Untitled Document
Long Term Investment Trustees
Report to Council
Sunday, June 24, 2007
Washington, DC
This report provides information regarding the performance of ALA’s Long Term Investment Fund (LTI) i.e. the Endowment Fund, for the calendar five-month period ending 5-31-07. It is provided as a supplement to the oral report given by the Chair of the ALA Long Term Investment Trustees. This report also provides information on the general condition of the financial markets, the performance of the individual portfolio managers and other issues that impact the LTI fund that are viewed as important to the membership. This report will be placed on the Treasurer’s web page after this Annual Conference at www.ala.org/treasurer.
Attachments
Attached for your review are charts (Exhibits #1–7) detailing the value of the portfolio, the allocation of the assets by type, investment style and manager. Also included is a historical review, manager investment style/benchmark comparisons and other pertinent information related to the management of the LTI Fund.
Economic/Financial Review 1st Quarter 3-31-07
Government reports state that economic growth of 2.6% in the U.S. economy as of 12-31-06. Most 2007 first quarter projections were for growth in the 2.5%–3.0% range. Interest rates held steady at 5.25% with the hope of a rate cut later in the year. Inflation was higher at 2.7% during the quarter than the much hoped for range of 2.0%, but still manageable. However, rising energy prices remain a major concern as refining capacity is still limited and the per barrel prices ranges from $65–$68. Housing continues to be a concern as default rates have started to rise considerably, particularly on subprime loans. This has had a negative impact on consumer confidence, which seems to waver month to month. On the plus side, double-digit corporate earnings continued a string of 20 straight quarters.
The US stock market continued its two-year run of weathering economic and political storms. After sprinting out of the gate with a fast 3% increase in the S&P index thru mid February, the market’s results were erased in one week as a result of the fallout from the China exchange. This caused a strong rally in the bond market as investors anticipated a reduction in interest rates by the Fed. After coming to their senses and realizing that the housing issues could be handled without too much trouble, the market came to its senses and rebounded. New highs were set in the Dow Jones Industrial Average, the tech heavy NASDAQ and the broader S&P 500 topped its previous high set in 2000. Stock valuations are still reasonable, although only moderately. This means that there is little undervaluation in the market.
Endowment Fund Performance
For the five months ended 5-31-07 the value in the ALA LTI fund increased by approximately $1.8 million from $29.0 million to $30.8 million—see exhibit #2 and #3. This resulted in a return of 5.7% compared to the portfolio’s benchmark of 6.5%.* Performance on an individual manager basis resulted in most of the managers trailing their respective benchmarks. There results is as follows:
Alliance Bernstein—For the period Alliance, the large cap core manager, returned 6.0% compared to its benchmark of 8.8%. Alliance continues to struggle with their strategy of moving to into technology and consumer discretionary stocks, while under-weighting energy and industrials stocks. Alliance is a classic sector rotator and they are just now beginning to benefit from their moves. In other words, they moved too quickly before the market joined in the rotation. Despite the recent turnaround the Trustees have put Alliance on notice and will be monitoring their performance for the next few months. Additionally, the Trustees, with the help of our investment advisor Merrill Lynch, are currently gathering information on potential replacements in the event that things don’t improve as expected.
Marsico—Marsico, the large cap growth manager, returned 7.3% compared to its index of 9.8%. After years of lagging the market the large cap growth sector is beginning to get some traction. Most market pundits foresee 7%–11% EPS growth in the 500 large cap companies comprising the S&P 500. Marsico is well positioned to take advantage of this trend.
Blackrock—Blackrock, the large cap value manager, returned 9.4% compared to its index of 8.5%. They have benefited from the markets preference with value vs. growth stocks. Future returns may be impacted by the current shift by the market into large cap growth stock as noted above.
NFJ/Alliance—NFJ/Alliance, the small cap growth manager, continues to outperform with a return of 12.0% compared to its benchmark of 6.3%. We are currently near the top of the recommended weighting for this category. Note that this is the first category to make an adjustment (downward) if it looks as though the economy is beginning to deteriorate.
Lazard—Lazard, the international manager, returned 8.7% compared to its index of 10.6%. The international market continues to be strong, particularly from emerging markets and Europe. Note that this manager will underperform the index during good times as a result of its defensive posture. The international market—like the small cap market—can turn negative in a hurry. Lazard protects on the downside in this potentially volatile sector.
Heitman—Heitman, the REIT manager, returned 8.7% compared to its index of 9.0%. The Heitman managers have indicated for over a year now that the valuation in this sector is at record highs. Performance over the last five years has returned a strong 23+%. This has moderated recently with the market net asset value fairly priced at a 5% premium.
PIMCO—PIMCO, the fixed income manager, reported a loss of (-0.4%) compared to its index which lost (-0.1%). Unfortunately during the last few weeks interests on ten year treasuries began to spike up driving down the price on older bonds in order to maintain an attractive yield. Because of the rate spike bonds are now poised to compete with equities for funds.
Ariel Capital Appreciation—Ariel Capital, the SRI mutual fund, reported a return of 11.6% compared to its index of 11.9%. Due to the unique nature of Ariel, other more appropriate SRI indices returned 8.0% and 7.7% respectively. See Exhibit #5. Since the third quarter of last year Ariel has turned its performance around. As with Alliance consumer discretionaries have benefited the portfolio, as well as, some media holdings.
Asset Allocation and Rebalancing
See exhibit #8 for details on asset allocation and rebalancing. The practice of rebalancing is based on an assessment of the prevailing risks and opportunities in the market. The Trustees’ continually monitor the portfolio and look for new opportunities to boost performance at appropriate levels of risk.
Based on prevailing market conditions the portfolio has benefited from an over-weighting in small cap stocks and international stocks. Each of these two sectors will be monitored closely as these represent the areas that can change the fastest. There has also been an under-weighting of the large cap value portion of the portfolio and a corresponding increase in the large cap growth portion. All indications are that large cap growth stocks are finally in a position to make some sustained gains, particularly if the economy shows any signs of softening. The weighting in the fixed income portion of the portfolio continues to be increased as the Federal Reserve has for the moment stopped its program of interest rates hikes.
Note: The Trustees meet on a monthly basis via telephone, with ALA staff and Merrill Lynch—ALA’s Investment Advisor—to review the LTI’s investment performance, asset allocation and other matters. As a result of this practice and asset allocation decisions made by the Trustees’ during the course of the year, based on prevailing market conditions.
Future Outlook in 2007
The year 2007 was supposed to be the year that double-digit returns on equities were to come to a crashing end. However, the first quarter picked up exactly where it ended in 2006. As a result, 2007 could be thought of as the year of “grudging” growth as world economic growth remains strong, U.S. consumers continue to spend and the U.S. housing issues are slowly being corrected. It was mentioned earlier that most market pundits foresee 7%–11% EPS growth in the 500 large cap companies comprising the S&P 500, as large cap stocks finally get on solid footing. This prognostication assumes that a slow to moderately growing economy can endure in an upward pattern over the next year or so in the context of low interest rates and constrained inflation. Note that globalization and the hot economies in China, India and a few other areas like emerging growth should benefit large companies.
All considered the general outlook for 2007 is positive for the economy and corporate earnings. As usual this is all predicated on the unpredictable i.e., inflation, energy costs, the direction of interest rates, threat of recession, etc.
Blackrock SRI Manager
During their most recent conference call on 6-6-07, the Trustees took action to the hire Blackrock as a portfolio manager to actively manage an SRI account. The initial investment totals $250,000. Blackrock’s approach is to construct a diversified target portfolio of socially screened companies that are included in the KLD Domini 400 Social Index, which are highly correlated to the S&P 500. This selection is the culmination of the Trustees ongoing effort to examine the SRI question. Blackrock will actively manage this portfolio, which is consistent with Trustees overall asset allocation strategy. The Trustees will continue to examine and monitor the issues surrounding SRI investing.
New Trustee Appointment
The ALA Endowment Trustees are pleased to announce and welcome the newest Trustee John Vitali, who was elected to serve a three term at the 2007 Executive Board Spring meeting in Chicago. His term officially begins at the conclusion of the 2007 ALA Annual Conference in Washington, D.C. and ends at the conclusion of the 2010 ALA Annual Conference in New York. He will be replacing Carla Stoffle whose term expires after this conference.
Mr. Vitali (John) has been actively involved with not-for-profit business administration for close to thirty-two years. He is currently the Deputy Director for Business Administration/Chief Financial Officer of the Brooklyn Public library. Before this position he served as the Director of Finance. He holds a Masters in Education from Rutgers University and a Bachelors of Arts in History.
We welcome John and look forward to utilizing his experience and insights in addressing the issues that face the Long-Term Investment Fund.
Acknowledgements
We continue to be well served by Greg Calloway, Keith Brown and Elaine Klimek of the ALA financial staff. They have been very dependable, reliable and thorough in assisting the Trustees in our financial oversight responsibilities.
Respectfully submitted,
Robert Newlen—Chair (2008)
Carla Stoffle—Trustee (2007)
Dan Bradbury—Trustee (2009)
Teri Switzer—ALA Treasurer, Ex Officio (2007)
*Composite benchmark is 55% Russell 3000, 10% MSCI EAFE and 35% ML Domestic Master
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