MINUTES OF THE CITY OF SARASOTA GENERAL EMPLOYEES' PENSION PLAN BOARD OF TRUSTEES REGULAR MEETING OF JULY 31, 2023 Present: Chair Ryan Chapdelain, Vice Chair Mark Nicholas, Secretary Shayla Griggs (telephonic), 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: Treasurer Kelly Strickland 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.' 3 4. ROLL CALL: Pension Plans Administrator Martin called roll. Treasurer Strickland was not present. Pension Plans Administrator Martin advised that Secretary Griggs is attending telephonically due to an unexpected matter which prevented her in-person attendance. Because a quorum of the Board was physically present at the meeting, Secretary Griggs requested approval from the Board to participate telephonically due to extraordinary circumstances. The Board and Attorney Christiansen discussed the criteria for when a trustee may appear telephonically; the Board informally agreed it should vote to determine extraordinary circumstances exist, but that a trustee would not be required to explain why their circumstances were extraordinary. Trustee Thornburg made a motion to approve Secretary Griggs' telephonic participation in the meeting due to extraordinary circumstances; Trustee Keeler seconded the motion. The motion carried 5-0 with Secretary Griggs not participating in the vote. Chair Chapdelain reiterated that he would accept a trustee's assertion that extraordinary circumstances existed without providing more information unless the trustee was willing to provide that information; Trustee Thornburg agreed. 5. PUBLIC INPUT: None. 6. APPROVAL OF MINUTES: Book 1 Page 390 07-31-2023 10:00 a.m. Book 1 Page 391 07-31-2023 10:00 a.m. 6.1. Approval Re: Minutes of the General Employees' Pension Plan Board Regular Meeting of June 20, 2023. Presenter(s): Chair Chapdelain. Trustee Keeler made a motion to approve the minutes of the Regular Meeting of June 20, 2023; Vice Chair Nicholas seconded the motion. The motion passed unanimously (6-0). 7. APPROVAL OF RETIREMENT REQUESTIS): 7.1. Presentation and Discussion: DROP Retirement Request of Leslie Griffin. Presenter: Debra Martin, Pension Plans Administrator. Pension Plans Administrator Martin advised that Mr. Griffin requested a normal retirement after 25.76 years of service and elected the 100% to joint annuitant under the pop-up option. Trustee Keeler made a motion to approve Mr. Griffin's request for retirement; Vice Chair Nicholas seconded the motion. The motion passed unanimously (6-0). 8. INVESTMENT PERFORMANCE REVIEW: 8.1. Presentation and Discussion Re: Lazard, Investment Performance Review as of June 30, 2023. Presenter(s): Ben Young, Vice President, Lazard Asset Management. Ben Young of Lazard Asset Management (Lazard) appeared before the Board and introduced himself. Mr. Young discussed the page of the materials titled Lazard Global Listed Infrastructure (USD Hedge), noting that Lazard considers, "preferred infrastructure," companies to be those which are monopolistic in nature and operate in industries with high barriers to entry, have steady cash flows on quarterly and annual bases, and can pass on rising costs to customers. Lazard seeks to generate greater returns than fixed income investments with less volatility than global equities and considers itself a value investor; he noted Lazard uses a passive currency hedge to remove volatility. Turning to the page titled Portfolio By Country and Sector, Mr. Young discussed the portfolio's diversity, noting itl has fewer domestic holdings than its peers as it believes domestic utilities to be overpriced, and that European and United Kingdom utilities offer similar exposures at lower prices. He briefly reviewed the Performance Summary page, noting the portfolio's strong returns, relative outperformance, and defensiveness. On the Stock Contribution - Top Contributors and Detractors page, Mr. Young discussed the top contributors under the One Year timeframe. He explained how Ferrovial and VINCI, which are toll road operators in Europe, meet Lazard's criteria for being preferred infrastructure. CSX is a U.S. railroad operator and Lazard's largest holding. Aena and Flughafen Zurich are airports, which are interesting assets as they have multiple revenue streams. To Trustee Keeler's question, Mr. Young discussed how Lazard incorporates risk factors, such as maintenance costs, liability, natural disasters, and workforce strikes into its buy and sell decisions. Lazard recently sold off some of its holdings due to excessive risk factors. Mr. Young gave a brief market outlook. Lazard believes inflation and interest rates will remain elevated in the developed world for severaly years, in both international and domestic economies; accordingly, Lazard anticipates listed infrastructure to outperform as an asset class, as well as for the portfolio to outperform relative to its listed infrastructure peers. Lazard believes airports and toll roads, and regulated European utilities will provide thel best returns. To Chair Chapdelain's questions, Mr. Young explained that Lazard has kept underweight positions in domestic utilities because it believes those stocks are overvalued, however, considering the recent drawdown in that sector, Lazard has identified some opportunities and may increase its domestic utility allocation over time. He noted that Lazard's bias towards European and United Kingdom utilities is not inherent to the fund. Further, Lazard's analysts still anticipate a mild recession, both domestically and abroad, which will sustain higher interest rates and higher inflation rates. To Trustee Reardon's questions, Mr. Young clarified that Lazard's outlook has not changed to date and it continues to anticipate mild recessions, both domestically and internationally. Equity markets appear to be narrowly driven by technology, and more specifically, artificial intelligence. That notwithstanding, Lazard's analysts are very cautious, if not overly so, and they've held for several quarters that recessions are likely. Lazard's analysts may believe that the labor market needs to break before a recession can occur. To Trustee Reardon's question, Mr. Young explained that Lazard has a pension fund client for which it runs an unhedged fund, and they compare that performance to the hedged portfolio. Over the long term, the hedged portfolio has outperformed the unhedged by 1.5% to 2%, although one may be outperforming the other in any given period; over the last 12 months ending June 30, 2023, the unhedged portfolio outperformed the hedged portfolio by 2%. Mr. Young noted that, since inception, the hedged portfolio has had 30% less volatility than the hedged portfolio. The Board thanked Mr. Young for his presentation. 8.2. Presentation and Discussion Re: Re: NFJ, Investment Performance Review as of June 30, 2023. Presenter(s): John Mowrey, Executive Managing Director, Chief Investment Officer Senior Portfolio Manager/Analyst; Krysta Hill, Director, Product Specialist telephonic); NFJ. John Mowrey of NFJ appeared before the Board and introduced himself. Mr. Mowrey provided a firm overview and noted that more than a third of the team has advanced degrees in data sciences. To Trustee Reardon's question, Mr. Mowrey advised that NFJ's analysts are not using Gpt to analyze datasets, although they are beginning to probe its use; NFJ has been using R-Python to create homogeneous peer sets. He analogized the stock selection process to using comparable properties to appraise real estate; NFJ uses technologies to narrow down stock comparisons to find the most accurate representation of peers. Mr. Mowrey reviewed NFJ's investment process as described on the Fundamental Analysis page of the materials. He asserted NFJ's analysis is superior to peers' because NFJ uses custom care sheets to find the most homogenous companies and peer sets. He noted that as many as 40% of the small cap companies do not earn money, and therefore NFJ excludes them from comparison, and only includes the remaining 60% which earns income. He discussed NFJ's Shareholder Yield process; it seeks companies which pay dividends and/or buys back shares to return money to shareholders. He explained that that dividend growth is a healthy defense against inflation and that NFJ looks for high returns on capital and high margins. Mr. Mowrey noted that NFJ avoids stocks with negative price momentum or heavily shorted stocks. Turning to the Portfolio Characteristics, Mr. Mowrey noted the portfolio's Price-to-Earnings ratio (P/E) (forward 1YR) appears to be higher than the index's because the index does not calculate P/E ratios for the 40% of the companies which do not earn money, and there is nothing to show on a forward basis. Because P/Es can be calculated on a trailing basis for all companies, including the 40% which lost money, the index's P/E ratio is clearly higher than the portfolio making the portfolio less expensive. Regarding dividends, Mr. Mowrey noted that, at a 9% dividend annual growth rate, the dividend income on the portfolio will double within 8 years, while it will take 19 years for the benchmark's dividend to double. He reiterated that dividends provide a strong defense against inflation, but NFJ does not offer a professional opinion on the subject. Mr. Mowrey stated that NFJ's objective is to manage a portfolio with an attractive valuation, trading at a discount, a higher yield, faster dividend growth, higher profitability, and faster earnings over time. Book 1 Page 392 07-31-2023 10:00 a.m. Book 1 Page 393 07-31-2023 10:00 a.m. Turning to the page titled Performance, Mr. Mowrey discussed NFJ's disappointing performance in 2022, noting there have been 8 calendar years since the fund's inception in which the market produced negative returns; NFJ underperformed the index in only 3 of those years including 2022. NFJ underperformed its benchmark because the portfolio was underexposed to energy in Q1 2022 when that sector was the only sector to outperform, in part due to the Russia/Ukraine conflict. He noted that Q1 2022 through 2022 were consecutive negative quarters, and NFJ outperformed in Q2 2022. In Q3 2022, NFJ observed attractive valuations and a lack of deterioration in the fundamentals in some companies, despite the market narrative indicating the economy was on the cusp of a recession. Because analysts now recognize the market environment and economic circumstances in Q3 2022 were not as dire as predicted, Mr. Mowrey expressed confidence in NFJ's process which had favored cyclical stocks to defensives at the time. He reviewed the Recent Performance page of NFJ's materials and stated that Q1 through Q2 2023 shows the benefits of active management and having differentiated market view. He attributed the portfolio's outperformance to being overweight in the homebuilding and semiconductor subsectors and explained how analysts shifted their current opinions to mirror past events, which is an ongoing issue in investment management. NFJ has sold off all of its homebuilder stocks and significantly reduced its exposure to the semiconductor industry and technology in general. To Trustee Reardon's questions, Mr. Mowrey stated that NFJ's view runs contrary to its peers which are attempting to capitalize on any remaining upswings in the homebuilder and semiconductor subsectors. NFJ is finding the stocks which its peers are selling to now be attractive; NFJ has increased its positions in utilities, energy, and consumer staples, and reduced its position in cyclicals. Mr. Mowrey discussed The Power of Active Management & Compounding page of the materials and commended the Board on its commitment to its allocation instead of chasing returns. He reviewed Sector Exposures, and noted that, as of July 31, 2023, the portfolio weight in Utilities is 5%, Technology is 7%, and Discretionary is 7%. To Trustee Reardon's questions, Mr. Mowrey asserted that utilities prices are driven by consumer sentiment. Many investors have divested from cyclicals in anticipation of a recession and moved to more defensive stocks; now that a recession seems less probably, those investors will move back into cyclicals in attempts to catch up with the gains made earlier in the year. In that context, the current dislocation is not a shift in fundamentals, but more a result of valuations coming in. He added that there are approximately 90 stocks in the portfolio. Mr. Mowrey discussed NFJ's position on financials and how it viewed the regional banking failures in March 2023 as results of poor decision making and individual circumstances, and not for lack of information. Through Q2 2023, NFJ has added to its regional bank allocation because of attractive balance sheets, more resilient lending standards, and attractive net interest margins. NFJ believes regional banks' stock prices were sufficiently repriced in the spring of 2023 for a potential recession and are now attractive investments. He asserted regional banks are uniquely integral to local economies in the U.S. compared to the rest of the world because of their involvement with small business and real estate markets; further, thei issues which caused the failures of 4 regional banks in the spring of 2023 were specific to those banks, and that, generally, regional banks are more financially sound than previously believed. Turning to the page titled Case for Small Cap Equities, Mr. Mowrey concluded his remarks by discussing the influence of big technology stocks on the market. He noted that Apple's and Microsoft's combined capitalization of approximately $5.5 trillion is greater than the entire market small cap universe; a 10% correction to either company, which is not uncommon, could direct investments towards small caps and create a run in that asset class, as has historically been the case. To Trustee Reardon's questions, Mr. Mowrey explained that, while largest companies in the S&P 500 have products and services which are seemingly omnipresent in daily life, some of the past market leaders still have a comparable market presence; consumers continue to purchase home appliances and have cellular plans even though GE and Verizon are no longer amongst the S&P 500's current leaders. Mr. Mowrey explained that investors will pay high P/E multiples for leading companies which show significant growth; however, because those leading companies' abilities to sustain significant growth over a long timeframe diminishes, investors' willingness to pay high P/E multiples for those stocks also diminishes. In that context, Mr. Mowrey asserted it would be inconsistent with history to assume that today's market leaders will continue to dominate to the exclusion of smaller capitalized domestic and European companies. He believes that for this shift to occur, small cap returns will grow, and investors will follow. He compared the current large cap leaders to 2008, when stocks in emerging markets were highly desirable, however their values rapidly stalled, and have since been poised for a comeback. He also noted the overwhelming global popularity of domestic large cap technology stocks, to the detriment of other asset classes and markets, suggesting a potential market inflection point. The Board thanked Mr. Mowrey for his presentation. 9. UNFINISHED BUSINESS: None. 10. NEW BUSINESS: None. 11. ATTORNEY MATTERS: Attorney Christiansen and Pension Plans Administrator Martin advised that Trustee Thomnburg will serve an additional term as she was unchallenged in the nomination process. Attorney Christiansen reported that the State of Florida has confirmed receipt of each trustee's financial disclosure for 2022. Attorney Christiansen noted that the Board's proposed ordinance addressing changes required by the Secure 2.0 Act will be presented at the City Commission's August 7, 2023, meeting along with a similar proposed ordinance approved by the Police Officers' Pension Plan; Attorney Christiansen will be available at the meeting to answer any questions. Trustee Thornburg advised that the item has been moved up on the meeting agenda. Attorney Christiansen presented his memo regarding Florida House Bill 3, which restricts the Plan, as well as other public institutions, from making investment decisions based on non-pecuniary factors. He forwarded this memo to the Plan's investment consultant and requested it draft proposed language to incorporate House Bill 3 requirements into the Plan's Investment Policy Statement (IPS). He expects the investment consultant to present a revised IPS to the Board at its next appearance before the Board. 12. OTHER MATTERS: 12.1. Presentation and Discussion Re: Proposed 2024 Calendar Year Meeting Dates. Presenter(s): Debra Martin, Pension Plans Administrator. Pension Plans Administrator Martin presented the Proposed 2024 Calendar Year Meeting Dates, noting the Police Officers' Pension Plan does not have a meeting scheduled on December 13, 2024. Trustee Thomburg also noted March 25, 2024, meeting will occur on a Monday. Secretary Griggs advised that the City Commission has been holding workshops on the Mondays between regular Commission Meetings, which may continue in 2024. If a Commission Workshop conflicted with a Board meeting, the Board meeting would need to be moved as some trustees would be required to attend the workshop instead of the Board meeting and a quorum may not be possible. Chair Chapdelain noted that the June 24, 2024, meeting conflicts with the FPPTA's summer conference; he also asked for the July 8, 2024, meeting to be moved to later in the month to avoid conflicting with Independence Day, as well as City Budget Workshops, which have previously been held during the 3rd week of July. Trustee Thornburg and Secretary Griggs proposed Friday, July 19, 2024. Pension Plans Administrator Martin advised she will review the. 2024 calendar with Attorney Christiansen's office and present a revised calendar to the Board. Chair Chapdelain asked Pension Administration to request Graystone's quarterly report materials in advance of the September 25, 2023, meeting; Pension Plans Administrator Martin she would, as well as request an updated Book 1 Page 394 07-31-2023 10:00 a.m. Book 1 Page 395 07-31-2023 10:00 a.m. IPS to present at the September 25, 2023, meeting as well. Chair Chapdelain also asked, if the July 2024 meeting is rescheduled to later in that month, that Graystone Consulting present at that meeting. 12.2. Presentation and Discussion Re: Asset Allocation as of July 11, 2023. Presenter(s): Debra Martin, Pension Plans Administrator. Pension Plans Administrator Martin presented the Asset Allocation as of July 11, 2023, for the Board's information. 13. ADJOURN. Chair Chapdelain adjourned the meeting at 11:02 a.m. - Saba Chair Ryan Chapdelain Sécrétary Shayla Griggs