MINUTES OF THE CITY OF SARASOTA GENERAL EMPLOYEES PENSION PLAN BOARD OF TRUSTEES REGULAR MEETING OF JANUARY 26, 2024 Present: Chair Ryan Chapdelain, Vice Chair Mark Nicholas, Treasurer Kelly Strickland, Secretary Shayla Griggs, Trustee Robert Reardon, Trustee Barry Keeler, and Trustee Jan Thornburg. Others: Attorney Scott Christiansen, Pension Plans Administrator Debra Martin, and Pension Specialist Peter Gottlieb. Absent: None 1. CALL MEETING TO ORDER: Chair Chapdelain called the General Employees' Pension Plan (Plan) Board of Trustees Regular meeting to order at 10:00 a.m. 2. PLEDGE OF ALLEGIANCE: Presenter(s): Debra Martin, Pension Plans Administrator. Pension Plans Administrator Martin led the Board and meeting attendees in the Pledge of Allegiance. 3. PLEDGE OF CIVILITY: Chair Chapdelain stated for the record, "We may disagree, but we will always be respectful to one another. We will direct all comments to issues, and we will avoid personal attacks." 4. ROLL CALL: Pension Plans Administrator Martin called roll. All trustees were present. 5. PUBLIC INPUT: None. 6. APPROVAL OF MINUTES: 6.1. Approval Re: Minutes of the General Employees' Pension Plan Board Regular Meeting of October 23, 2023. Presenter(s): Chair Chapdelain. Trustee Keeler made a motion to approve the minutes of the Regular Meeting of October 23, 2023; Vice Chair Nicholas seconded the motion. The motion passed unanimously (7-0). 7. APPROVAL OF RETIREMENT REQUESTIS): 7.1. Presentation and Discussion: Early Retirement Request of Kathleen Suarez. Presenter: Debra Martin, Pension Plans Administrator. Pension Plans Administrator Martin advised that Ms. Suarez requests an Early Retirement, and she selected the 50% to Joint Annuitant. Book 1 Page 408 01-26-2024 10:00 a.m. Book 1 Page 409 01-26-2024 10:00 a.m. Vice Chair Nicholas made a motion to approve Ms. Suarez's request for retirement; Trustee Thomburg seconded the motion. The motion passed unanimously (7-0). 7.2. Presentation and Discussion: Early Retirement Request of Paul Shumway. Presenter: Debra Martin, Pension Plans Administrator. Pension Plans Administrator Martin advised that Mr. Shumway requests an Early Retirement; he has 23.35 years of service, and he selected the pop-up option with 100% to Joint Annuitant. Trustee Keeler made a motion to approve Mr. Shumway's request for retirement; Trustee Thornburg seconded the motion. The motion passed unanimously (7-0). 7.3. Presentation and Discussion: Early Retirement Request of James Alexander. Presenter: Debra Martin, Pension Plans Administrator. Pension Plans Administrator Martin advised that Mr. Alexander requests an Early Retirement; he has 20.01 years of service, and he selected the lifetime option. Trustee Keeler made a motion to approve Mr. Alexander 's request for retirement; Trustee Thornburg seconded the motion. The motion passed unanimously (7-0). 7.4. Presentation and Discussion: Deferred Vested Retirement Request of Barbara Powell Harris. Presenter: Debra Martin, Pension Plans Administrator. Pension Plans Administrator Martin advised that Ms. Harris selected the deferred Option 1 benefit when the Plan changed from defined benefit to defined contribution, and her benefit has been fixed since that election. She had 6.04 years of service, and she selected the lifetime option. Trustee Keeler made a motion to approve Ms. Harris's request for retirement; Trustee Thornburg seconded the motion. The motion passed unanimously (7-0). 8. INVESTMENT PERFORMANCE REVIEW: 8.1. Presentation and Discussion Re: Graystone Consulting Quarterly Performance Summary and Quarterly Performance Report as of December 31, 2023. Presenter/(s): Scott Owens, CFA, CIMA, Managing Director - Wealth Management, Institutional Consulting Director, Corporate Retirement Director, Impact Investing Director, Alternative Investment Director; Theodore J. Loew, Vice President, Institutional Consultant; Graystone Consulting. Scott Owens and Theodore Loew of Graystone Consulting ("'Graystone") appeared before the Board and introduced themselves and their presentation. Mr. Owens reminded the Board that at his prior appearance, the Board was concerned about the relative underperformance of large cap growth managers; for the year, large cap growth stocks were up approximately 42%, and therefore some underperformance in that context is not significantly concerning. He noted that all of the large cap growth managers have outperformed in Q4 2023; the portfolio was up approximately 8% for the quarter. Mr. Loew discussed the market and economy. Despite uncertainties such as the Russia/Ukraine and Israel/Hamas conflicts, the Federal Reserve (Fed) continuing to increase short term interest rates, and regional bank failures, the market was up 24% for the last 12 months. While the Fed has been trying to cool the economy, consumers are continuing to spend, although consumer savings have decreased by more than half, and amount of credit card debt and number of delinquencies are increasing. The market has reacted contrarily to conventional wisdom: when the Fed indicated that it would continue to raise interest rates in 2024, the market soared; when strong employment numbers were reçently announced, the market tanked. In that context, the economy has whip-sawed while searching for a true event or data to which to react. One year ago, the labor market offered 2 open positions for every jobseeker while now that ratio is closer to 1 to 1; for people looking to change careers, there is only 1 open position for 2 jobseekers, and the offered positions frequently come with lower salaries than those in the field the jobseeker is leaving. Graystone asserts the current environment is what the Fed has been attempting to accomplish, and questions if the effect was too much, or not enough. Turning to the Capital Market Retums in the presentation materials, Mr. Loew reviewed the US Equity Markets. The S&P provided incredible returns both Quarter to Date and Year to Date despite analysts' predictions that 2023 would experience an economic crisis. The Russell 1000 Growth outperformed the Russell 1000 Value by nearly four times. Growth stocks and the market were driven by the Magnificent 7; NVidia was up nearly 300% in 2023 and up 20% year-to-date in 2024. Small caps outperformed in Q4 2023, however that appears to be an anomaly as they have pulled back in Q1 2024. Graystone asserts an environment in which a select few stocks drive the rest, as is currently being seen, is unsustainable over the long term; either the low-quality stocks which are driving the market will need to produce earnings, or eamnings multiples will need to come down. In 2024, many of the Magnificent 7 stocks are lagging ifr not declining, and a sell-off may be in order; Graystone believes a bifurcated market will have some investment opportunities and active managers will outperform index funds. Mr. Owens noted that while "the market" is generally synonymous with the S&P 500 Index, nearly 75% of stocks were flat or negative; because the S&P 500 Index is cap-weighted, its positive retums in 2023 were driven by a select few, very large companies. An equally weighted index would show flat performance. Mr. Owens asserted that active management generally works in the portfolio's favor in a volatile market, but when a select few stocks outperform without regard for fundamentals, active managers are constrained by their individual strategies and philosophies, and they will typically underperform their respective indexes. Mr. Loew continued. Although the Energy sector led in most of 2023, it was the only negative sector during Q4 2023; the portfolio's infrastructure manager is underweighted in energy. International equities in developed markets tracked similarly to domestics, with strong Quarter to Date and Year to Date returns; emerging markets are the outlier and ended in negative territory for the year, with Taiwan being the exception. Real estate, leverage, and employment issues have plagued China's economic performance; its central bank has been dramatically cutting interest rates to stimulate growth. While not listed in the materials, India shows significant growth and many emerging market investors have looked for opportunities there. In the Fixed Income market, bonds are performing similarly to equities. The 10-year Treasury started and ended 2023 at 3.8%, however, during Q4 2023, the 10-year rate reached 5%; this is significant volatility and should be seen as a unique event. Because fixed income funds currently have such high rates, they are an opportunity to lock in guaranteed returns with low risk. That notwithstanding, the yield curve remains inverted, and cash is eaming the most with the lowest duration, and therefore Graystone recommends caution. Mr. Owens added that Graystone's analysts believe that, eventually, the short end of the yield curve will go down, and the long end will stabilize in the 4.0% to 4.5% range, which is when it would be most advantageous to invest in longer duration bonds. Mr. Loew discussed market risks and portfolio positioning. While the Fed indicated it may reduce short term interest rates as many as 3 times in 2024, the market is anticipating up to 6 cuts; Graystone anticipates volatility in the near term. The page titled Morgan Stanley Cycle Indicator for US Economy shows the economy is slowing down, and the page titled Recession Indicators suggests the probability of a recession is rising. To Chair Chapdelain's question regarding timing, Mr. Owens referred to the Bull Markets and Economic Expansion Have Continued for Close to 4 Years After the First Rate Hike page of the materials, and explained that the economy takes, on average, almost 4 years to contract after the first interest rate hike, however there Book 1 Page 410 01-26-2024 10:00 a.m. Book 1 Page 411 01-26-2024 10:00 a.m. have been extraordinary events in the current environment, making it fari from average. He cautioned the Board to separate the market from the economy, as they act independently. Although the Fed has been clear that it will continue increasing short-term interest rates until inflation comes down to 2% to 2.5%, the economy is approximately 70% consumer-driven, and consumers have remained strong; he noted that although consumer strength has weakened, they remain stronger now than they had been as of 2019. While the economy is slowing, the question remains whether the Fed's efforts will lead to an economic soft landing or a recession. Nearly a third of the large cap's 42% return in 2023 was due to "multiple expansion,' meaning when a stock is purchased, and then later sold at a higher relative price-to-earnings multiple, however the stock's price was driven up byi investor demand. He explained that an elevated, yet unsupported price is unsustainable and either the stock price must come down, or the company must increase their earnings, keeping in mind that the Fed's efforts to slow the economy is putting downward pressure on companies' earnings. These circumstances leave analysts and investors with an abundance of contradictory indicators as to which direction the market will take. Accordingly, Graystone recommends a neutral allocation at or near long-term targets. Mr. Loew added that the available economic and market data are widely known, the market is pricing in the known indicators, and companies have been laying off workers in preparation for an economiç slowdown. Even though it would likely take a substantial event or series of events to drive the economy into a deep recession, market and economic indicators remain conflicted. Mr. Owens discussed an anecdote about Amazon and the number of employees it had in 2019 compared to today suggests that, although companies are laying off employees, employment levels are higher than 5 years ago, and unemployment remains low. Mr. Loew concluded his remarks by noting that 70% of the Gross Domestic Product is consumption, and therefore if consumers remain healthy, then the economy will as well. However, the number of job openings for every. job seeker is trending downward. He reminded the Board that, if a stock is down by 50%, the stock needs to rebound by 100% to recover toi its prior price, and therefore a low downside capture rate and defensiveness are important attributes for a portfolio. Mr. Owens discussed the portfolio's performance. He noted that the quarterly return as of December 31, 2023, already exceeded the annual expected rate of return, although the portfolio trails its benchmark by 31 basis points; he asserted that when the market is being led by a small concentration of stocks, some underperformance is to be expected. The portfolio's 2.5% to 3% allocation to cash returned approximately 5%, however that trailed the fixed income allocation. The majority of the return came from fixed income. Mr. Owens expressed confidence in the portfolio's weighting in cash and fixed income for the current environment. He reviewed the Total Fund - Risk/Return Analysis and noted that the standard deviation for large cap equities is approximately 17%, and the portfolio has less volatility, meaning less up- and down-capture, than the index, but retains 74 basis points of alpha, or excess return. He reviewed the Asset Allocation Compliance Executive Summary for the portfolio, noting the underweight in fixed income is approximately the amount of cash holdings. The Executive Summary showing each manager shows the portfolio is exactly on target with the exception of fixed income, which he believes is appropriate for the environment. Mr. Owens reviewed each manager's performance. Hudson Edge, formerly HGK, trailed over the 1-year term, but led its index over every other timeframe. Hudson Edge's beta, or volatility, and having more downside capture than upside, is causing its negative alpha; while negative alpha is undesirable, it is more palatable when a manager has a higher return, and the rest of the portfolio has lower risk. Clearbridge and Polen are in similar circumstances, both with negative alpha, but sizeable returns for the quarter and year. He reminded the Board that Clearbridge's portfolio is approximately 50% in core stocks, and the remaining 50% is balanced between defensive and momentum stocks, biased towards the style currently favored by the market; this strategy is adversely impacted when the market has capitulation, or extreme panic selling, which has occurred in abundance since 2020. Polen had been outperforming but lagged relative to its benchmark in 2023 as it does not own energy stocks, and that sector was a market leader in that year. He advised the Board that Graystone has had numerous in-depth conversations with Polen as it has lagged its index in every timeframe except Quarter/Fiscal Year-to-Date; he asserted that for every down year, it then outperformed for 5 or 6 years. Graystone will continue to monitor Polen. NFJ significantly outperformed its benchmark for the year. Geneva slightly underperformed its benchmark for the quarter but surpassed for the 1-year. Templeton has an approximate 100% up capture rate, but only a 94.35% down capture, and positive alpha, making it very defensive. It has had periods of out- and under-performance over the. years; as a value investor, Templeton began to outperform as interest rates went up and growth stocks were less favored. Graystone will continue to monitor Templeton. Renaissance, which allocates 2% of its portfolio to 50 holdings, had been underperforming until recently; its current performance has been strong enough to change the 1-, 3-, and 5-year returns from negative to positive. Segall Bryant Hammil and Invesco, as fixed income managers, both provided solid returns. The portfolio has approximately $14 million with Segal Bryant and $14 million with Invesco. In the coming months, ift the Fed lowers short term interest rates, Graystone may recommend moving funds from Segall Bryant Hammil to Invesco, as Segall Bryant Hammil is a short-term manager. He added that it may be advantageous to maintain some balance with Segall Bryant Hammil as an alternative within thei fixed income space. Both AEW and UBS, the portfolio's real estate managers, continue to underperform on an absolute basis as that sector remains challenging, but outperformed their index. Mr. Owens advised that the portfolio is using real estate as an alternative to fixed income, and since inception in 2014, AEW has returned over 7%, which fixed income would not have returned over that timeframe. Lazard Global Infrastructure continues to perform well, is one of the portfolio's largest relative contributors, and has very low volatility. To Vice Chair Nicholas's question, Mr. Owens clarified that the Real Estate sector within the S&P 500 in the Capital Market Returns section of the materials includes publicly traded Real Estate Investment Trusts (REITs) which have an approximate 85% correlation to stocks; the portfolio has private real estate funds, and those do not correlate to stocks. The NCREIF NFI ODCE Value Weighted index is an accurate benchmark as it also does not contain REITS. Mr. Loew added that Graystone anticipates the REITS in the public side will catch up to the private side over the next 12 months; in 2022, UBS and AEW were both positive when REITS were negative. Mr. Owens noted that REIT prices are influenced by demand for the shares while private real estate values are based on property valuations and transaction amounts. To Chair Chapdelain's question as to whether there is a reverse correlation between REITS and private real estate, Mr. Loew explained that REIT prices typically react faster to market pressures than private real estate share prices, and therefore REITS reflect how the public feels about the market as a whole. While there is some nominal correlation between private real estate and REITS, it is more of an indicator of what the future may hold, and perhaps the commercial real estate market may have bottomed out, and flat to slightly positive results may be seen going forward. Mr. Owens noted that, rrespective of private real estate, REITS and equities perform similarly; it was coincidental that real estate was outperforming while REITS and the equities were crashing. Mr. Owens concluded his remarks by noting there were no Compliance Checklist issues, he has no recommendations. at this time, and other than to continue monitoring some of the managers; he expressed confidence in the portfolio's positioning. The Board thanked Mr. Owens and Mr. Loew for their presentation. 9. UNFINISHED BUSINESS: None. 10. NEW BUSINESS: None. 11. ATTORNEY MATTERS: 11.1. Presentation and Discussion Re: Financial Disclosure Portal. Presenter(s): Scott Christiansen, Christiansen & Dehner, P.A. Attorney Christiansen advised that the State Commission on Ethics has opened a web portal for trustees to file financial disclosures. The State has expanded Form 6, which is required for some commissioners and local elected public officials, to be more detailed; some people who are required to file Form 6. have resigned instead of providing more information. The Board is not required to file Form 6; Form 1, which local public pension board trustees must complete, remains otherwise unchanged. Trustee Keeler explained when that he filed his financial disclosure in 2023 in the county he resides in, a different county advised that he had not filed his disclosure; he thanked the City Auditor and Clerk's office and Book 1 Page 412 01-26-2024 10:00 a.m. Book 1 Page 413 01-26-2024 10:00 a.m. Pension Administration for rectifying the issue. Attorney Christiansen explained that, by filing financial disclosures through the web portal, trustees will be filing directly with the Commission on Ethics, and the issue Trustee Keeler experienced will not occur. Secretary Griggs advised that trustees who experience any issues filing may contact Pension Administration. Attorney Christiansen advised that the state legislature is now in session; there are proposed changes to public records laws, including additional positions which are exempt from public records requests, however there are no proposed laws at this time which are directly applicable to pensions. Attorney Christiansen advised that, other than acknowledgement of receipt, he has received no response from the State regarding the Plan's reporting in compliance with HB3 to confirm the Plan does not make investment decisions based on environmental, social, or governance issues. The Plan is not required to file another report for HB3 until 2025. 12. OTHER MATTERS: 12.1. Presentation and Discussion Re: Administrative Budget Analysis as of September 30, 2023. Presenter(s): Debra Martin, Pension Plans Administrator. Pension Plans Administrator Martin presented the Administrative Budget as of September 30, 2023. The Board had no questions. 12.2. Presentation and Discussion Re: Check Register for July 1, 2023, through September 30, 2023. Presenter(s): Debra Martin, Pension Plans Administrator Pension Plans Administrator Martin presented the Check Register for the period of July 1, 2023, through September 2023. The Board had no questions. Pension Plans Administrator Martin advised that the April 8, May 13, and October 14, 2024, Board meetings will begin at 2pm. Attorney Christiansen advised that he will be unavailable to attend the April 8, 2024, meeting. To Chair Chapdelain's question, Attorney Christiansen advised that the legislative session will conclude before the Board's March 26, 2024, meeting at which time he may discuss any enacted legislation that will affect the Plan. To Chair Chapdelain's question, Pension Plans Administrator Martin confirmed that Pete Strong, of Gabriel, Roeder, Smith, and Company (GRS), will appear in person to present the actuarial valuation at the February 23, 2024, Board meeting, and when received, Pension Administration will provide copies of the valuation upon request prior to the meeting. 13. ADJOURN. Chair Chapdelain adjourned the meeting at 10:48 a.m. et Fab Chair Ryên Chapdelain Sécretary Shayla Griggs