Administration, Investment, & Fiscal Management Board - Regular Meeting

All right. Good afternoon, everybody, and welcome to the May 21st meeting of the Administration Investment and Fiscal Management Board. Clerk, can you please call the roll?

Thank you, Chair. Member Tamayo? Here. Member Colville is absent. Member O'Toole is absent. Member Zemanudin?

Here.

And Chair Coletto?

I am here. If everyone would please rise for the land acknowledgement and Pledge of Allegiance. So please rise for the opening acknowledgments in honor of Sacramento's indigenous people and tribal lands. To the original people of this land, the Nisenan people, the Southern Maidu, Valley and Plains Miwok, Patwin Wintun peoples, and the people of the Wilton Rancheria, Sacramento's only federally recognized tribe. May we acknowledge and honor the native people who came before us and still walk beside us today on these ancestral lands by choosing to gather together today in the act of practice of acknowledgement and appreciation for Sacramento's indigenous people's history, contributions, and lives. Thank you. I pledge allegiance to the flag of the United States of America and to the republic for which it stands, one nation under God, indivisible, with liberty and justice for all. Okay, so first let's move to the consent calendar. Are there any public comments on consent?

Thank you, Chair. I have none. Entertain a motion?

I'll move it. I'll second. Are there any board member comments or questions? Seeing none, I will do roll call vote. All those in favor, please say aye. Aye. Opposed? Abstentions? The motion passes. So we'll move to the discussion calendar, and we will start with item number six. Sorry.

So for our annual asset allocation, which you do have in the weekend, I can scroll through it if we need to, we are going to recommend for the upcoming fiscal year that we move more funds into the fixed account as we try and maintain the funded status being over 100%. And we're not in the scenario now where we need to be reaching for outsized returns. And I will talk about some of the de-risking measures we've made on the portfolio this fiscal year. And I'll talk about that in the quarterly report, just because I have some pages that show that. So for going forward, we are looking for July 1 to change the allocation on the fixed account to 47.5%. This increase is a 7.5% increase. We did look, or excuse me, it's a 5% increase. And we did look at going all the way up to 50-50. but when we looked at the long-term returns on a 10 and 20 year basis, we were just under hitting the actuarial return. So we thought it was more prudent to back it down a little bit and make it 47 and a half fixed and 52.5 equities. And doing that, that puts our expected returns in the 5.8 to 6.3 range. I will say though, Siegel did the analysis for us in January, February, and when that analysis was done, The outlook for the bond market was we were in an environment where they were going to be reducing interest rates over the next six to eight months, two, three cuts. Things have changed. Interest rates have gone up dramatically since then. So the odds are that the short-term returns for the fixed funds is probably going to be greater than when they did the analysis back in January. In January, when we started looking at the report, the 10-year treasury was a 4.17. As of yesterday's close, it's at 4.6. So we've seen a quite dramatic increase across all the maturities with a steepening yield curve. So we're very comfortable that we can achieve our actuarial return by having the 47.5, 52.5% split. And also of note is, as we're able to secure these higher interest rates, These increased payments at these higher interest rates are going to offset any operating needs we have, which is always great to not have to be a consistent seller to meet the operating needs of the fund. At the next meeting in November, I anticipate that if the market just kind of treads water for the next six weeks, we could probably see another 3% to 5% increase over our funded status when the actuary produces their report this fall. So we think at this point it's prudent to move more into the fixed fund and try to insulate somewhat the gains that we've had in the portfolio.

Thank you. Are there any members of the public signed up to speak?

Thank you, Chair. I have no speaker slips.

Are there any board member comments or questions?

Just a quick question. Stacey, do we still have the wiggle room of 5% by asset class?

We do. 5%, correct, on either side.

Is this the highest allocation we've ever had for fixed income?

It is not. If you go back a long, long time ago, it was over 50%. So it's really just a return to normal. And 20-some years ago, the fund was overfunded as well. And then equity markets went the wrong direction. And we went in one year, I think we were like 110% down to like 90% when equity markets really took a hit. So at that time, when interest rates were higher, there was a higher allocation to it. So it's almost like the funds come full circle. We're back to a situation where we're overfunded and we have interest rates that are substantial enough that we feel comfortable moving more money back into the fixed fund.

Good news.

Yeah, it is good news.

With yields being higher than what they were when the numbers were run, would it make more sense to go back to the initial thought of going 50-50?

We did talk about that, but like Michael mentioned, we have the 5% buffer. So we could Even though we're at 47.5, we could go up to 52.5.

That was my follow-up question. Yeah, exactly.

So we do have the room to do that if that's what the market outlook looks like. Got it. Okay.

And is there any openness to, if there's opportunities in the equity market, is there any openness to go back into equities? I know within that 5% range, but do you need ROK to be able to go back?

Only if it was going to be more or less than the 5% buffer. Okay. Perfect. Thank you.

I mean, I'll just say I'm very supportive of taking some risk off the table. So I appreciate this. I think this is the right way to go.

And as I mentioned, we have made some moves this past or during this fiscal year, and I will go over those in the quarterly report later on.

I do have one more question. With the fixed income, are you going more towards corporates or treasuries?

Well, we try to do a mix. We stay away pretty much from unis right now. But the yields in the corporates are very attractive. And as I was going to mention later on, but I do have some notes on it that it's kind of an interesting dynamic. Right now, the long bond's at 510. And spreads on high-grade corporates are 70 to 100 basis points. So in theory, you could take the entire portfolio, put it in high-grade corporates, and lock in the actuarial rate. It's not something we're going to do. So right now, high-grade corporates are offering the most bang for the buck.

Are there any more comments or questions? If not, do we have a motion? I'll motion. Do we have a second?

I'll second.

We have a motion and a second. All those in favor, please say aye. Aye. Any opposed? Abstentions? The motion passes. So we're going to go a little out of order. So next we're going to take item number eight.

Okay. So as usual, we have our quarterly report. This goes through March 31st. As I think I've been saying at every meeting for the the last couple of years, things have changed. It seems like whatever's shown in the report is different by the time we sit down for this meeting. And a year ago, it was very, very similar. When the early April tariff announcements were made, Liberation Day, Markets crashed. They were already weak, and they crashed, and then within a couple weeks bounced very strongly back, and stock market really for the rest of the year was on an upward trend. This year, first quarter was not good for stocks, but it was really March. January, February were fine for stocks and bonds. Late February, the Iran war started. Markets did not like that. S&P 500 ended up, as you can see, down over 4% for the quarter. And bond yields went up and, as Stacey was just saying, have continued to go up. Not huge amounts in the first quarter. The brown line there in the upper right is where we ended March. The green line is... where we'd been at the end of the year. So kind of especially in sort of the belly of the curves, as they call it, that's where the biggest increases were. But those increases have continued since then. On the equity side, obviously, since the end of March, we've once again seen a dramatic turn in performance. April was one of the best months ever in the stock market. May has been choppier, but still positive. So the S&P, as of a few days ago, had gone from down more than 4%, through March to up more than 8% through like the end of last week. Kind of bounced around this week, a couple bad days, a good day yesterday. So you can see a pretty dramatic, actually very dramatic turn in stocks. Stacy can talk more about what she's actually doing in the portfolio, but just a quick snapshot. Here's the allocations as of the end of March. compared to December, not much change there. And in terms of weights versus targets, pretty close, a little bit underweight in equity, a little bit overweight in fixed, but well within the bands around those targets. And then here's the performance. So for the quarter, slightly positive, which was good given the bond market was basically flat and equity markets overall were down. But if you look down that quarterly line, you see the equity income fund was up more than 2.5%, which was 1% ahead of its index. So this was a change from what we had seen in prior years, where it was the big tech companies, the Mag7, dominating. First quarter, what was best? Energy companies were by far the best performers. And other things like utilities, more defensive things, did well. You see large cap growth. The index was down 4.5%. That's the S&P on a price change basis. This portfolio only slightly down. So good job, Stacy, on outperforming those benchmarks. And then the bonds down at the bottom, like I said, basically flat. 0.0% return for the quarter. Fiscal year, the July to March column there, so that's nine months. You can see 8% return at the top line, well ahead of the actuarial assumption and the total plan benchmark. And if you look over the longer term, 1, 3, 5, 7, 10, well ahead of the actuarial assumption on all of those periods and the benchmark. So this continues to do very well on both an absolute and a relative basis, and probably most importantly compared to the actuarial assumption. So again, I think given what's happened, bonds with yields going up, bonds are slightly negative this quarter. Stocks are positive. So this overall plan return is probably going to be even a little bit better. than what it was at the end of March, sitting here today. But kind of anything can happen. But all this looks good and very solid. Any questions?

Do we have any members of the public signed up to speak?

I have no public comment.

Are there any member questions or comments?

Are there any thoughts in...

Are there any thoughts in rotating between the equity income portion versus growth?

It is something we look at. Obviously, in this kind of a portfolio, if we're more interested in wrapping up and keeping secure, equity income would probably be a little more something we would look to. And there are a lot of names in the large cap portfolio that don't pay any dividends. They're simply there for growth. So it's something on our radar, and we do look at it. And when I go through what the plan is for the quarter, because we are sitting on some cash positions, I'll touch on that as well. But it is something we're very aware of.

OK. Is there a motion to accept the report?

I'll move it.

Moved. Do we have a second?

I'll second.

We have a second motion and a second. All those in favor, please say aye. Aye. Any opposed? Abstentions? The motion passes. So now we'll move to item seven, the quarterly investment report.

If I may, before we do that, while she's calling that up, I think we mentioned at the last meeting, I'm retiring later this year, actually in October. So this will be my last meeting with you. David Roll, my colleague, is here. He's going to take over. So he's been watching the videos and he's here in person. And you'll be seeing him going forward.

Well, on behalf of the city, thank you. Thank you so much. It's been really informative, all your presentations. Thank you.

I very much enjoyed this, and everybody is doing a great job. I wish I could say that for all of our clients, but this one is in very good shape. Thank you.

Okay, so I'm going to go over the internal report just as I talk about the quarter. I like to always have Jeff start to talk about the bigger picture, what's going on in the markets, and then kind of drill into what we're doing. So as I've alluded to a couple times, and then John and I, we went back and forth with this at the previous two meetings, we did opt to take some of the equity exposure off the table. So on March 11th, we sold 50% of the large cap and equity funds and placed them in cash. And at that time, the S&P was at $67.75. So that's why on March 30, when the quarterly report closed, we were outperforming so much because we got the benefit of the doubt that the markets went down and we were sitting half in cash. That has reversed in April, obviously, with, as Jeff mentioned, the markets have continued to go up, but we're still participating in half of that. The other 50% that's in cash is in our pooled funds for the city, and that's earning just under 4%. So we are sitting in the sidelines for part of it, but it's not, complete cash drag because it is earning a pretty good interest rate on there. So looking forward for the new allocation, what we would look to do is to take those funds, go back into the market. Obviously, a lot of those funds are now going to be allocated over to the fixed fund at much higher interest rates because of what's happened in the last month. So we will look to go, when we reallocate in the equity funds, we'll look to go to the ETFs for the benchmarks. We currently have positions in a bunch of different names, but we feel like just to be nimble, to be able to go in and out, and whether that's in between equity income or the S&P, to have them all on the benchmarks easier for us to go in and out and try to take advantage of X dates on dividends. So we do want to keep actively managing it to try to take advantage of if we see the swing towards defensive, if we see the swing away from tech. So that will be something on our radar. And the goal would be that on July 1, we are at the new allocation of 52.5 and 47.5. So also with some of that cash, we've been discussing internally pre-funding some of the operating needs for the year, as opposed to going back into the markets and then turning around and having to sell them to raise cash for the operating needs. We may just take a chunk of the cash that we have right now, allocate that over to operating, just so that that's taken care of for the next few months. So as of the end of April, so as of the end of March, we were at 7.96, as Jeff mentioned. As of the end of April, and this is unaudited, our return had jumped up to 10.66%. So if we had been all the way in, it probably would have been a couple percent higher. But we're super comfortable with 10.66% with a 6% actuarial. And again, when I mentioned that if things kind of stay where they are, that we could see another 3% to 5% on our funded status, That's from that alone, basically, what the return is. I did already kind of mention the fixed account and just where the long bonds are. Years ago, when I started, John always said to me he wished he had bought 30-year treasuries when they were 6.5% and stopped even managing the fund. We're not going to do that, but it is something we are keeping our eyes on. So we're just really going to try to take this very conservative approach to it. Yes, the portfolio will still be in a majority of equities, but we do want to actively manage it and keep an eye on, as we've talked about before, those seven names that seem to be the S&P still dominating it. And if you're on the wrong side of that, it will be painful. So we really, and I think, Mr. O'Toole, you mentioned last time, are those still 30%, they're still 30% and moving the S&P. So it's, I mean, I kind of feel like it's not really, If you're in the S&P these days, it's not even really a diversified asset. It's too top heavy with those names. But it is our benchmark for now. So we will continue to manage that going forward and be ready for the new fiscal year. And other than that, I think we're set up really great to end the fiscal year.

Great job. Do we have any members of the public signed up to speak?

I have no speakers.

Do I have any member comments or questions?

I have a question. So to allocate for operating expenses and pre-funding it, can you kind of elaborate on that? Does that mean to prepay or to keep us on operating cash?

Yeah, so we have a separate account that's an actual operating account, and it doesn't get calculated in our weightings for the different asset classes. So our asset classes are here, and the operating sits outside of it. So whether there's $1 million in here or $10 million, it doesn't go to those percentages over here. So it gets parked over there. It earns the pooled rate, which, again, is about 3.8%. And then as the HR and payroll, they need the funds to send out for the participants, they just draw it straight out of this account. So part of our job is to always make sure there's enough money in this account over here for when they're drafting out of it. Got it. So it still earns. And the income it earns there, the fund gets credit for. It just gets pulled out of the weightings, basically. Okay.

Yeah, if I may, if you noticed in our report, we didn't show a big cash position because of what she's talking about. That money's sitting over here separately.

And I will just, one more thing I just wanted to add because we won't see you again until November and by then we'll have the actuarial report. And they may look at our allocation and they may look at our overfunding status and they may push back and say, we don't think 6% is the right number anymore. They may opt to say it should be lower. So that's a conversation we'll have with the actuaries probably September, October, as they're starting to do their report. When they ran their analysis last year, they ran a sensitivity analysis for 100 basis points higher and lower. And when they ran it last year at 5%, it still showed we were underfunded. So that is something we might have a discussion about come November.

And where's the 30-year treasury?

5.1%.

Yeah. John may get his dream.

He may get his dream.

Do we have any other member comments, questions? So I think we need a motion to accept the quarterly investment report. I'll move it. Second. We have a motion and a second. All those in favor, please say aye. Aye. And the opposed, abstention. The motion passes. So next, we move to any board member comments, ideas, and questions. Okay, hearing none, do we have any public comment for matters not on the agenda?

Thank you, Chair. I have no public comment.

Okay, well, thank you, everyone. We are adjourned.