FWCJUA Investment Committee Meeting Report: May 27

The Florida Workers’ Compensation Joint Underwriting Association (“FWCJUA”) Investment Committee (“Committee”) met via teleconference on Wednesday, May 27, 2009.

The meeting began with an update on the status of the investment marketplace and a review of the FWCJUA’s portfolio from Jason Weinstein of Evergreen Investment Management.

Mr. Weinstein informed the Committee that Evergreen had been part of Wachovia Corporation, which was acquired by Wells Fargo in December 2008.  Evergreen is being integrated into Wells Fargo’s Asset Management Group, and there is no formal name change at this point.

Regarding the current economic climate, Mr. Weinstein summarized it as “less bad is good.”  The national unemployment rate, currently at 8.9 percent, is forecast to be over 10 percent by the end of 2009.  Positive market aspects include an unexpected spike in consumer confidence, which rose 14 points in May, and a rebound in the corporate bond market.  In the short term, inflation is not a matter for concern.  Mr. Weinstein reiterated that developments in the housing market are a key economic factor, and the expectation is that a market bottom is now being established.

The FWCJUA’s current cash and invested assets are yielding 3.17 percent – a drop from the return of 4.5 percent in January 2008 — with an average maturity of 1.2 years.  The FWCJUA portfolio is performing better than United States Treasury bonds, and the portfolio overall is rated at “AA.”  With approximately $33.2 million of investments maturing during the rest of 2009, that money will be reinvested at lower yields as interest rates remain low.

Mr. Weinstein pointed out that in the FWCJUA’s investment portfolio, there has been an undue focus on the financial industry, particularly on Bank of America and Bank of New York, which have suffered heavy losses.  However, the FWCJUA’s holdings outside of the financial industry represent a larger portion of the portfolio.

Evergreen does not recommend a change in investments at this time.

 

The Committee reviewed currently authorized exceptions to the FWCJUA Investment Policy, which were most recently reconfirmed by the FWCJUA Board of Governors (“Board”) on May 1, 2009.  The FWCJUA maintains nine bonds downgraded below an “A” rating in its portfolio, including those issued by Home Depot, Anheuser Busch, Lehman Brothers, SunTrust, CitiGroup and Vulcan Materials. 

Subsequent to the Board’s review, the Vulcan Materials bond was further downgraded on May 5 from “BBB+” to “BBB” with a stable outlook.  While Moody’s has Vulcan on “negative watch,” Evergreen reported that it believes the downgrade is not indicative of Vulcan’s ability to service its debt.  The construction market is expected to rebound in 2010, thus stabilizing Vulcan.

The Committee authorized the continued holding of the further downgraded Vulcan Materials bond and re-confirmed the continued holding of the aforementioned bonds in the FWCJUA’s portfolio as authorized Investment Policy exceptions.  With Vulcan confirmed, holdings are now in compliance with the FWCJUA Investment Policy, and will be presented to the Board for confirmation at its meeting on June 9.

 

Mr. Weinstein asked Committee members for guidance in considering the direction of the FWCJUA’s future portfolio management, such as how to set parameters that mirror the marketplace and still meet the FWCJUA’s goal of holding bonds with a two- to five-year maturity at approximately four percent, with consideration given to declining rates.

Traditionally, the FWCJUA has purchased bonds in increments of $500,000, but it is now considering an increase in this investment level.   The FWCJUA has typically used a conservative “buy and hold” strategy – that is, holding bonds to maturity.  The overall future strategy includes the purchase of solid financial institutions, including J.P. Morgan and Northern Trust. 

Mr. Weinstein suggested the future possibility of “limited duration” investments, specifically those with a one- to three-year maturity, which offers a substantially higher return relative to risk.  Committee members reacted cautiously and discussed creating a chart to demonstrate how past FWCJUA investment returns would have looked with limited duration investing in order to determine whether it would have any advantages.

Mr. Weinstein asked if the FWCJUA had any tolerance to lowering its yield policy below four percent.  A Committee member said he felt comfortable with the current policy, which positions the FWCJUA to have cash available for when better investments become available.  The FWCJUA is now heavily invested in CDs, because Treasury bond yields are so low.  Members agreed it was important to maintain the current level of liquidity, while monitoring the possibility that inflation could surge as a result of the infusion of $11 trillion of government cash in the market.

Evergreen also recommended that the FWCJUA formalize current procedures regarding timely notice of security downgrades from the investment adviser to the Committee.  It was suggested that language added to the FWCJUA Investment Policy providing that the investment manager will notify the Committee as soon as practical of such rating change and any recommended action. 

Staff concurred with the recommendation, but suggested that the notification be to the FWCJUA Executive Director, who has the responsibility of implementing the Investment Policy under the direction of the Committee.  The Executive Director would then be responsible for communicating with the Committee.  The recommendation will be presented to the Board on June 9.

 

The Committee reviewed the performance of Evergreen and considered whether a change in the investment manager is warranted at this time.  The current fee structure paid by the FWCJUA, which has not changed since Evergreen became the FWCJUA’s investment manager in August 1995, is extremely competitive.  This was most recently confirmed in May 2007 when the FWCJUA conducted a competitive solicitation for investment management services and was unable to identify another opportunity in which proposed fees did not exceed the fee structure now paid by the FWCJUA by at least 35 percent.

In addition, the FWCJUA investments have consistently outperformed its comparable benchmarks.  Given the FWCJUA’s restrictive investment policy, its staff believes that the investment manager is achieving the best returns possible.  In February 2008, Evergreen appointed two new designated representatives to service the FWCJUA’s account, and a good working relationship has developed over the past year.

The Committee determined it would recommend that the Board continue its current relationship with Evergreen, and agreed it would examine the relationship in more detail during 2010.

 

The Committee adopted the following tentative schedule for the remainder of its 2009-2010 meetings.  All begin at 10:00 a.m.:

Friday, June 26, 2009

Friday, July 31, 2009

Friday, August 28, 2009

Friday, September 25, 2009

Friday, October 30, 2009

Monday, November 30, 2009

Monday, December 28, 2009

Friday, January 29, 2010

Friday, February 26, 2010

Friday, March 26, 2010

Friday, April 30, 2010

Friday, May 28, 2010

 

Should you have any questions or comments, please contact Colodny Fass.

 

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