Pension Fundamentals – Session #2 Investment of Plan Assets

Investment of Plan Assets

OBJECTIVE

To provide retirement system trustees and plan administrators a general overview regarding the investment of public plan assets.

OUTLINE

I. YOUR ROLE AS A TRUSTEE “FIDUCIARY RESPONSIBILITY”

WHO IS A “FIDUCIARY”?

The term “fiduciary” is derived from early Roman law and means “a person having the character of a trustee; one who has a duty to act for another’s benefit.” Those who have discretionary authority in connection with the administration of employee benefit plans, whether they are designated administrators or trustees, or simply members of the governing boards, committees or commissions, are “fiduciaries” and are charged with fiduciary responsibilities.

WHAT LAWS ESTABLISH FIDUCIARY RESPONSIBILITIES?

The laws encompassing fiduciary responsibility are a complex network of federal and state statutes and case law, all of which define and delineate the parameters and rules within which a trustee must operate.

Trustees of public employee retirement systems in the State of Michigan must comply with the fiduciary duties as provided by the Public Employee Retirement System Investment Act, Public Act 314 of 1965, as amended (“Act 314”).

Act 314 defines “investment fiduciary” as a person who does any of the following:

(1) exercises any discretionary authority or control in the investment of a plan’s assets.

(2) renders investment advice for a fee or other direct or indirect compensation.

Section 13 of Act 314 in pertinent part requires that a trustee shall:

(1) Discharge his or her duties solely in the interest of the participants and the beneficiaries.

(2) Act with the same care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a similar capacity and familiar with those matters would use in the conduct of a similar enterprise with similar aims.

(3) Act with due regard for the management, reputation, and stability of the issuer and the character of the particular investments being considered.

(4) Make investments for the exclusive purposes of providing benefits to participants and participants’ beneficiaries, and of defraying reasonable expenses of investing the assets of the system.

(5) Give appropriate consideration to those facts and circumstances that the investment fiduciary knows or should know are relevant to the particular investment or investment course of action involved, including the role the investment or investment course of action plays in that portion of the system’s investments for which the investment fiduciary has responsibility; and shall act accordingly. For purposes of this subsection, “appropriate consideration” includes, but is not limited to, a determination by the investment fiduciary that a particular investment or investment course of action is reasonably designed, as part of the investments of the system, to further the purposes of the system, taking into consideration the risk of loss and the opportunity for gain or other return associated with the investment or investment course of action; and consideration of the following factors as they relate to the investment or investment course of action:

(i) the diversification of the investments of the system;

(ii) the liquidity and current return of the investments of the system relative to the anticipated cash flow requirements of the system;

(iii) the projected return of the investments of the system relative to the funding objectives of the system.

(6) Give appropriate consideration to investments that would enhance the general welfare of this state and its citizens if those investments offer the safety and rate of return comparable to other investments permitted under this act and available to the investment fiduciary at the time the investment decision is made.

(7) Prepare and maintain written objectives, policies, and strategies with clearly defined accountability and responsibility for implementing and executing the system’s investments.

(8) Monitor the investment of the system’s assets with regard to the limitations on those investments pursuant to this act. Upon discovery that an investment causes the system to exceed a limitation prescribed in this act, the investment fiduciary shall reallocate assets in a prudent manner in order to comply with the prescribed limitation.

Accordingly, a trustee has a duty to properly administer the provisions of the Plan and invest the funds of the Trust in accordance with Public Act 314. It is important to note that fiduciary duties are measured on an objective standard. As one court put it, “if is not sufficient that a trustee has a pure heart and an empty head.”

DELEGATION OF RESPONSIBILITY

Fiduciaries are generally not liable for a breach of duty if that duty has been specifically allocated to another fiduciary. Fiduciaries must exercise reasonable prudence in delegating responsibilities. The persons selected must be qualified and capable of adequately discharging the responsibilities delegated.

Fiduciaries may delegate responsibility with respect to the management or control of plan assets only to another recognized fiduciary. It is essential that the qualifications and written fiduciary acknowledgment are well documented in the official records of the plan.

Prudence also requires the trustees to actively monitor the activities of the appointed fiduciaries. The review process should critically scrutinize the relevant issues and responsibilities.

II. INVESTMENT AND OTHER PROFESSIONAL SERVICES A. Authority

1. Plan Provisions

2. Section 13(4) of Act 314 provides:

B. Professionals/Specialists

1. The Custodial Bank

2. The Investment Consultant

3. The Broker

4. The Investment Manager(s)

5. The Legal Advisor

6. The Actuary

7. The Auditor/Accountant

C. The Due Diligence Process

1. Request for Proposals

2. Interviews

3. Board Action

4. Contracts

III. EVALUATION OF INVESTMENTS AND QUALIFICATION UNDER ACT 314 HIGHLIGHTS OF THE PUBLIC EMPLOYEE RETIREMENT SYSTEM INVESTMENT ACT

Public Act 314 of 1965, as amended (MCL 38.1132 et seq.)

Public Act 314, as amended (“Act 314”), governs the investment of assets of all public employee retirement systems in the state; provides for the payment of expenses in the administration of the retirement system; and, prescribes the powers and duties of the system’s investment fiduciaries.

This outline highlights the key elements of Act 314. Please refer to the specific statutory language when addressing investment issues:

Definitions – Section 12

Assets [Section 12a]. Plan assets are valued at “market” for purposes of meeting the asset limitations under the Act.

Investment fiduciary [Section 12c(1)]. Includes individuals who render investment advice to a system for direct or indirect compensation.

Investmentgrade[Section12c(3)]. Meansgradedinthetop4majorgradesasdeterminedby2 national rating services.

National rating services [Section 12d(1)]. Means Moody’s Investors Service, Inc.; Standard & Poor’s Ratings Group; Fitch Investors Service Inc.; Duff & Phelps Credit Rating Corp.; or any other nationally recognized statistical rating service as determined by the state treasurer.

Soft dollar [Section 12e(3)]. Means brokerage commissions that are used by the system to purchase goods or services.

Investment Fiduciary – Section 13

Controlling Authority – Section 13(1) and (2). Act 314 “shall supersede any investment authority previously granted to a system under any other law of this state.” “The assets of a system may be invested, reinvested, held in nominee form, and managed by an investment fiduciary subject to the terms, conditions, and limitations provided in this act.”

Fiduciary Duties – Section 13(3). An investment fiduciary shall discharge his or her duties solely in the interest of the participants and the beneficiaries, and shall do all of the following:

Highlights of Act 314 (Cont.)

(a) Act with the same care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a similar capacity and familiar with those matters would use in the conduct of a similar enterprise with similar aims.

(b) Act with due regard for the management, reputation, and stability of the issuer and the character of the particular investments being considered.

(c) Make investments for the exclusive purposes of providing benefits to participants and participants’ beneficiaries, and of defraying reasonable expenses of investing the assets of the system.

(d) Give appropriate consideration to those facts and circumstances that the investment fiduciary knows or should know are relevant to the particular investment or investment course of action involved, including the role the investment or investment course of action plays in that portion of the system’s investments for which the investment fiduciary has responsibility; and shall act accordingly. For purposes of this subsection, “appropriate consideration” includes, but is not limited to, a determination by the investment fiduciary that a particular investment or investment course of action is reasonably designed, as part of the investments of the system, to further the purposes of the system, taking into consideration the risk of loss and the opportunity for gain or other return associated with the investment or investment course of action; and consideration of the following factors as they relate to the investment or investment course of action:

(i ) The diversification of the investments of the system.

(ii ) The liquidity and current return of the investments of the system relative to the anticipated cash flow requirements of the system.

(iii ) The projected return of the investments of the system relative to the funding objectives of the system.

(e) Give appropriate consideration to investments that would enhance the general welfare of this state and its citizens if those investments offer the safety and rate of return comparable to other investments permitted under this act and available to the investment fiduciary at the time the investment decision is made.

(f) Prepare and maintain written objectives, policies, and strategies with clearly defined accountability and responsibility for implementing and executing the system’s investments.

Highlights of Act 314 (Cont.)

(g) Monitor the investment of the system’s assets with regard to the limitations on those investments pursuant to this act. Upon discovery that an investment causes the system to exceed a limitation prescribed in this act, the investment fiduciary shall reallocate assets in a prudent manner in order to comply with the prescribed limitation.

Costs – Section 13(4)

An investment fiduciary may use a portion of the income of the system to defray the costs of investing, managing, and protecting the assets of the system; may retain investment and all other services necessary for the conduct of the affairs of the system; and may pay reasonable compensation for those services. Subject to an annual appropriation by the legislature, a deduction from the income of a state administered system resulting from the payment of those costs shall be made.

Prohibited Transactions – Section 13(5), (6) and (7)

Each public pension system is a separate and distinct trust fund and all business must be conducted as an arms-length transaction particularly with a “ party in interest” as defined in Section 12d(4).

An investment fiduciary shall not do any of the following:

(a) Deal with the assets of the system in his or her own interest or for his or her own account.

(b) In his or her individual or any other capacity act in any transaction involving the system on behalf of a party whose interests are adverse to the interests of the system or the interest of its participants or participants’ beneficiaries.

(c) Receive any consideration for his or her own personal account from any party dealing with the system in connection with a transaction involving the assets of the system.

This section does not prohibit an investment fiduciary from doing any of the following:

(a) Receiving any benefit to which he or she may be entitled as a participant or participant’s beneficiary of the system.

(b) Receiving any reimbursement of expenses properly and actually incurred in the performance of his or her duties for the system.

(c) Serving as an investment fiduciary in addition to being an officer, employee, agent, or other representative of the political subdivision sponsoring the system.

(d) Receiving agreed upon compensation for services from the system.

Highlights of Act 314 (Cont.) Investment Advisers – Section 13(8)

An investment fiduciary shall meet 1 of the following requirements:

(a) Be a registered investment adviser under the Investment Advisers Act of 1940 or the Michigan Uniform Securities Act.

(b) Be a bank as defined under the Investment Advisers Act of 1940.

Debt Instruments Issued by Foreign Countries Engaging in Terrorism- Section 13(9)

Prohibits investment into debt instruments issued by foreign countries which have been identified by the United States State Department as engaging in or sponsoring terrorism.

Soft Dollars – Section 13(10)

A system shall annually publish and make available to plan participants and beneficiaries a list of all expenses paid by soft dollars as defined in Section 12e(3).

MacBride Principles – Section 13a

Establishes limitations on direct investments in stock of companies doing business in Northern Ireland.

Domestic Equities – Section 14

An investment fiduciary may invest not more than 70% of a system’s assets in stock. An investment fiduciary shall not invest in more than 5% of the outstanding stock of any 1 corporation, nor invest more than 5% of a system’s assets in the stock of any 1 corporation, unless otherwise provided in this act.

Stock invested in under this section shall meet 1 of the following requirements:

(a) Be registered on a national securities exchange regulated under title I of the Securities Exchange Act of 1934.

(b) Be on the national association of securities dealers automated quotation system or a successor to this system.

An investment fiduciary may designate an American Depository Receipt (ADR) as either a domestic or foreign stock.

Mutual Funds – Section 15

Highlights of Act 314 (Cont.)

An investment fiduciary may invest in investment companies registered under the Investment Company Act of 1940. The management company of the investment company shall have been in operation for at least 5 years and shall have assets under management of more than $500,000,000. An investment in an investment company shall be considered an investment in the underlying assets for all purposes under this act.

Annuity Investment Contracts, Investment Accounts of Life Insurance Company- Section 16

An investment fiduciary may invest in annuity investment contracts or participations in separate real estate, mortgage, bond, stock, or other special investment accounts of a life insurance company authorized to do business in this state. An investment in such a separate account shall be considered an investment in stock under Section 14 only to the extent that the separate account’s assets include stock, and then only for the purpose of determining the 70% maximum investment limit under Section 14. An investment in such a separate account shall also be considered an investment in real or personal property under Section 19(2), but only to the extent that the separate account’s assets include real or personal property, and then only for the purpose of determining the 5% maximum investment limit under Section 19(2).

An investment fiduciary may invest in the general account of a life insurer authorized to do business in this state under the insurance code of 1956, but the total amount of assets of any 1 system invested in any 1 insurer shall not exceed 50% of the capital and surplus of the insurer.

A life insurance company under this section shall have been in operation for at least 5 years and have assets under management of more than $500,000,000. The insurance company shall have a claims-paying ability rating no less than single A according to A.M. Best & Company or AA- according to Duff & Phelps Credit Rating Corp., and overall company financial strength rating no less than Aa3 according to Moody’s Investors Services, Inc. or AA- according to Standard & Poor’s Ratings Group.

Fixed Income – Section 17

An investment fiduciary may invest in any of the following:

(a) Obligations issued, assumed, or guaranteed by a solvent entity created or existing under the laws of the United States or of any state, district, or territory of the United States.

(b) Obligations secured by a security interest in real or personal property and a lease obligation given by a solvent entity whose obligations would be qualified investments under the provisions of this act.

(c) Obligations issued, assumed, or guaranteed by the United States, its agencies, or United States government-sponsored enterprises.

Highlights of Act 314 (Cont.)

(d) Obligations of a possession, territory, or public instrumentality of the United States, or of any state, city, county, township, village, school district, authority, or any other governmental unit having the power to levy taxes, or in obligations of other similar political units of the United States.

(e) Banker’s acceptances, commercial accounts, certificates of deposit, or depository receipts issued by a bank, trust company, savings and loan association, or a credit union.

(f) Commercial paper rated at the time of purchase within the 2 highest classifications established by not less than 2 national rating services as determined by the state treasurer, and which matures within 270 days after the date of issue.

(g) Repurchase agreements for the purchase of securities issued by the United States government or its agencies and executed by a bank or trust company or by members of the association of primary dealers or other recognized dealers in United States government securities.

(h) Reverse repurchase agreements for the sale of securities issued by the United States government or its agencies and executed with a bank or trust company or with members of the association of primary dealers or other recognized dealers in United States government securities.

(i) Any investment otherwise permitted by this section in which the interest rate varies from time to time.

(j) Obligations secured by any of the obligations described in subdivision (a) or (c).

(k) Dollar denominated obligations issued in the United States by foreign governments, supranationals, banks, or corporations.

Except as otherwise provided in this act and except for obligations described in subsection (1)(c), an investment fiduciary shall not do any of the following:

(a) Invest in more than 5% of the outstanding obligations of any 1 issuer.

(b) Invest more than 5% of a system’s assets in the obligations of any 1 issuer.

Highlights of Act 314 (Cont.) Real Estate or Certain Mortgages – Section 18

An investment fiduciary may invest in real estate or mortgages on real property leased or to be leased to the United States government, or to a state, territory, agency, authority, or public instrumentality of the United States.

Real Estate Investment Trusts (REIT) or Real or Personal Property – Section 19

An investment fiduciary may invest up to 5% of a system’s assets in publicly or privately issued real estate investment trusts or in real or personal property otherwise qualified pursuant to section 15, 16, or 20c.

In addition to investments authorized under subsection (1), an investment fiduciary of a system having assets of more than $100,000,000 may do any of the following:

(a) Invest in, buy, sell, hold, improve, lease, or acquire by foreclosure or an agreement in lieu of foreclosure, real or personal property or an interest in real or personal property.

(b) Develop, maintain, operate, or lease the real or personal property referred to in subdivision (a).

(c) May form limited partnerships, corporations, limited liability companies, trusts or other organizational entities under the laws of the United States or of any state, district, or territory of the United States to hold title to, improve, lease, manage, develop, maintain, or operate real or personal property.

(d) Invest in investments otherwise qualified pursuant to subsection (1).

Except as otherwise provided in this section, the aggregate investments made under subsection (2) shall not exceed 5% of the assets of the system. The purchase price of an investment made under this section shall not exceed the appraised value of the real or personal property.

If the investment fiduciary of a system is the state treasurer, investments described in subsection (1) or (2) may exceed 5% of the assets of the system.

An investment qualified under this section in which the underlying asset is an interest in real or personal property constitutes an investment under this section for the purpose of meeting the asset limitations contained in this act. This subsection applies even though the investment may be qualified elsewhere in this act. An investment in stock under this section shall not be considered an investment in stock under Section 14.

An investment in a Real Estate Investment Trust (REIT) may be designated as domestic stock or as real estate for the purpose of meeting the asset limitations contained in this act.

Highlights of Act 314 (Cont.) Investments in Loans – Section 20

An investment fiduciary may invest in loans secured by any of the following:

(a) First liens upon improved or income bearing real property, including but not limited to improved agricultural land, and improved business, industrial, and residential properties.

(b) First mortgages or deeds of trust on leasehold estates having an unexpired term equivalent to the term of the mortgage, inclusive of the term or terms that may be provided by enforceable options of renewal.

(c) First mortgages on unimproved real property, at least 60% of which real property is under contract of sale and that contract or contracts are pledged as additional collateral.

Investments in Small Business – Section 20a

An investment fiduciary of a system having assets of more than $250,000,000 may invest not more than 2% of a system’s assets in a small business or venture capital firm having its principal office or more than 1/2 of its assets within this state. An investment fiduciary may also join with a group composed of other retirement systems, financial institutions, corporations, or governmental agencies to accomplish the purposes of this section. An investment in stock under this section shall be considered an investment in stock under Section 14 only for the purpose of determining the 70% maximum investment limitation.

Deposits with Political Subdivision or State Treasurer – Section 20b

An investment fiduciary may make interest bearing deposits with the treasurer of the political subdivision sponsoring the system or with the state treasurer, either of whom may then manage and invest the deposits in a collective investment fund, common trust fund, or pooled fund that is established and maintained for investment of those assets by the treasurer of the political subdivision sponsoring the system or by the state treasurer in accordance with this act.

Investment in Collective Investment Fund, Common Trust Fund, or Pooled Fund – Section 20c

This section authorizes the investment of plan asset into a collective investment fund, common trust fund or pooled fund established and maintained by a state chartered bank, a national bank, a trust company or a qualified management company. An investment under this section shall be considered an investment in the underlying assets(s) and accordingly subject to any applicable asset limitation in the Act.

Highlights of Act 314 (Cont.) Investments Not Otherwise Qualified under this Act – “Basket Clause”- Section 20d

(1) An investment fiduciary of a system having assets of less than $250,000,000 may invest not more than 5% of the system’s assets in investments not otherwise qualified under this act, whether the investments are similar or dissimilar to those specified in this act.

(2) An investment fiduciary of a system having assets of $250,000,000 or more may invest not more than 10% of the system’s assets in investments described in subsection (1).

(3) An investment fiduciary of a system having assets of $1,000,000,000 or more may invest not more than 15% of the system’s assets in investments described in subsection (1).

(4) An investment fiduciary of a system who is the state treasurer may invest not more than 20% of the system’s assets in investments described in subsection (1).

(5) If an investment described in subsection (1) is subsequently determined to be permitted under another section of this act, then the investment shall no longer be included under this section.

(6) This section shall not be used to exceed a percentage of total assets limitation for an investment provided in any other section of this act.

Securities Lending – Section 20e

Authorizes an investment fiduciary to loan bonds, stocks or other securities.

Transfer of Securities – Section 20f

An investment fiduciary may use 1 or more nominees to facilitate transfer of a system’s securities and may hold the securities in safekeeping with the federal reserve system, a clearing corporation, or a custodian bank which is a member of the federal reserve system.

Investment in Securities Exempt from Income or Other Taxes – Section 20g

Notwithstanding any other provision of this act, investment in securities wholly or partially exempt from income or other taxes levied by the United States shall be made only at taxable-equivalent yields or returns available in the marketplace on otherwise comparable securities at the time the investment decision is made.

Reporting Requirements – Section 20h

A. Actuarial Reports – A system with assets of $20 million or more is required to have an annual actuarial valuation and a system with assets of less than $20 million to have actuarial valuations at least every other year. Actuarial valuations shall have assets valued on a market-related basis.

B. Summary Annual Reports – A system is required to prepare and issue a summary annual report which shall be made available to the plan participants and beneficiaries and the citizens of the sponsoring municipality. The summary annual report shall include all of the following:

(1) The name of the system.

(2) The names of the system’s investment fiduciaries.

(3) The system’s assets and liabilities.

(4) The system’s funded ratio.

(5) The system’s investment performance.

(6) The system’s expenses.

Derivatives – Section 20j

Provides specific guidelines and limitations for investment into derivatives which are otherwise qualified elsewhere in the Act. Investment in derivatives for the purpose of leveraging a portfolio or shorting securities as a sole investment is specifically prohibited.

Foreign Securities – Section 20k

A system is authorized to invest not more than 20% of the system’s assets in foreign securities (i.e., stocks, bonds, etc) subject to: (1) a 5% limitation in the outstanding foreign securities of any 1 issuer; and (2) a 5% limitation of a system’s assets in the foreign securities of any 1 issuer. Investments in foreign securities shall be made only by qualified investment fiduciaries who have demonstrated expertise in investments of that type.

FOIA Exemption – Section 20l

Financial or proprietary information pertaining to a portfolio company in connection with real estate or alternative investments is exempts from the disclosure requirements of the Freedom of Information Act (FOIA).

NOTES:

IV. EQUITY MANAGEMENT: Marie A. Vanerian – Merrill Lynch

A. Definition of Equity Securities

1. Equity securities represent ownership shares. The owners have a residual claim (which comes after a creditor’s claim) on the corporation’s assets and earnings. Equity-related assets include publicly traded common stock, preferred stock, options, convertibles, mutual funds as well as ownership positions in small firms and venture capital investments. Each of these investments represents direct or indirect ownership in a profit-seeking enterprise.

B. DirectOwnershipofaCompany

1. Common Stock

a. Provides residual ownership of a corporation.

b. The benefit of any appreciation in the firm’s value accrues to its owners, the stockholders.

c. A company’s stockholders theoretically control it by electing its board of directors.

d. Dividend payments on stocks are not assured or contractually guaranteed.

e. Common stock never matures.

2. Preferred Stock

a. Preferred stock is technically a form a form of ownership, but preferred shareholders usually have no real control of the company.

b. All preferred stock carry promised annual dividend payments.

c. Virtually all preferred stock is cumulative, which means that any missed dividends must be made good before common shareholders can receive dividends.

d. In any reorganization of the company, the preferred shareholders must be paid the liquidation value of their stock before common stockholders receive anything.

3. Limited Partnerships

a. The Limited Partnership is an alternative way of organizing a business enterprise.

b. These partnerships combine the benefits of a corporation’s limited liability with the single-taxation advantage of a partnership.

c. Most limited partnerships have one major drawback, because they are relatively small, their ownership units trade in very thin markets.

4. Private Placement/Venture Capital

a. Venture capitalists provide risk capital to undercapitalized companies that they believe have attractive growth prospects.

b. In exchange, venture capitalists receive ground-floor equity positions in what may turn out to be highly lucrative ventures.

C. Types of International Equity Securities

1. American Depository Receipts (ADR)

A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas. ADRs help to reduce administration and duty costs that would otherwise be levied on each transaction.

2. Global Depository Receipts (GDR)

A bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares, but are offered for sale globally through the various bank branches. A financial instrument used by private markets to raise capital denominated in either U.S. Dollars or Euros.

3. Ordinary Shares

Foreign company shares that trade directly on Foreign market exchanges and currencies.

D. Overview of Equity Market Institutions

1. Domestic Exchanges

a. The New York Stock Exchanges (NYSE) is the most dominant exchange in terms of market value of trades and the market value of companies listed on an exchange. Only members can transact business on the exchange, and only listed securities may be traded. A membership is referred to as a seat, and there are 1,366 seats.

b. The American Stock Exchange (ASE) traditionally has been the exchange for firms too small to be listed on the NYSE. Currently there are about 1,000 stocks listed on the Amex. Amex is also one of the largest exchanges for the trading of options, and it also provides bond trading.

c. The Regional Exchanges includes the Chicago Stock Exchange (CSE) which currently lists over 3,500 stocks; Pacific Exchange (PCX) trades options on more than 1,200 firms; Boston Exchange (BSE) which lists approximately 2,000 stocks; the Philadelphia Stock Exchange (PSE) which lists approximately 2,200 stocks and provides option trading for over 900 stocks; and Cincinnati Stock Exchange.

2. NASDAQ and Over-the-Counter (OTC)

a. The Over-the counter (OTC) market is any trading done by a dealer. Almost any dealer can decide to make a market in any stock in which he or she thinks there is a profit to be made from such trading. Dealers profit from the bid-ask spread. There are over 35,000 securities in this market. The main problem with this system is lack of public information.

b. The National Association of Securities Dealers Automated Quotation System (NASDAQ) was the world’s first electronic market in order to provide price quotations from this market. There are currently about 3,600 companies listed on the NASDAQ market. Unlike the more formal exchanges, there is no trading floor; the market is strictly people connected electronically. The NASDAQ generates more trading volume than any other trading market.

3. Third and Fourth Markets

a. The Third Market grew up when the exchanges had fixed commission schedules. In today’s environment, third market dealers may well offer a more attractive overall price (stock price and commission) than is available on the exchanges.

b. The fourth market provides its institutional participants with an even less costly way of trading. Because the institutions trade directly with each other, no commissions are incurred. Organizations that provide this market are known as electronic communications networks (ECNs).

E. EquityInvestmentManagement

1. Investment Styles

a. Growth investment managers usually seek companies exhibiting strong momentum, whether in earnings or price.

b. Value investment managers seek to buy companies at a perceived discount, constructing portfolios that generally have high dividend yields, low price-to- earnings ratios and low price-to-book ratios.

2. Market Capitalization

a. Large Cap stocks generally have a market capitalization over $10 billion.

b. Stocks with a market capitalization between $2 and $10 billion are usually consider to be Mid- Cap stocks.

c. Small Cap stock normally have market capitalization under $2 billion.

3. Investment Approaches

a. Passive Management simply means that a manager does not depart from his or her “normal” asset-class weightings in response to changing expectations about performance of different markets.

b. Active Management assumes an ability to outguess the other investors in the market and to identify either securities or asset classes that will shine in the near future. Active security selection adds value in three areas: asset allocation, industry/sector selection and security selection.

i) Bottom-up versus Top-down

· A Bottom-up manager typically emphasizes his stock selection based on fundamental analysis of individual stocks and their Management team, products, services and outlook for the future.

· Managers are commonly referred to as Top-down if their emphasis is on Sectors, Industry or Theme bets as opposed to individual stock selection. Stocks are actively selected, but they are chosen in large part to flesh out an investment theme.

ii) Fundamental versus Technical

· Fundamental analysis is the evaluation of firms and their investment attractiveness based on the firms’ financial strength, competitiveness, earnings outlook, managerial strength, and sensitivity to the macro-economy and to specified future date

· Technical analysis is a method of evaluating securities and forecasting future price changes based only on past price and volume behavior

iii) Concentrated versus Diversified

· A concentrated portfolio is one in which a disproportionately large percentage of the value is in one or a few securities

· A well-diversified portfolio spreads out investments over many securities in such a way that the weight in any security is small. The risk of a well-diversified portfolio closely approximates the systemic risk of the overall market, the unsystematic risk of each security having been diversified out of the portfolio

NOTES:

V.FIXED INCOME MANAGEMENT George Tarlas – Asset Consulting Group, Inc.

Please refer to PowerPoint Presentation Materials

NOTES:

VI. REAL ESTATE George Tarlas – Asset Consulting Group, Inc.

Please refer to PowerPoint Presentation Materials

NOTES:

VII. ALTERNATE ASSET CLASSES George Vitta – Asset Strategies Portfolio Services, Inc.

Please refer to PowerPoint Presentation Materials

NOTES:

VIII. THE INVESTMENT PROCESS George Vitta Asset Strategies Portfolio Services, Inc.

A. Developing an Investment Program

B. Implementing a Program

C. Program Oversight

Please refer to PowerPoint Presentation Materials

NOTES:

Pension Fundamentals – Session #2 Investment of Plan Assets

Investment of Plan Assets

VMT LAW

Pages

ATTORNEYS

ARTICLES