South Carolina Retirement System may change allocations, hire director

Changes will depend upon results of Hewitt EnnisKnupp study

Hershel Harper Jr.
Hershel Harper Jr., chief investment officer of the South Carolina Retirement System

The South Carolina Retirement Systems Investment Commission, Columbia, might approve an asset allocation change in the middle of its fiscal year and will name a new director of operations at its Feb. 28 meeting.

Commissioners, who oversee investment of $26.4 billion for the South Carolina Retirement Systems, chose a new consultant in September. That firm, Hewitt EnnisKnupp, has conducted an asset-liability study and will present its findings and recommendations at that meeting, said Hershel Harper Jr., chief investment officer, in an interview.

Mr. Harper was named CIO in July, after being tapped as interim CIO when Robert L. Borden, who served as CEO and CIO, abruptly announced his resignation. Mr. Borden left the commission in mid-January 2012 to join a private equity manager.

Adam Jordan added the interim CEO role to his existing role as the commission's chief of staff. The CEO position was relabeled director of investments and a candidate to fill the job likely will be approved by the commission at the Feb. 28 meeting, Mr. Harper said.

Having joined the commission as deputy CIO in June 2008, Mr. Harper said he was well-briefed and ready to take over management of the pension system.

Mr. Harper spent his first year in the CIO's role managing the pension fund to the target allocation for the 2013 fiscal year that was devised by former consultant NEPC LLC and improving oversight of the system's 13 strategic investment partnerships.

The current allocation is equities, 30%; fixed income, 25%; cash/short-term investments, 7%; global tactical asset allocation, 10%; opportunistic hedge funds, 5%; real assets (real estate and commodities), 6%; and private equity/private debt, 17%.

Mr. Harper said the actual portfolio allocation as of Dec. 31 was equities, 29%; fixed income, 23%; cash/short-term investments, 12%; global tactical asset allocation, 10%; opportunistic hedge funds, 3%; real assets (real estate and commodities), 7%; and private equity/private debt, 16%.

The net return of the total fund was strong — 12.4% — for the 12 months ended Dec. 31. Investment gains contributed a net $3 billion to the pension fund in the year. The annualized net three-year return of the fund was 8.2%. Returns for both periods exceed the commission's 7.5% annual assumed rate of return, as well as the prior 8% expected rate.

Exactly what Hewitt EnnisKnupp will recommend later this month is under wraps; Mr. Harper said he couldn't share the information in advance of the meeting.

Mr. Borden, who was the investment commission's first CIO, introduced a number of innovations during his 5-year tenure. The South Carolina Retirement Systems was one of the earliest public pension fund adopters of strategic partnerships, setting aside 19% of assets in 2008 to be managed in a variety of asset classes at the discretion of the money manager (Pensions & Investments, May 26, 2008).

The system had 13 strategic partnerships with aggregate assets of $6.7 billion invested in private equity, opportunistic credit and hedge funds as of June 30, the most recent information available. The five largest strategic partnerships are Lighthouse Investment Partners LLC, which manages $1.2 billion; Morgan Stanley (MS) Investment Management, $909 million; Grosvenor Capital Management LP, $692 million; Mariner Capital Group LLC, $681 million; and Goldman Sachs Asset Management, $678 million.

When Mr. Borden announced his departure, Allen Gillespie, then chairman of the commission, and Mr. Harper and other staff immediately set up meetings with all of the strategic partners and focused primarily on administrative and investment processes.

None of the partnerships was terminated, but Mr. Harper said because he and Mr. Borden were the only two investment staffers who dealt with all of the partnerships, one of the first things he did was to name two more key liaisons to each strategic partnership. He also serves as a liaison for every partnership.

Hewitt EnnisKnupp has been methodically combing through the strategic partnerships and might come back to the commission at the Feb. 28 meeting with proposals for change, but Mr. Harper would not speculate on what those changes or the asset allocation recommendations might be.

“The most important thing is getting the correct beta exposure and paying the right price and finding diversified alpha sources and paying an appropriate price for them,” Mr. Harper said.