Book 1 Page 377 05-08-2023 8:30 a.m. MINUTES OF THE CITY OF SARASOTA GENERAL EMPLOYEES' PENSION PLAN BOARD OF TRUSTEES REGULAR MEETING OF MAY 8, 2023 Present: Chair Ryan Chapdelain, Secretary Shayla Griggs, Treasurer Kelly Strickland, 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: Vice Chair Mark Nicholas 1. CALL MEETING TO ORDER: Chair Chapdelain called the General Employees' Pension Plan (Plan) Board of Trustees Regular meeting to order at 8:30 a.m. 2. PLEDGE OF ALLEGIANCE: Presenter(s): Secretary Griggs. Chair Chapdelain 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. Vice Chair Nicholas was not present. 5. PUBLIC INPUT: None. 6. APPROVAL OF MINUTES: 6.1. Approval Re: Minutes of the General Employees' Pension Plan Board of Regular Meeting of April 24, 2023. Presenter(s): Chair Chapdelain. Trustee Keeler made a motion to approve the minutes of the Regular Meeting of April 24, 2023; Trustee Reardon seconded the motion. The motion passed unanimously (6-0). 7. APPROVAL OF RETIREMENT REQUEST(S): 7.1. Presentation and Discussion: DROP Retirement Request of Gay Lynn Jones. Presenter: Debra Martin, Pension Plans Administrator. Pension Plans Administrator Martin stated that Gay Lynn Jones requests to enter the DROP effective April 1, 2023, with 17 years of service; she selected the lifetime only option. Trustee Keeler made a motion to approve the DROP retirement request of Gay Lynn Jones; Treasurer Strickland seconded the motion. The motion passed unanimously (6-0). 8. INVESTMENT PERFORMANCE REVIEW: 8.1. Presentation and Discussion Re: HGK Asset Management, Investment Performance Review as of March 31, 2022. Presenter(s): Matthew Witschel, Vice President, Director National Accounts, HGK Asset Management. Chair Chapdelain announced that Scott Owens of Graystone Consulting is attending the meeting elephonicaly and may ask questions. Matthew Witschel of HGK Asset Management (HGK) appeared before the Board and introduced himself. Noting the Plan has been invested in HGK's Large Cap Value fund for 10 years, Mr. Witschel thanked the Board for its confidence. He advised that in June 2023, HGK will rebrand itself to Hudson Edge Investment Partners; he will forward a press release to the Plan. There have been no other changes at HGK. Mr. Witschel explained that HGK invests in high quality companies which are well capitalized, have strong balance sheets, and can finance their own growth. He reviewed the page of the presentation materials titled Statement of Changes Trailing 1 Year as of March 31, 2023, noting the Total Market Value dropped primarily due to withdrawals, and approximately 2% due to performance. He reviewed the details of the Statement of Changes, Since Inception. On the Long Term Performance Calendar Year, March 31, 2023, he discussed the changes HGK made to its management team in reaction to its performance in 2015, including the addition of Chief Risk Officer Matthew Kosara; since 2016, HGK has been in the top 25% of its peer group, and it has outperformed the Russell 1000 Value benchmark on an annualized basis over all listed timeframes on both calendar year and fiscal year bases. Mr. Witschel reviewed the Attribution Analysis pages, both YTD, December 31, 2022, and YTD March 31, 2023. In 2022, approximately 85% of HGK's outperformance was a result of stock selection and not due to over- or under-weights relative to the benchmark. The stocks which helped performance in 2022 included: Hubbell Incorporated and Lockheed Martin Corp. which are Industrials; AbbVie, Bristol Myers Squibb, and McKesson in Health Care; Dollar General and Genuine Parts Company in Consumer Discretionary; and IBM in Information Technology. It did not have overweighted positions in cash or the Energy Sector. Year-to-Date pertormance in 2023 has been the opposite of 2022; growth stocks rebounded and, as a whole, significantly outperformed value. He discussed the underperforming sectors in the portfolio during this timeframe. Financial stocks comprise 20% of the Rusell 1000 Value Index benchmark and are its largest sector weight; while HKG is underweight in Financials relative to the benchmark, its holdings detracted significantly. He noted that HGK did not hold positions in Signature Bank, Silicon Valley Bank, or First Republic Bank, which failed during Q1 2023, but does hold the regional bank Key Corp. HGK does not believe the issues plaguing the banking sector are systemic, as they had been from 2007 to 2009, although it sold its position in Western Alliance Bank, not because itl had poor fundamentals, but because declining consumer confidence and depositor confidence would significantly impact the stock value. Further detracting from the performance was HGK's decision to not own Meta, which now comprises 2% of the benchmark. Noting there have been no changes to the Client Guidelines, Mr. Witschel discussed the Portfolio Characteristics. He asserted its lower-than benchmark Price-to-Earnings (P/E) multiple aided to its downside protection; over the history of the Plan's investment with HGK, the dividends have totaled approximately $6.4 million, which is approximately 30% of the portfolio's total return. Sector weights are close to the benchmark and active share is approximately 80%. He reviewed the Top Ten Holdings, noting 3 of the 10 are Financials, but HGK is still underweight in that sector to the benchmark. Book 1 Page 378 05-08-2023 8:30 a.m. Book 1 Page 379 05-08-2023 8:30 a.m. Mr. Witschel discussed the Key Points on the Portfolio Commentary, noting Apple and Microsoft comprise 14% of the S&P 500, and adding Meta, Tesla, and Google, that group represents approximately 25% of the S&P 500 which is a concentration risk to those investing in that index. While inflation appears to be trending downward, it remains stubborn; HGK anticipates it will not reach the Federal Reserve's (Fed's) target of 2% to 2.5% until the end of 2024. Considering the recent positive jobs report, HGK believes the Fed may raise short- term interest rates again in 2023 to ensure inflation is controlled which will cause an economic slowdown in late 2023 or early 2024. HGK asserts it will outperform in the current market environment in which bonds are paying comparable yields to equities and investors not only have options but value fundamentals as well. He asserted HGK will remain consistent to its focus on large cap value stocks and not drift towards becoming a core or a blend manager, and that the chart on page 22 of the materials titled "Scorecard factor relative weight by quintile" will appear similar over HGK's history by showing it is overweight to quality and less expensive companies. He clarified that HGK is not a factor-based manager, although it is mindful of them. Trustee Reardon asked how HGK adjusts regional banks' earnings for manipulations, adjustments, and distortions, considering regional banks are not required to mark to market their hold-to-maturity assets, and therefore have substantial unrealized losses. Mr. Witschel explained that the only regional bank HGK currently holds in the portfolio is Key Corp., and it had sold off its position in Western Alliance Bank. He suggested the Fed could expand the current, more stringent regulations which apply to super-banks, such as JP Morgan or Bank of America, into the regional bank sector. While this would have an adverse effect on regional banks' stock values, HGK has a nominal position in that sector. He advised he could find more information from HGK's analysts and report back to the Board through the investment consultant. To Chair Chapdelain's questions, Mr. Witschel explained that although the scorecard factor page of the materials is a relatively new slide, it would accurately describe HGK's values over its history. Regarding the US debt ceiling, Mr. Witschel advised that Michael Pendergast, HGK's Chief Executive Officer and Chief Investment Officer, believes Congress and the President will increase the credit limit before the country goes into default. Mr. Owens asked Mr. Witschel to opine on the adverse consequences of raising the debt ceiling. Mr. Witschel acknowledged there are issues with raising the debt limit, however he would provide Mr. Pendergast's opinion at a later date, and that HGK will continue to invest according to its strategy. Mr. Owens asked Mr. Witschel to discuss HGK's forecast for value and growth equities in the current environment, noting growth had outperformed value for most of the last decade, value led growth for the last 5 to 6 quarters, but growth again outperformed in Q1 2023. Mr. Witschel asserted that growth's outperformance was during a time when interest rates were kept at or near 0%; now that the Fed Funds Rate is closer to its historical average, value stocks will be less disadvantaged. Mr. Owens asked Mr. Witschel to opine on long-term and short-term interest rates, considering the long end of the yield curve has not changed significantly, and therefore when the Fed eventually reduces interest rates, short term rates would need to be between 0% and 3%, absent a flat or inverted curve. Mr. Owens noted that low to 0% interest rates create externalities which adverse to the market, however, if long-term rates are at 3.5%, then short term rates must be less than that. Mr. Witschel agreed; HGK expects the Fed to cut rates towards the end of 2023, but that 0% rates were in reaction to the extreme circumstances of the financial crisis in 2007, 2008, and 2009. HGK does not foresee a similar crisis in the near future. At Trustee Thornburg's request, Mr. Witschel discussed HGK's opinion on why Meta recently spiked. He noted it was down 65% in 2022 when it transitioned its focus to the Metaverse which is artificial intelligence (AI); because of the popular interest in Al, Meta's stock price skyrocketed, and now up 100% as of May 5, 2023. The Board thanked Mr. Witschel for his presentation. 8.2. Presentation and Discussion Re: Polen Capital, Investment Performance Review as of March 31, 2023. Presenter(s): John Gunther, Senior Relationship Manager; Polen Capital. John Gunther of Polen Capital appeared before the Board and introduced himself. Mr. Gunther gave an overview of his presentation, mentioning that Polen Capital (Polen) is a large cap growth manager and has served the Plan for the last 10 years. He gave a market overview of calendar year 2022, noting Polen's strategy was out of favor and accordingly down almost 38%, and negative 16% on a trailing basis; since inception, however, the fund remains near its long-term average of 13% (net). While reviewing the page titled The Polen Capital Investment Process, Mr. Gunther advised that all Polen employees are materially invested in the same strategy as the Plan. There have been no changes at Polen regarding its investment team, strategy, or process. In discussing Polen's investment process, he explained how the thematic trends which drove growth stocks through 2020 had allowed market valuations to become overextended; while this favored the portfolio, it also allowed excess earnings to be unsustainably pulled forward. Polen's research indicated conditions and earnings would gradually normalize over 3 to 5 years, however, high multiples while interest rates rose caused that normalization to occur over 3 to 5 months, which led to a significant downturn in the portfolio's performance in 2022 as high-quality growth companies were impacted the most. He asserted the sell-off of growth stocks was excessive, and that a rebound has already begun. To Trustee Reardon's question, Mr. Gunther discussed why Polen sold its position in Meta in Q4 2022. Polen had first bought Meta, then known Facebook, approximately a year after its initial public offering in 2014 and sold it in 2016 due to Facebook's impulsivity in purchasing WhatsApp. Because Facebook founder Mark Zuckerberg had retained all of the voting shares of its stock, he is not subject to accountability by its shareholder or board of directors. This in itself is not problematic, as Polen has large positions in similarly structured companies, such as Alphabet (formerly known as Google), where it can communicate concerns with management; Mr. Gunther noted Polen does not view itself as an activist investor. Beginning in Q4 2021, Mr. Zuckerberg abruptly changed Facebook's course by renaming it Meta and committing sizable resources into Al; this reduced its profit margins and diminished its competitive advantages over its peers, yet Meta was also unable to indicate how or when Al will be monetizable and profitable. Further, even though Mr. Zuckerberg had indicated during 2022 that Meta would reduce its investments in Al, its 2023 guidance stated the opposite. Meta's stock devalued such that it was reclassified from the growth index to the value index. As a result of Mr. Zuckerberg's ability and tendency to unexpectedly redirect the company, and his focus only on the long-term without addressing short-term profits as desired by investors, Polen believed Meta was too risky an investment and sold it during Q4 2022. Mr. Gunther also noted that Meta's core business remains a highly effective advertising platform, as it holds seemingly unique capabilities for targeted communications, and therefore it remains a very attractive underlying company. In Q1 2023, possibly in response to his own declining net worth or to investors' demands, Mr. Zuckerberg again changed Meta's direction by reducing its Al investments and instead focused resources on efficiencies; Meta's stock rebounded however the rebound was after Polen sold its position. Meta was Polen's largest detractor from performance. To Chair Chapdelain's question, Mr. Gunther explained Polen's position in Thermo Fisher Scientific (TFS). Referencing the page titled Investing Across the Growth Spectrum, Mr. Gunther explained that, even though all Polen's investments survive its selection process, short-term volatility still impacts the portfolio. To counterbalance that volatility, Polen holds companies with lower earings-per-share (EPS), such as TFS, which are on the Safety side of the growth spectrum. He explained that TFS provides equipment to the life sciences industry, including the biotech and pharmaceutical sub-industries, and it has sizable economies of scale and significant recurring revenues. It is a stable company which has ample room for growth. To Trustee Thornburg's question, Mr. Gunther discussed Polen's position in Salesforce, which offers subscription-Dased software used for client management and customer relations. These create recurring revenues, a captured client base, light capitalization, and increase its margin. While the COVID-19 pandemic drove Salesforce's stock prices down due to valuation compression, and it has had some challenging acquisitions, it's settling now and is one of Polen's largest holdings. Mr. Owens noted that Meta was reconstituted from the growth index to value because its stock price was low; he asked Mr. Gunther to opine on what happens now that Meta has doubled in price. Mr. Gunther stated that stocks transitioning from the growth index to value indicates a disconnection in the market. While Meta has doubled in price from its low, its valuation is now rich, even with its current earnings from its core businesses: Instagram and Facebook. In that context, its valuation is less attractive and Polen still has concerns regarding Meta's corporate governance. Book 1 Page 380 05-08-2023 8:30 a.m. Book 1 Page 381 05-08-2023 8:30 a.m. Mr. Owens asked Mr. Gunther to comment on Polen's expectations for value versus growth style equities. Mr. Gunther noted that Berkshire Hathaway's principles Warren Buffett and Charlie Munger had described growth and value styles as two sides of the same coin. Accordingly, there are attractively priced growth stocks even when they may be classified as value style. He provided a broad overview of 2020 through 2023 when the market rotated from favoring growth to favoring value. Looking forward, Polen believes growth stocks are more attractive; Even though holding both styles is important to a balanced portfolio, Polen's current P/E multiple is 25x, which gives growth stocks more growth potential. Referencing the page titled Portfolio Earnings Growth Trends VS. the Index, Mr. Gunther explained why Polen should outperform most other asset classes. He noted there had been a run-up in value stocks and they are now overpriced. As rumors of an earnings recession spread through the market, Polen believes the companies in its portfolio already had an earnings recession in 2022, and value stocks are now reaching their peak, and therefore value-style stocks may expect a decline. Because growth stocks already experienced an earnings recession, those companies may soon begin reporting positive earnings while value stocks decline. Secretary Griggs left the meeting at 9:29 a.m. and returned at 9:33 a.m. Mr. Gunther noted the consistent earnings per share rate above 10%, even during the 2008 financial crisis and 2011 debt ceiling scare. Growth companies valuations are becoming more attractive and Polen anticipates this class will soon outperform. On the page titled Company Valuations, Mr. Gunther noted the current valuations are well below their 10-year averages and Polen expects accelerating growth. The Board thanked Mr. Gunther for his presentation. 8.3. Presentation and Discussion Re: Graystone Consulting, Quarterly Investment Performance Review as of March 31, 2023. Presenter(s): Scott Owens, CFA, CIMA, Associate Vice President, Institutional Consultant (Telephonic), Graystone Consulting. Mr. Owens began by providing a brief market overview, and noted Graystone largely agrees with HKG's and Polen's market analysis. Interest rates will remain at their current, elevated level for an extended period of time. Inflation has been reduced from 9% to approximately 5%; Graystone anticipates the transition from 5% to the Fed's target of 2% will have a greater economic impact than what had been experienced when inflation dropped from 9% and 5%. Graystone anticipates the interest rate yield curve will remain inverted for at least 12 to 18 months, and that the Fed indicated it will not reduce interest rates even if inflation data meets the Fed's expectations. Regarding the regional bank failures, Graystone believes the issues are isolated and not systemic. He explained the failures were a result of mismatched assets and liabilities. Because those banks' cash- generating assets were long-term loans made at relatively low interest rates, but their liabilities were certificates of deposits at high interest rates, cashflows were rapidly depleted. Further, Silicon Valley Bank's clients were largely venture capitalists, which default more than established companies. Graystone anticipates an earnings recession, and therefore companies which must leverage their assets to fund operations during a higher interest rate environment will not fare as well as companies with strong cashflows and strong balance sheets. Turning to the Equity Market Returns on the Capital Market Returns in the Quarterly Performance Summary, the worst and best performing classes were separated by 15%, which is significant. He noted that value outperformed growth over the last 12 months, but, quarter-to-date, growth outperformed substantially, although Graystone believes this to be an anomaly and for value to moderately outperform going forward. In that context, he recommends the portfolio be overweight to value. In international markets, he explained that the US Dollar has been dropping precipitously relative tot foreign currencies, which is al benefit to domestic investors; it had previously been overpriced and therefore this is a return to its normal value which will continue to be a tailwind. In fixed income, Mr. Owens pointed out that the Bloomberg US Aggregate quarter-to-date is higher than every other timeframe, and that securing a 5% bond would be an opportune method to de-risk the portfolio when this asset class typically delivers only 1%. Turning to the Total Fund - Executive Summary, Mr. Owens noted the positive performance for the quarter; with less volatility and less risk, the returns were a result of better downside protection more than stock-picking. He reviewed the Asset Allocation Compliance and explained the portfolio was most hurt by being overweighted in value style equities and real estate. He added that the Plan has submitted redemption requests to the real estate managers, but they have not been satisfied; the real estate redemptions are being reallocated to bring the fixed income funds up to their respective targets. He believes the portfolio is well-positioned for the current and forecasted environment, although he would recommend reducing the Total Equity allocation from 65.8% to 64% and holding the proceeds in cash in anticipation of market volatility. Within Equities, Mr. Owens recommended being overweight to international equities. To Chair Chapdelain's question, Mr. Owens explained that the real estate managers currently anticipate the redemption requests to be fully satisfied by 2026, although this timeframe may change with market conditions, and the Plan has already begun to receive quarterly redemption payments. To Chair Chapdelain's questions, Mr. Owens advised he recommends investing the real estate redemption payments into fixed income and reducing equities and holding the proceeds in cash. Because fixed income is below target and real estate is illiquid, request for funding must be satisfied from equities; further, Graystone anticipates equity volatility, therefore reducing that allocation while the asset class is improving would be prudent. Mr. Owens reviewed each fund manager's Executive Summary. He noted HGK outperformed its benchmark consistently, although by greater margins over the 1- and 3-year ranges and with more volatility. Their negative alpha is less concerning in the context of their return. Clearbridge has performed well; he noted 50% of its portfolio is core, 25% is momentum, and 25% is defensive. Clearbridge outperforms when the market trends and it underperforms when the market capitulates. NFJoutperformed quarter-to-date and fiscal year-to-date. Mr. Owens explained that NFJ and similar managers underperformed over the 5- to 9-year timeframes when interest rates were suppressed, and liquidity flooded the market. Now that rates are normalizing, NFJ has begun to outperform. He added that NFJ is the largest contributor to the portfolio's outperformance due to its low downside capture rate. Geneva and Segall Bryant have both outperformed but are recent additions to the portfolio. Franklin Templeton and Renaissance have had volatile histories, but both have generally outperformed, especially over the last year and fiscal year-to-date. Invesco, and fixed income in general, have been drags on portfolio performance, although it has had larger returns as rates increase. AEW and UBS, the portfolio's 2 real estate managers, have underperformed in declining markets. Mr. Owens noted the NCREIF Property Index Current Quarter return was negative 1.89%; it was not available when Graystone published their materials. Although the Plan has only held Lazard Global Infrastructure since 2020, the fund has outperformed with very low risk. Mr. Owens noted no compliance issues or fund-manager recommendations. He reiterated his recommendation to reduce equities to 64%, with an overweight in international equities and underweight in domestic equities and holding the proceeds in cash. Chair Chapdelain noted AEW and UBS will present to the Board at its Tuesday, June 20, 2023 meeting; Mr. Owens stated that Graystone will also attend. The Board, Attorney Christiansen, and Mr. Owens discussed the rebalancing recommendation. Mr. Owens explained that his recommendation was based upon the performance data as of March 31, 2023; because the account balances and allocation percentages have changed since that date and he did not have the current balances, the motion should refer to rebalancing the portfolio to the respective targets designated in the Investment Policy Statement. He recommends rebalancing the portfolio now before the market becomes volatile. Over the last 10 years, the portfolio has typically kept all assets invested with no amount in cash because of the market's trajectory. In this case, Mr. Owens recommends proactively generating cash in advance of the Plan's need. Mr. Owens clarified that, as of March 31, 2023, HGK Large Cap, NFJ Small Cap, and Geneva Small Cap were each .2% overweight; he recommends reducing HGK, NFJ, and Geneva to their respective targets, or slightly underweight, and moving the proceeds to cash. Based on Mr. Owens' recommendation, Treasurer Strickland made a motion, clarified by Trustee Thornburg, to authorize Graystone to liquidate the portions of equity investments which exceed their respective targets and reduce the portfolio's total allocation in equities from 65% to 64%, and reinvest the proceeds into cash; Trustee Thornburg seconded the motion. The motion passed unanimously (6-0). Book 1 Page 382 05-08-2023 8:30 a.m. Book 1 Page 383 05-08-2023 8:30 a.m. To Attorney Christiansen's question, Mr. Owens confirmed the Board had previously approved the real estate redemption requests and had directed the reinvestments into fixed income. To Chair Chapdelain's question, Mr. Owens clarified that cash is held in a money market account which is currently paying 4%. While the yield on a money market account may change, there is no change to the account value, which would happen in a bond. At Trustee Thornburg's request, Mr. Owens advised that Graystone will forward its rebalancing worksheet to the Plan upon completion of the rebalance. The Board thanked Mr. Owens for his presentation and confirmed the next meeting date. 9. UNFINISHED BUSINESS: None. 10. NEW BUSINESS: None. 11. ATTORNEY MATTERS: Attorney Christiansen reminded the Board that Trustee Thornburg's seat expires June 30, 2023. Also, trustees should soon receive State financial disclosure forms by mail; trustees must complete and file their financial disclosures by July 1, 2023. Attorney Christiansen noted that he incorrectly advised the Board regarding employee contributions upon the death of a retiree; Pension Plans Administrator Martin had correctly advised him that, if a retiree dies before the total benefit payments equal the total amount of employee contributions, and no survivor was elected, the participant's beneficiaries are entitled to an amount equal to the employee contributions less the amount of benefit payments made to the participant. Most of Attorney Christiansen's clients do not have this provision. There is no new pending egislation; the Governor has not signed the law applicable to Environmental, Social, and Governance investing. 12. OTHER MATTERS: None. 13. ADJOURN. Chair Chapdelain adjourned the meeting at 10:07 a.m. Shu Ong Chair Ryan Chapdelain Secretary Shayla Griggs