March 30, 2006

St. Louis County Retirement Board of Trustees Meeting Thursday, March 30, 2006 - 10:00 a.m. Division of Fiscal Management 8th Floor Conference Room 41 South Central Ave. Clayton, MO 63105 Meeting called by: Type of meeting: Facilitator: Note Taker: Members Present: Kirk McCarley, Plans Administrator Board of Trustees Regular Monthly Meeting Msgr. Robert L. McCarthy, Chairman Dana Hutchings, Retirement Specialist Brian Bass Clayton Erickson Det. Gary Fourtney Gladys Lewis Captain Vince Manning (Retired) Others Present: St. Louis County Margaret Hart Mahon, Associate County Counselor Christopher McCarthy, Associate County Counselor Glenn Pearl, Chief Accounting Officer Kari Creighton, Summit Strategies Group John Ehli, RREEF Jon Thompson, RREEF Thomas Wright APPROVAL OF MINUTES BOARD OF TRUSTEES MEETING Consultants Guests Absent Were: For Approval: Presentation of the minutes of the Board of Trustees meeting of February 23, 2006 and call for any additions, deletions or corrections to the minutes. A motion was made by Msgr. McCarthy, seconded by Mr. Erickson, and unanimously carried to approve the minutes of the Board of Trustees meeting of February 23, 2006 as presented. There was only one comment that I had and unfortunately Tom’s not here to answer. He did have a comment on the discussion regarding Social Security didn’t do a stepping stone when everyone was told that 65 was no longer retirement age. He made a comment that wasn’t in there. If his comment is not in there, it is only because there was more than one person talking at the same time and his comment could not be heard. LIST OF EMPLOYEES REQUESTING RETIREMENT BENEFITS Decision: Brian Bass Dana Hutchings For Approval: Requests for Retirement Benefits submitted by participants in the Civilian Employees’ Retirement Plan. 1 Kirk McCarley Clayton Erickson Glenn Pearl Brian Bass Dana Hutchings We have eighteen participants retiring this month under the Civilian plan. Was there anything special about last month that so many retired? They are worried about “Rule of 85”. I think the first of the year is relevant in terms of taxes. There are the tax issues and there are also a lot of employees who get their pay increases in January and they like to wait until February to retire so they can get their payout at the higher rate of pay. It appears that an employee, Frank Heinle, passed away while working here and therefore it goes right to the spouse. Mrs. Heinle opted to wait until his first eligible early retirement date, which was this month. Brian Bass Dana Hutchings Decision: There being no unusual circumstances regarding these requests, a motion was made by Mr. Bass, seconded by Det. Fourtney, and unanimously carried to approve the Retirement Benefits for Civilian employees as presented. Requests for Retirement Benefits submitted by participants in the Police Officers’ Retirement Plan. There being no unusual circumstances regarding these requests, a motion was made by Capt. Manning, seconded by Det. Fourtney, and unanimously carried to approve the Retirement Benefits for Police Officers as presented. APPLICATIONS FOR VESTED TERMINATION BENEFITS For Approval: Decision: For Approval: Requests for Civilian Plan Vested Termination Benefits. There were no requests for Civilian Plan Vested Termination Benefits. For Approval: Requests for Police Plan Vested Termination Benefits. There were no requests for Police Plan Vested Termination Benefits. APPLICATIONS FOR DEATH BENEFITS For Approval: Decision: Beneficiary requests for Civilian Plan Death Benefits. There being no unusual circumstances regarding these requests, a motion was made by Mr. Bass, seconded by Mr. Erickson, and unanimously carried to approve the Beneficiary requests for Civilian Plan Death Benefits as presented. Beneficiary requests for Police Plan Death Benefits. There were no beneficiary requests for Police Plan Death Benefits. FINANCIAL REPORTS A. Retirement Fund Balance Sheet through February 28, 2006 from the Division of Fiscal Management. Jennison Associates LLC Account Reporting Package for period ending February 28, 2006. 2 For Approval: B. C. Wellington Management Company St. Louis County Retirement Plans Account Period Ended February 28, 2006. OakBrook Investments St. Louis County Enhanced S & P 500 Index Portfolio Statement as of February 28, 2006. Capital Guardian Trust Company Portfolio Statement as of February 28, 2006. Deutsche Asset Management Portfolio Review. Batterymarch Financial Management Performance Summary February 28, 2006. Summit Strategies Group St. Louis County Retirement Plans ASAP Report February 28, 2006 - The Economy February 28, 2006. Missouri Valley Partners Portfolio Performance February 28, 2006. Aronson + Johnson + Ortiz Portfolio Performance as of February 28, 2006. RREEF America REIT II. Sanderson Asset Management Performance Statement at February 28, 2006. There being no unusual circumstances regarding the financial reports a motion was made by Mr. Bass, seconded by Capt. Manning and unanimously carried to approve the financial reports as submitted. THE ECONOMY – FEBRUARY 28, 2006 D. E. F. G. H. I. J. K. L. Decision: Kari Creighton Unfortunately February was not as grand as January was. The final GDP came out today and was revised slightly up to 1.7% from the last estimate of 1.6%. Most of that did come th from business fixed investment. Consumer spending really slowed down in the 4 Quarter. st The 1 Quarter 2006 has been wonderful with the growth in the economy. Consumers have st picked up a little bit but most of the 1 Quarter growth is going to come from business fixed investment. Unemployment jumped up slightly in February to 4.8%. Home sales fell almost 10.5% in February, which is the most we’ve seen in 9 years. What is RREEF’s percentage in residential? It is the smallest percentage they have in the portfolio and I think it is actually underweight to the NCREIF benchmark. Residential is the only area right now that is experiencing a “housing bubble”. CPI was basically flat in February, rising only about 10 basis points and PPI actually fell 1.7% in the month. The core figures were only up .1% on CPI and .3% on PPI, so very tame inflation figures. The Fed is not worried about inflation but as you all know, they do continue to raise the Fed funds rate by 25 basis points. The Fed met a couple of days ago and raised th the rate to 4.75%, which was expected by the market. The Fed’s next meeting is May 10 and the market is expecting another 25 basis point increase then also. Brian Bass Kari Creighton Brian Bass Kari Creighton There is a St. Louis CPI/PPI isn’t there? You know there probably is. 3 The yield curve is now fully inverted. Your 5, 10, and 30-year treasuries are yielding less than your 2-year treasuries. This has corrected since the end of February. We’ve seen a big jump in yields in March, so we no longer have an inverted curve. Two-year treasuries in February were yielding 4.68% and the 10-year was yielding 4.55% and the 30-year treasury was only yielding 4.5%. The 30-year is now sitting at 4.87% in March so far and the 10-year is at 4.83%. A lot of the action we’ve seen in the yield curve is because of Ben Bernancke’s comments he has made on the yield curve. Clayton Erickson Bernancke’s words were that more rate increases may be needed and that’s what spooked the market. This pull-back has been really in just the past week. The equity markets for the month of February had very lackluster performance. Both equity and fixed income posted returns of around 30 basis points. It was a fairly flat market. You will notice that the S & P, as I mentioned, was up about 30 basis points. Value outperformed growth in February. The Russell 2000 (the small cap benchmark) was actually negative for the month and down almost 30 basis points. In the small cap markets value outperformed growth. The International markets, as represented by the MSCI EAFE was down 20 basis points. We had a strong dollar in the month, resulting in a loss about 100 basis points. Energy, Materials, and Information Technology were the worst performing sectors in February. The strong performer continues to be Emerging Markets. You can see they also had negative performance in February, down 12 basis points, but year-to-date, Emerging Markets are up 11%. Small Cap Growth is the second best performer for the year, up a little over 4.9%. The EAFE benchmark is about 300 basis points above the S & P 500, year-todate. In the fixed income market, the Aggregate had exactly the same return as the S & P 500, about 30 basis points for the month of February. Government bonds significantly underperformed the rest of the fixed income market in February, it was 30 basis points behind corporate bonds and mortgage-backed securities. The longer you were in the curve, the better you did, as yields dropped on 30-year treasuries. In the international markets, you will see government bonds had negative performance due to the dollar depreciating, down 69 basis points but emerging market bonds were up 2.5%. So far March has been a good month. The equity markets are up between 2 – 4.5% and small cap is outperforming large cap. The international markets are around 2.5%. Kari Creighton ASAP REPORT – FEBRUARY 28, 2006 Kari Creighton Looking at the plans themselves, you will notice it was not only a bad month in absolute terms, in relative terms all of the managers underperformed their benchmarks in the month of February with the exception of your fixed income managers, that were basically flat. OakBrook were 20 basis points behind in February but year-to-date, they are still 40 basis points above their benchmark. Aronson was flat for the month but they were 60 basis points behind their benchmark and now they are 30 basis points below year-to-date. 4 Kari Creighton Missouri Valley Partners with their overweight to Information Technology and underweight to Energy, it evened itself out and they were only 20 basis points behind their benchmark but year-to-date they are still trailing 260 basis points. We are holding off on terminating their account until the end of next month but we are going forward with funding Gryphon. We are taking $9 million from Capital Guardian to fund Gryphon on April 3, 2006. When MVP is terminated at the end of April, we will transition that balance into Gryphon’s portfolio. Jennison had terrible performance for the month. The big effect on their portfolio is from Google and Google had a terrible February. Google was down 16 or 17% for the month and Google is about a 4% holding in Jennison’s portfolio. Apple and Yahoo were holdings for Jennison and both of those stocks as well took a hit in the month of February. Batterymarch underperformed considerably by 200 basis points in the month of February. They had an overweight to Materials and Energy and those two sectors were the worst performing sectors in February. I still have concerns with Batterymarch’s product. They continue to grow the product. Right now they have a small cap product and a smid cap product and those two products together have about $4 billion under management. The small cap product is a little over $3 billion, which I think is too much in the small cap market. Taking a look at their holdings across all of their client accounts and right now they have about 500 stocks that they hold across all client accounts and each account only has about 150 stocks. The issue I have with them is that they hold different stocks in all of their client accounts because they can’t buy the same stock across all of their client accounts, so there is dispersion between their client accounts and their composite account that they report. I have taken a look at their procedures on selecting stocks and how they determine what accounts get what stocks. Batterymarch says the determination of what stocks go into what portfolios is completely random but it is interesting when you look at some of the stocks that get in some client portfolios and how they are always the number one and number two rated stocks based on their fundamental and quantitative process. I do still have issues, I think that the procedure they have in place will still perform well but the question is whether it will perform as well as it did in the past? Probably not. The dispersion between client accounts is my concern but it hasn’t hurt St. Louis County. You have actually been on the positive side of the dispersion. Clayton Erickson My concern with them is the size. When we went in with them they were a $1.5 billion fund, which is still big in the small cap market but you look at anybody and say give me your 50 best ideas and now they have gone to the point of give me your 250 best ideas. Who has 250 best ideas? You get so much money and you have to work your way further and further down the totem pole. That’s why I mentioned that they are holding about 500 small cap stocks. I don’t know anybody that has 500 good ideas. It may be time to send Batterymarch a “watch’ letter. Do you have good small cap managers that have not grown to this size? Kari Creighton Clayton Erickson Kari Creighton Clayton Erickson 5 Kari Creighton The only problem with the small cap managers is that they close so fast, which is what we want to see. We want to see managers close their product and not take on any new clients. We are constantly doing research on new management firms or new teams that maybe move from one firm and started their own group. We are always watching that area of the market – it is the most active. We do have some good candidates. Do they have any closing amounts? Batterymarch is actually growing the account to $5 billion. They tend to say that with their quantitative process they can grow to be that large, which I tend to disagree with. They have a little more leeway than most managers because they do have a quantitative process with a fundamental overlay, but it has still gotten too high. Would you like me to go forward with sending a “watch” letter? Clayton Erickson Kari Creighton Gary Fourtney Kari Creighton Looking at their performance, I think so. Luckily you have had them in place for a long period of time and you had the success with Batterymarch. Is February just a boring enough month that we want to wait one month to see what happens in March? They’ve had lackluster performance for quite a while. I went back to Batterymarch this month and had some long discussions with them on their process and whether anything has changed. They have changed a little on their trading side but it’s been a benefit to the portfolio. Their actual trading cost is about .02 per share, which is extremely good for a small cap manager. On the investment side, there are not many changes to their process. They still overweight the top four sectors, underweight the bottom four sectors, rank all the individual stocks in the universe and they overweight the top ten stocks that fall out and the bottom ten, they won’t hold. They are doing this across all their client portfolios, but whether you get number one or number ten, that is a random process. So what is your description of the change from when we bought them to what they are now? They had more of a model portfolio in the beginning. Which is one of the reasons we hired them. That’s fair. Since we are talking about their performance, we know there are some issues, so I don’t see a problem sending out a letter. I would hate to see them go down further to wait and send a letter out. A motion was made by Detective Fourtney, seconded by Mr. Bass, and unanimously carried to have Summit Strategies send a “watch” letter to Batterymarch. When were they last in here to talk to the Board? It’s been a while, at least a year. They are scheduled for June 29, 2006. Is J.J. over the account? Yes. 6 Brian Bass Kari Creighton Brian Bass Kari Creighton Brian Bass Kari Creighton Gary Fourtney Decision: Gary Fourtney Kari Creighton Dana Hutchings Kari Creighton Dana Hutchings Kari Creighton J.J. services one of my other client accounts and she is going to be leaving Batterymarch. I think Batterymarch still has a good process but going down the road, I don’t think it will be the seller it has been in the past due to those reasons I mentioned to you. I also presented a mid cap market review to one of my other clients. You just have small cap exposure and mid cap has done extremely well. You may want to have a manager with small cap and mid cap exposure. You do a little mid cap exposure but maybe a manager with a greater percentage in mid cap makes sense. Do you know what percentage they are in mid cap? It is very small. The tragedy with Batterymarch is that they were anchor during the most turbulent times. That 25.5% on 3-years, that is not annualized, that is 3-years figure? That is annualized. For the last 3 years, they have averaged 25%, so each year they are picking up 25%. But as you can see their index did 300 basis points better. It is at 5-years that it really shows up. Their forte’ used to be to outperform the index and they used to do it quite handily. Success in a money manager like this generally breeds a lot more money and then that money took them up double the size of the fund in the small cap arena. Are they still open? They had closed both their small cap and smid cap products but they recently opened it up to a capacity of $125 million. They say the reason they have capacity is due to rebalancing – clients moving money out of small cap into other areas of their portfolios. Small caps have had a wonderful 5 years now. You would think they reopened it because more people were rebalancing out of small caps and they wanted to take their total back up again. Would you want us at Summit to do a mid cap core search? Mid caps are outperforming right now. We could certainly go forward with the search and be prepared if the decision came to terminate Batterymarch at some point in time. In place of Batterymarch? Don’t we still want to have small cap? We still want to have small cap, they would also have some mid cap. We call it smid cap. I will bring a chart to the next meeting on the comparison of mid cap with large and small over three and five-year rolling periods. Gary Fourtney Kari Creighton Kirk McCarley Brian Bass Kari Creighton Clayton Erickson Kari Creighton Clayton Erickson Gary Fourtney Kari Creighton Clayton Erickson Kari Creighton Gary Fourtney Kari Creighton Brian Bass Gary Fourtney Kari Creighton 7 On the international managers, we saw underperformance relative to their respective benchmarks as well. Value did do better than growth in the international markets. Sanderson was down by 20 basis points and underperformed by 90 basis points. Their overweight to Information Technology and Materials also hurt them. Capital Guardian underperformed by 20 basis points but there you will see that they lost 1.3% and again it was the Information Technology sector that really hurt the growth managers and Capital Guardian also has an overweight to Japan. You may have heard that Japan actually fell for the month the first time since April 2005. So it is the first time that the Japan Nikkei had negative performance. If you look at your Global Equity composite, you will see you did lose 90 basis points for the month of February. Year-to-date, you are up 4.3% and versus your global policy index, you are outperforming by 30 basis points year-to-date. On the fixed income side, your managers were basically flat with their benchmarks. They both continue to underweight Corporates and overweight Mortgage-Backed securities. They also underweight Government securities, which was also a benefit to their performance. Year-to-date, they are right even with their benchmark. Your real estate manager, RREEF is in today. We don’t have monthly performance for them because they report on a quarterly basis and we also are still working on how to report their fees. We’ve had many discussions with our performance measurement department at Summit to discuss how we want to report those fees going forward to reflect it as accurately as possible. Clayton Erickson So then once you do that you will be able to get some numbers in there for the last year. The $33,212,000 is as of? Since as of December 31, 2005. On a total fund level, you did lose money. You were 60 basis points down and underperformed the custom index by 70 basis points. Year-to-date, the total fund is up 3% but you underperformed your custom index by 40 basis points. The fund total market value as of the end of February was $418.5 million, so you dropped about $2.5 million from last month. I checked market values as of yesterday and the fund has picked up about $5.8 million so far in March and that’s also not updating values for Sanderson, Capital Guardian, and RREEF. You will see your equity allocation is about 3% over your target and as of the market values I pulled down yesterday, you are very close to your 5% boundary. You are sitting at around 69% equity as of yesterday. This will be something we will take a look at next month. Gryphon will be funded with $9 million which will come from Capital Guardian and eventually we will get the $11 million from Missouri Valley Partners funds in there as well. SUMMIT STRATEGIES UPDATE Kari Creighton Summit hired two more research analysts, who are actually working in the manager research area, so now we have eight manager research individuals. Their sole responsibility is to look at managers and their products. The two individuals were added to basically focus on private equity and hedge funds. Due to that growth, we will also be moving offices probably at the end of May. The new offices will be on Maryland Avenue right across from Straubs, which is the Smurfit Building. We will be taking over a floor and a half in the Smurfit building. We will definitely be having an open house and will probably try and time it for around the time of the Art Fair in Clayton (the first weekend after Labor Day). Kari Creighton 8 CORRESPONDENCE CAPITAL GUARDIAN BOARD NOTIFICATION OF REMOVAL FROM “WATCH LIST” Notification to Capital Guardian on their removal from the “watch” list and the $9 million to be liquidated from their account to partially fund Gryphon. RECOMMENDATION TO COUNTY COUNCIL REQUESTING LEGISLATION TO TERMINATE AGREEMENT WITH MISSOURI VALLEY PARTNERS Letter to the County Executive requesting recommendation for the legislation necessary to terminate the County’s agreement with MVP. DIRECTION LETTER TO STATE STREET SPRINT CLASS ACTION PROCEEDS BE DEPOSITED INTO SANDERSON ACCOUNT Direction letter to deposit the Sprint class action proceeds from Chartwell and Independence into the Sanderson account. SANDERSON ASSET MANAGEMENT 2005 AUDITED FINANCIAL STATEMENTS AND POLICIES Sanderson Asset Management’s 2005 Audited Financial Statement and Policies were received and are on file in the Retirement Plans Office and available for review. AJO CERTIFICATE OF INSURANCE Aronson + Johnson + Ortiz has provided a copy of their Certificate of Insurance and is on file in the Retirement Plans Office. AJO ON THE CUSP OF AN EQUITY BEAR MARKET? More information from AJO for the Board. ESTABLISHMENT OF THE ST. LOUIS COUNTY CIVILIAN RETIREES’ ASSOCIATION Kirk McCarley This article was received from Joe Passanise, establishing a St. Louis County Civilian Retirees’ Association. They are having meetings once a month and are encouraging anyone who has retired from St. Louis County and would like to attend to do so. The Police have their own retiree association also. How often does the St. Louis County Police Retiree Association meet? About every 6 - 8 weeks. Where do they meet? They meet here now in the Police Headquarters. 9 Clayton Erickson Vince Manning Kirk McCarley Vince Manning Clayton Erickson Vince Manning Social? Mostly. The Civilian group indicates that they will have someone from the group at the meetings to monitor these proceedings. I helped them somewhat to organize this group on several occasions. OTHER BUSINESS ANNUAL REVIEW RETIREE COLA 2006 Kirk McCarley Vince had requested last month that the annual COLA review for 2006 be on the agenda this month. Does the Board want to establish a date to have a discussion with the Plan Improvement Committee? Do we get a cost estimate or have a meeting first? You could either ask Steve to prepare something in preparation for that meeting or have a meeting first and then go to Steve? The COLA that was approved last year, when did it go into effect? September 2005. Usually to be in the correct queue in regards to the Budget, there needs to be a targeted recommendation by the end of June. I think we need to get some kind of an estimate of the cost factor? Based on what? Don’t we have to give Steve some kind of parameters? Look at a COLA based on CPI for 2005. Do we really think we are going to approve a COLA this year when we just had one? I want to have the review that we agreed to do every year. We need to have that on the agenda for the Plan Improvement committee prior to next month’s Board meeting. I think we need figures from Steve Siepman to be able to make any decision. That’s a difficult thing to get through. Realistically, whatever we do would probably not take place until the following year. I recommend that we wait until we get the June actuarial report and have it presented at the same time and then have the Plan Improvement committee meet after that to review the COLA. Steve will have the preliminary information presented in May. Glenn, can you confirm that the report that Steve will present in May will show what the change in percentage will be? We usually do that analysis in May. We give the information to Pam Reitz and they start the Budget process. 10 Clayton Erickson Kirk McCarley Clayton Erickson Brian Bass Kirk McCarley Vince Manning Clayton Erickson Vince Manning Clayton Erickson Vince Manning Msgr. McCarthy Vince Manning Msgr. McCarthy Clayton Erickson Brian Bass Dana Hutchings Brian Bass Glenn Pearl Vince Manning I keep going back to a couple of years ago when we were told that it was cheaper for the County to give COLA’s on an annual basis than it is to wait for 3 or 4 years down the road. You would lose the present value of money that way. I think the issue has always been that if we start giving COLA’s every year then Steve has to start including them in his actuarial assumptions. A motion was made by Vince Manning, seconded by Gary Fourtney, and unanimously carried to have the actuary include a review of a COLA increase with his preliminary actuarial report each year in May, so that the Board will have the information for their annual COLA review. Clayton Erickson Glenn Pearl Decision: MAPERS 2006 CONFERENCE ATTENDANCE Kirk McCarley Gladys Lewis Brian Bass Brian Bass has requested to attend the MAPERS 2006 Conference, July 11 – 14, 2006. Do you have conference materials on the conference, Brian? It is online at www.momapers.org. I would like to request to attend this again. Gary Fourtney Clayton Erickson Gladys Lewis Brian Bass Clayton Erickson Gladys Lewis Decision: I would like to go also. To me this is worth the cost. Historically, how many people have attended per year? It’s up to the Board. Gladys, are you suggesting that you would like to go also? I would like to attend. A motion was made by Clayton Erickson, seconded by Vince Manning, for Brian Bass, Gary Fourtney, and Gladys Lewis to attend the 2006 MAPERS Conference and that the costs associated with this conference be paid from the retirement fund. SCHEDULED BOARD PRESENTATIONS Kirk McCarley There is no presentation scheduled for the April 27, 2006 meeting of the Retirement Board. OakBrook Investments is on the schedule for the May 25, 2006 meeting. What would be the Board’s preference? The Board made the decision that it was not necessary at this time for OakBrook Investments to make a presentation on fund performance at the meeting of May 25, 2006 and to move Batterymarch up on the schedule to make a presentation at the May 25, 2006 meeting. Decision: MOSERS REQUEST IN REGARDS TO RECIPROCATING AGREEMENT 11 Maggie Hart-Mahon Last year the Board considered a request from MOSERS to allow former County employees, who had gone to work with the State of Missouri to take their paid up pension benefit amount with the County and purchase service credit with the State of Missouri. The Board voted in favor of allowing this. In a letter to the County Executive, the Board advised the County Executive that they felt the decision on whether the County should enter into an agreement with the State should be made by the County Executive and the County Council. Under Missouri law, if they are an employee with the State of Missouri for 10 years, as long as they have not retired from the County and drawn any benefits, they can come back to the County and ask that the money that has been set aside for them as a vested participant be sent to the State of Missouri to buy pension with the State. Jim Baker called me yesterday and said that the County Executive is in favor of the option and he intends to ask the County Council to approve it. Brian Bass We recommended that this would be okay with the Board but that the County Executive make the decision? The letter said that the Board didn’t have jurisdiction over that. In your letter it says that the Board sees the decision to enter into this arrangement is beyond it’s purview, however, and feels the ultimate decision should be incumbent upon the County Executive and the Council. Kirk McCarley Maggie Hart-Mahon PRESENTATION RREEF AMERICA II REAL ESTATE INVESTMENT MANAGER JOHN EHLI AND JON THOMPSON Jon Thompson I was hoping to bring with me a woman named Toupa Melanowski, who is going to be joining RREEF in a client relations role. I have been asked by RREEF to move to London and establish a client relations practice for the Deutsche Bank. I am in the process of moving over there in the middle of April. Toupa will be the person moving forward to service the th account and a point of contact for you in the future. Her effective start date is April 10 . RREEF continues to be owned by Deutsche Bank. The company continues to grow and things are going well for RREEF. Nothing has really changed in terms of where the corporate offices are located in San Francisco, Chicago and New York. One of the things that does make us a little different is we do tend to manage most of the properties that we own on your behalf. It is important to have that type of control at the property level. I would guess between now and when we met last, we probably run about $10 billion in assets under management. In terms of running the funds, the Applications and Investment Team has 42 professionals who are out there every day trying to source transactions for the fund and the Market and Research Team is the team that sits down with the Portfolio Management Team each year and tries to get a perspective on how the portfolio’s position is, how we can better position it going forward, identifying markets that we want to invest in, and identifying property type or market type that we may want to avoid given our various perspectives on the markets. Kari Creighton Jon Thompson Clayton Erickson Jon Thompson Have you lost any team members? No we have not lost any team members. Do you have a limit as to where you would cap the fund? If you would look at the open-end funds that are out there right now, JP Morgan, Prudential and maybe two or three others that are bigger than us, I don’t think we’ve talked about capping the fund, the perspective has been as the fund grows if we can continue to manage it and put the right staff in place, maybe $10 billion would probably be a pretty good size. 12 Clayton Erickson Jon Thompson In going to London, just to look for investors or investments? My role there will be to look for investors and to service our US investors who are investing oversees. We have one global fund and we are in the process of launching another global fund. Historically in Europe, the money we’ve had to invest has come off the bank’s balance sheet, so they are sort of taking the RREEF model and trying to implement it across Europe. In terms of the growth of the fund, you can see from its inception in 1999, we have 186 overall investments and about 231 institutional investors. I think this supports the performance and also the RREEF organization. We had almost $2.5 billion of funding last year, financing was $700 million. The fund is capped at 30% in regards to debt we can have. Right now we are at 26%. In regards to maturity of the debt, the average maturity is 2012, so we are very well positioned in that regard. We have interest rate on average of about 5.75%. Dispositions were fairly minimal last year at $128 million. Going forward, we are identifying to sell more buildings in the market place because we think this is a very attractive time to also sell property. Investor redemptions have been very negative flow of about $29 million. A few of the major acquisitions last year was a Continental Portfolio, which is one of the few joint ventures that we’ve done and the largest acquisition we had last year was Cal East, which was a diversified investment portfolio located in about 15 markets across the country. What’s a portfolio as opposed to investing in direct properties? I call it a portfolio because it is a group of properties. Cal East is basically a group of properties that were sold off together. It is not one building; it is a number of assets. One of the challenges particularly in the core space, there has been a lot of available capital to acquire real estate, so for an office building that is $20 million, there may be 20 investors and a lot of them may be high worth individuals who are using a lot more leverage than our cap of 30%. One of the advantages of having a large fund is to be able to approach an acquisition of $1.3 billion. There aren’t that many organizations that have enough professionals to even do due diligence to do the deal, so we are able to be one of three or four bidders for a transaction like that and in this environment, it is very difficult to acquire real estate. It is an advantage for us to be large in that scenario. Who was the other part of the joint account? The joint venture account was with a developer. Your average property size? The average size is right around $40 million. In the earlier days of the fund, it was probably closer to $12 million. The fund historically and will continue to overweight to the industrial sector. The reason that we weight to the industrial side is the core nature of the fund. The industrial product is a much more conservative investment. As compared to office and the other products, retail primarily, it shows less volatility going up and a lot less going down. The core tenements to the fund are basically capital preservation and income yield. The other benefit to overweighting the industrial side is that it has very low capital reserves required versus like office, which is very expensive to re-tenant and re-lease because you have very high tenant improvement costs. The industrial side also has the benefit of fairly long lease terms. What is the minimal percentage you would have? John Ehli Brian Bass John Ehli Jon Thompson Clayton Erickson Jon Thompson Kari Creighton John Ehli Jon Thompson John Ehli Gary Fourtney 13 John Ehli We would probably have around 38% - 40%. The index is running around 19%. We are actually at 43% right now and one of the exercises we are going through is looking at selling a few industrial assets. We have been as high as 50% in the industrial sector. For any asset type, 50% is the maximum allocation. We are also overweighted to the West Coast. Our overall strategy is called the Tri-Coastal strategy. We lean towards the west coast, the gulf states, and then also the east coast. When we say the gulf region, we are not talking about New Orleans. We are fairly balanced in our portfolio right now and are not looking to over invest in one region or the other. We might buy a little bit more on the east coast but primarily the ratio that we have today will pretty well remain in place. The return of the funds has just been outstanding and that is primarily due to the amount of money that has entered the real estate markets. Basically, there has been a compression in the returns, which has forced the prices up tremendously. The other thing that we are seeing right now is those returns, at least what we’re forecasting because the amount of money should start stabilizing that is going into real estate but the underlying fundamentals that support the real estate are actually improving right now, so it is a good time to own real estate. We are seeing the vacancy rates drop across the boards and even the average market is improving. The only asset class by way of having any kind of struggle or change would be the condo-conversion market. The apartments that we own are not in conversion type markets and we are not trying to buy in those types of markets, so we are not feeling any of that type of impact. The top ten metro areas are basically in California or the East Coast. We don’t feel that we are overweighted to any one of the markets, even though we have 27% in California, it is a big state and those markets operate independently of one another. We are currently at 90% occupied on the fund and we are projecting 93% in 2006. We have a very manageable expiration schedule. We don’t have a lot of buildings that are single tenant, large user buildings, so we don’t feel there is a lot of risk there and we are also seeing increase in the NOI and we expect a 4% increase next year. Jon Thompson John Ehli Jon Thompson When we presented the fund to you a little over a year and a half ago, this NOI number, rents were still rolling down. In a core fund like this, historically, it should deliver a 9% - 10%. It is nice that we are delivering 14% - 18% returns, but it shouldn’t be your expectation. I would expect returns to moderate. As rates do start to rise a little bit some of that will be offset by this increase in Net Operating Income (NOI). The initial commitment of $30 million has grown by a little over $2 million. You are currently reinvesting your dividends. You may recall from the original presentation if for some reason you need to take some capital from the fund, you can send us a letter and have the option to take the dividend whether than reinvesting it. Kari Creighton Jon Thompson What is the current queue on the fund for investments? I want to say it’s $200 - $300 million, which would be about 6 months. I think whenever we presented to you, it was probably 12 – 18 months. We put a lot of money out last year, so the money that came in we placed fairly quickly. We put about $2.5 million out last year and we don’t see that type of growth this year. We haven’t seen it so far; I’ve had a couple of presentations for new business recently and I’ve seen some interest but not like it was when we presented to you all. 14 John Ehli Jon Thompson Clayton Erickson Jon Thompson Clayton Erickson John Ehli Clayton Erickson John Ehli Clayton Erickson John Ehli It’s all about interest rates. Absolutely and the money was coming off of bonds. Of the 26% leverage and you said your average rate is 5.75%? Correct. Fixed, floating? Fixed. What kind of term? We have mixed maturities with the average maturity being 2012. One of the interesting things about the market right now is that it is very expensive to build a building and so the prices and values that are in place, certainly on this fund and other ones, even though some money does move out of the market, it still is going to support the values that are there today. There are a lot of challenges in the markets we are in. It is very expensive to build and it’s not only the price of materials but the price of labor and some of those things are imposed by certainly what’s happening internationally and also domestically with some of the recent disasters in the south. Clayton Erickson Do you think that the rise in interest rates makes apartments more appealing and will help your occupancy rates? Yes. The closest you get to residential is apartments? Yes – no single family. Jon Thompson Clayton Erickson Jon Thompson DETERMINE DATE OF NEXT MONTH’S BOARD MEETING It was unanimously agreed that the next meeting of the Board of Trustees will be held on Thursday, April 27, 2006 in the Lawrence K. Roos County Government Building, Division of th Fiscal Management 8 Floor Conference Room, 41 South Central, Clayton, MO at 10:00 a.m. ADJOURNMENT Adjournment: A motion was made by Msgr. McCarthy, seconded by Capt. Manning, and unanimously carried to adjourn at 11:35 p.m. 15 04-27-2006 Thomas Wright, Acting Chairman Date 16