these high returns. So this so to to sum it up, you know, if we have these returns all baked in today and we don't see acceleration of productivity, you could see that level off because there's, you know, it's kind of priced for this perfect world that AI is going to, you know, solve the world. And does that make sense?

Yeah, kind of. But the the other thing is is that it's such a small, you know, there there's not many players in the marketplace either. So that kind of makes it, you know, re I'll say real players in the marketplace, right? That's right. That's right. There's just a few names that we hear about. So it's so the the the trading going between them or the agreements going around between them kind of makes it interesting. Uh and I I agree with you as far as far as like there scratch it's like you scratch my back I'll scratch your back relationship. That's right. That's right.

So there is there is some concern over what will happen but on the flip side you know you got major players that that are in that marketplace. So um I don't know it's it's it's hard to say what's going to happen. And then you you you mentioned that the inflation is going to is predicted uh um you said what coming in at three 3%.

That's what it came in uh I believe last week even though the numbers are hard to measure with with with the government closure but it came in three markets were expecting 3.1. Um you know obviously the Fed's preferred number is 2%. There's lots of question on that if that even makes sense to have that number. should it be higher? So, you know, that's that's the concern, but I think the the markets rallied because the expectation was it was going to increase 3.1% and it came in at 3%. So, that gives the Fed a little bit more wiggle room and the markets rallied. So, if you think about the Federal Reserve wants is looking at softening employment and softening labor. So they want to get ahead of that and cut rates, but their concern is if inflation's too high and remains too sticky or if tariffs produce additional inflation, they don't want to be cutting rates in that environment. So by showing an inflation rate that was a little bit lower than is expected, it allows the Federal Reserve to cut inflation, excuse me, to cut interest rates today, but it is a balancing act. There there's risk on both sides of the coin um with what they're facing, especially with lack of data. we're not if we stay closed, if the government stays closed for another week, we're not going to have October inflation um reports. So, it just makes it makes, you know, operating in that environment even more challenging,

right? Does that does that answer your question? Yeah, but I I'm not sure I'm not sure if I agree with the statement that inflation's high. Um it's trending. It's it's not trending. I mean, high to me is, you know, one what eight n%'s high. That's right. % you know that's now we're stretching when we start to say two 3% is high um but I I think that again as depending on a decision the Fed makes today will really depend on what the back quarter the last quarter looks like

yeah and I should have clarified high relative to the Fed's goal of a 2% inflation you're right it was at 9% last year it's absolutely come down it's done extremely well given you know concerns of tariffs and they don't seem to impacting the inflation rate as strongly as many had thought.

Right. So, all right. Well, yeah, I mean, I'm I'm tracking, you know, some of the stuff that you've been talking about and I I kind of agree. I I'm just really the the AI thing. I I thought it was kind of interesting what you said about a bubble. So, u but I agree with the assessment of what you're saying. I just, you know, I I I kind of think that's an interesting way to say, you know, that there's concern is it a bubble, which it one one could argue it could be. So, we'll have to watch that. So, but anyway, thank thank you. Absolutely. Yeah, great questions. We're going to be looking at productivity. That's the key measurement when you look at it. So, thanks for the great questions. I appreciate it. Thank you. Go one more slide further, please.

And this just shows the reconciliation of the assets. You can see I've highlighted here the 87 million in your year-to- date gains. And on the next slide is the portfolio returns. I'll just focus on year-to- date. You can see great returns of 13.5 on a net basis. One thing I don't talk about a lot, but your index is 12.8%. So you can see their 70 basis points return above your benchmark. Both of your equity funds are passive, which means they replicate an index. But your fixed income and alternatives do track um and track a market indicy and they have active positioning, which means they stray from the benchmark to provide additional returns. I did back of envelope calculation just a few minutes ago that 70 basis points amounts to $5 million. So your plan has gained $5 million just in the year-to- date because of that extra alpha which is return above a benchmark. So some of this active management is helping the portfolio. But just looking down the year-to- date line, you can see US equity up 14%. As I mentioned earlier, global equity, the Vanguard um world fund was up 26% and again almost double what US has saw. So that exposure, you're about, you know, almost 50/50 there. A little bit more US uh home bias, but that's really adding a nice return year-to- date for the portfolio. Fixed income, you can look down the year-to- date line. All positive numbers across the board. um all funds are beating their benchmark. If you look at emerging market debt, up 15% um from an absolute basis versus the benchmark of 13%. So contributing to the portfolio nicely from an absolute return. And then on the next slide, uh you'll see the high yield bond fund up 7%, I think it's up over eight or nine% through today. Um so these riskier areas continue to do well with spreads so compressed. Alternatives are up collectively 8%. And then finally, I'll end my comments on the dynamic asset allocation fund.

That's up 16% for the year. It is benchmarked to the S&P 500 of 14%. If you recall, that's the fund where we we implement some of our short-term points of view. One interesting trade that we had within the fund was gold. We had it as a hedge as we entered, you know, midyear just concerns with a lot of uncertainties. Um we actually sold a few days before it went down. Not because we were market timing, but just because we felt it was getting very throy frothy, excuse me. But um that's a trade within that fund. Yield curve steepening, some commodity exposure, some you know divergence with currencies. So you can see that's paying off nicely with returns above the S&P 500 index, the benchmark. So I will end it there and uh see if there's any questions. So great. Thank you.

Thank you very much. No, I would just uh say that, you know, if if we end the year with this kind of performance that's in place right now, it's going to be very beneficial to the plan and our actuarial evaluation report that'll be done next year and in Q1 or Q2. So let's be hopeful that it continues on that path. Yeah. I mean, it's nice. It's nice to have some positive news these days. So, thank you. Yep. All right. Um, if we're good, I'm going to make a motion to adjourn the meeting. Second, Bobart seconds it. Thank you.

All right, that's it. Unless I heard somebody try to say something. I think we're good. Okay, we're good. Okay. All right. Thanks everyone. Thank you. Thank you. Thank you. Sorry at you.