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Oregon Investment Council
Unofficial Minutes Prepared by Bill Parish
December 16, 2004
Copyright 2004

The Oregon Investment Council was called to order at 9:00 at PERS headquarters in Tigard by Chair Gerard Drummond. This was a remarkable meeting and even included a presentation from George Roberts, the R in KKR. The board awarded $1.3 billion in funds to two investment firms with Franklin receiving $925 million and KKR $400 million.  See following summary for details.

Perhaps most remarkable, however, is that Chair Drummond and Treasurer Edwards publicly stated that the November meeting had been cancelled yet in reality they produced a summary of minutes indicating that, rather than being cancelled, a private teleconference meeting was held instead in which a private equity firm, Citigroup affiliated CVC Partners, was awarded $100 million.

OIC Members Present Included: Paul Cleary, Gerard Drummond, Mark Gardiner and Randall Edwards. Richard Solomon participated via conference call

Staff Members Present Included: Jay Fewel, Linda Haglund, Norma Harvey, Perrin Lim, Michael Mueller, Steve Gruber, Kevin Nordhill and Ron Schmitz

OIC Paid Investment Consultants Present: Tara Blackburn, Pacific Corporate Group, John Meier, Strategic Investment Solutions

Investment Firms Present:   George Roberts, Founding Partner KKR
                                               Mike Michelson, Partner KKR
                                                John Cone, President/CEO Franklin Investments
                                                Kim Doggett, Vice President Franklin Investments

Legal Counsel:                      D. Kevin Carlson, Oregon Department of Justice

I. Summary of Agenda

The agenda listed 10 topics yet the minutes have still not officially noted the departure of Gerry Bidwell nor the removal of Diana Goldschmidt from the council by the Governor.

II.  Review and Approval of Minutes for 9/29 and 10/27/04 Meetings

Although the council stated that the November meeting was cancelled, a clandestine 12 minute “conference call meeting” was held in which the minutes for the September and October meetings were approved and $100 million allocated to a private equity firm affiliated with Citigroup, CVC Partners. It is not known whether this conference call meeting was recorded, as required by State Law. See Parish & Company unofficial summary of  October 27, 2004 Oregon Investment Council Minutes for more details why this is most unusual. It should now be no surprise why State Senator Vicki Walker has drafted legislation that would require the council to have a monthly public meetings that are recorded.

III.  Portfolio Performance Evaluation by CEM Inc.

CEM Director Mike Heale presented what is clearly to date the best overall evaluation of the Oregon PERS funds performance using a wide range of measures. It's primary conclusion was that “the 3 year policy return of 1.5 percent was below the US median of 2.0 percent.”  This underperformance is being driven by the private equity portfolio, both resulting from lower returns and higher fees.

IV.   Franklin Investments Proposal to manage $925 million in an Enhanced Index Fund

Franklin was awarded $925 million to manage a large cap value index fund.  What Franklin does is basically take an index and then concentrate its holdings, for example 2.5 percent of this fund is now invested in Home Depot even though Home Depot only respresents .8 percent of the Standard and Poors 500 Index.  This means that roughly $23 million in state pension funds will be dedicated to the purchase of Home Depot stock.

It was not disclosed whether any of the OIC's paid consulting firms receive fees directly or indirectly from Franklin.

V.  KKR Proposes to Manage $400 million in a New Europe Fund

Legendary George Roberts, the R in KKR, made the presentation himself, noting Europe was not unlike the U.S. in the late 70's and early 80's, now offerring significant cost reduction opportunities that will correspondingly bring up profits.  Roberts, who has now been doing leveraged buyouts for 38 years, also noted one of their key strategies is to eliminate competition in the industries they target.  As an investment advisor I think this is very short sighted and probably explains why KKR gets such high initial returns for themselvs but then long term investors seriously languish later.  Some might also argue that such short term thinking, funded by public pensions, is destabilizing the overall economy itself.

Council members noted that they all met privately with Roberts prior to the meeting and unanimously approved the proposal.  Mark Gardiner did however express continued frustration with the lack of transparency regarding returns so that comparisions could be made with other funds. “We can't see real apples to apples comparisons,” he noted.

It was not disclosed whether any of the OIC's paid consulting firms receive fees directly or indirectly from KKR.

KKR is now also trying to purchase a major public utility in Arizona, not unlike TPG's proposal here in Oregon, and is meeting stiff resistance.  Roberts noted, however, in a private discussion after the meeting with me that even though the administrative judge ruled against KKR in Arizona, it's really up to the 5 commissioners and he feels confident they will approve the purchase.  I indicated that I opposed both deals, citing that here in Oregon competitve power rates are crucial to our economy due to the absence of other traditional competitive advantages.

VI.  PERS Shortfall Update Commentary from Paul Cleary

Paul Cleary noted that significant progress had been made in eliminating the deficit yet the means for doing this is somewhat unusual.  Cleary noted that returns are “smoothed” over a four year period, which is common and practical, yet 100 percent of the returns are recognized with respect to reducing the liability.  Some might consider this creative accounting at its best.

VII.  Public Comment:  None

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