South Carolina takes new look at partnerships

The South Carolina Retirement System Investment Commission, Columbia, is in the process of restructuring its $6.7 billion strategic partnership network, shutting down its $3.9 billion portable alpha strategy, and deciding on a new asset allocation, according to information presented at a Feb. 28 meeting.

During a contentious meeting that ran for more than eight hours, the commission also:

• passed a motion condemning and censuring Curtis Loftis Jr., the state treasurer and a commissioner for making public and private statements other commissioners thought was inaccurate and creating a hostile work environment for commission staff;


• averted defaulting on a private equity fund capital call;
  


• cleaned that the search for a global custodian will be completed within the next few weeks; and
  


• appointed a new chief operating officer.
  

The $26.6 billion South Carolina Retirement Systems was one of the earliest public pension plans to adopt strategic investment partnerships that allowed money managers wider discretion to manage the system's money in a variety of asset classes (Pensions & Investments, May 26, 2008). The commission oversees investment of the state employee defined benefit plan.

The initial 2008 allocation of 19% of plan assets has grown to 25% or $6.7 billion of total assets, managed by 13 different money managers.

Suzanne Bernard, a partner at Chicago-based Hewitt EnnisKnupp and the commission's lead consultant, told commissioners on Feb. 28 that the strategic investment relationships are one area of concern for the system.

According to data Ms. Bernard presented at meeting, hedge funds, opportunistic credit and private equity managers handle the bulk of the strategic partnership portfolio.

The five largest partnerships are Lighthouse Investment Partners LLC, which manages $1.2 billion; Morgan Stanley Investment Management, $909 million; Grosvenor Capital Management LP, $692 million; Mariner Capital Group LLC, $681 million; and Goldman Sachs Asset Management, $678 million.

These partnerships in aggregate had become “too large a piece of the overall portfolio. They got a little oversized,” she said, indicating the commission's investment staff had “narrowed” the partnerships, reducing the amount of money managed overall in these relationships; dividing up some of the partnerships into component asset classes; and terminating some managers.

Neither Ms. Bernard nor Hershel Harper Jr., RSIC's CIO, was available for comment after the meeting about specific changes made to individual investment partnerships.

Hewitt EnnisKnupp also presented the results of an asset-liability study it conducted for the system and proposed four asset allocation mixes at last week's meeting.

Any change to the asset allocation for the system's 2013-'14 fiscal year must be approved by May 1, said Adam Jordan, strategic partnerships director.

The asset mix favored by the consultant would combine all public equity into a single global allocation with a target weighting of 40%, up from 38.5%.

The diversified credit strategies target would be decreased to 19% from 20.5%; conservative (core) fixed income would be lowered to 15% from 20%; real assets would increase to 8% from 6%; and opportunistic strategies also would increase to 18% from 15%.

A $3.9 billion portable alpha strategy invested in hedge funds would be eliminated under all four of the proposals.

The recommended asset allocation with its “subtle” changes will result in a higher expected return with slightly lower risk, said Ms. Bernard.

Hewitt EnnisKnupp's favored asset allocation is projected to return an annualized 7.14% over 10 years compared with 7% for the current allocation.Ms. Bernard said reducing the number of money managers and “focusing on active management where it can add the most value, in hedge funds with low beta exposure and real estate, for example, will increase returns and lower volatility.

To achieve that goal, assets likely will be moved to passive or enhanced index managers where “alpha can't be reliably counted on” from active managers, said Hershel Harper Jr., chief investment officer.

Reynolds Williams, commission chairman, said he would call a special meeting, likely in the last week of April, to approve a new asset allocation.

The meeting began with a long and heated discussion followed by a motion to condemn and censure Mr. Loftis for “engaging in false, misleading and deceitful rhetoric.”

Edward N. Giobbe, vice chairman, introduced a four-page motion citing allegedly inaccurate or misleading statements about the investment commission that Mr. Loftis has made to the media since 2011.

Mr. Loftis told the commission that he had not seen the motion prior to the meeting, characterizing it “as the best ambush since Custer.” He denied making any misleading or inaccurate statements.

“This is embarrassing to me and, as I looked around the room, to others as well,” Mr. Loftis said. But he added he saw the motion “as a badge of honor. I will not stop until the problems (at this system) are fixed.”

The investment commission approved the motion on a 5-1 vote, with Mr. Loftis casting the dissenting vote.

A copy of the motion and Mr. Loftis' response are available online at pionline.com/loftis.

Later in the meeting, commissioners confronted Mr. Loftis, who is the custodian of the funds in his role as state treasurer, about his refusal to fund the first capital call for a $50 million commitment made in September to Warburg Pincus XI Partners, a private equity fund managed by Warburg Pincus LLC. The size of the capital call was not revealed during the meeting.

Mr. Loftis told commissioners he would not make the transfer because he was unable to get a printed copy of the contract. Commissioners may view money manager contracts online but are not permitted to print them.

Mr. Loftis said requests to commission staff to print the 500-page contract for him were not met.

“I am the custodian. I will direct the funds as I see fit,” Mr. Loftis said. “I will not repudiate my fiduciary duty because I could not read the contract.”

After leaving a closed-door executive session, Mr. Loftis said in an interview he was receiving a hard copy of the Warburg Pincus contract and will transfer assets for the capital call.

During the meeting, Mr. Loftis also said he will award the contract for global custody services for the system within the next several weeks.

Incumbent Bank of New York Mellon Corp. was permitted to rebid, he said.

Among other commission acts was the approval of Darry Oliver as the system's first chief operating officer, effective Feb. 28. Last year, the commission decided to separate the CEO and CIO functions, which both had been held by Robert L. Borden, who left the commission in January 2012. The CEO role was re-labeled as COO.

Mr. Harper was named CIO last summer, having previously served as deputy CIO.

Mr. Oliver most recently was chief financial officer and a partner at venture capital manager Edison Ventures, Lawrenceville, N.J.