Pension Board Minutes 1.22.19 - Laserfiche WebLink

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th was up 10.6% so it looks to be another strong double digit return year. In the 4 quarter, December was the worst December since 1931 for a number of reasons including worries that the Feds would hike rates too fast and inverting the yield curving and causing recession and the government shutdown. After the Christmas Eve Fed meeting the market rallied a little at year end, but at year end the S&P was down 4.4% and the Russell 1000 was down 4.8%. Looking into 2019, inflation is coming in below expectations so the to raise interest rates as fast as the market thought and the market is pricing 0% increases for 2019 which will stabilize inflation and level interest rates. Corporate earnings had very good earnings last year, but are expected to slow down to about 8% growth this year, but that is still strong average growth. Excluding tax cuts impacts, earnings grew 11% last year. Outlook is good and not seeing signs of recession. Chairman Reedy asked Mr. Hughes about the impact of the Feds unwinding the balance sheet- having inflated/quadrupled its balance sheet over the last ten yearshow does it impact interest rates and why is it so powerful? Mr. Hughes stated they expanded their balance sheet which is like stimulus for the economy and when they reduce the size of their balance sheet it the liquidity in the system. They expanded their balance sheets by giving money to the banks and the banks gave the Feds bad assetsmortgages and treasuriesso the Fed put money in the system for QE so when assets are maturing the cash would have gone to the bank or whoever was holding the asset but now the cash goes nowhere when the mortgage matures-it goes to the Fed, not a bank. Mr. Hughes discussed investment strategy and extending the duration of the option portfolio from 1.1 months to 3.8 months to lock in high level of volatility for a little longer which should benefit us going forward, and it already has when looking at the year to date numbers. Member Niemann asked what happens if there are a large number of calls all rolling off at the same time. Mr. Hughes replied that we have a diversified portfolio with different strike prices and expiration dates vs. the benchmark which all expires on the same day, twelve days per year. Mr. Hughes provided a performance overview stating that the performance was not good in 2018another year where growth stocks outperformed value by 900 basis points during the year. Growth stocks returned 0% and value stocks were down 9% during the year. Slight good news is that the stock portfolio outperformed the value index by 20 basis points so for the year the stock portfolio was down 8.8%, value index down 9% and benchmark down 4.8%. Covered Call strategy also underperformed due to growth vs. value. The call options in the Covered Call strategy outperformed the benchmark by 46 basis points during the year, again due to growth vs. value. The call option outperformed but provided less income than normal because volume th was below normal for most of the 4 quarter. Member Stutuz asked Mr. Hughes to explain what Covered Call is supposed to do for us in general. Mr. Hughes explained that FAMCO has been doing covered call since 1997 and over a market cycle, which is expansion and recession, it tends to produce equity-like returns with a third less risk, historically, so it gives a better risk- adjusted return. The outlook going forward for Covered Call is the best in many years. Since the market bottom situation in December 2018 to last Friday, the S&P is up 13.7%, our equities are Ћ