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South Carolina allocates nearly $1.9 billion to equity options, infrastructure strategies

South Carolina Retirement System Investment Commission approved investment of nearly $1.9 billion in two new asset classes for the $28.2 billion South Carolina Retirement Systems, Columbia, on Thursday.

To fill a new $1.6 billion allocation to equity options strategies, $800 million each was allocated to the Russell Enhanced Put Write strategy, managed by Russell Implementation Services and to AQR Capital Management for its AERO Composite strategy, which will invest in both the AQR Style Premia U.S. Equity Beta 1 fund and AQR Volatility Risk Premium Master Account.

Steven Marino, a senior investment officer, told commissioners that even as the pension fund needs equity-like returns — the plan's U.S. equity weighting is about 15 percentage points below its peers — “the plan cannot accept significantly more downside risk,” a meeting webcast showed.

By combining Russell's passive approach with AQR's active strategy, Mr. Marino said the equity options portfolio is expected to outperform the CBOE S&P 500 BuyWrite index by between 200 and 500 basis points over three- and five-year periods; reduce losses during equity market drawdowns; and generate excess returns during equity market stress.

The pension fund is also moving into world infrastructure, another new asset class, but more gradually by investing or committing about 1% of total plan assets per year until the 3% target allocation is reached, said Ashli Aslin, global core strategies investment officer, during the meeting.

The RSIC approved the fund's first infrastructure investment at Thursday's meeting: $275 million was allocated to Deutsche Global Infrastructure Securities strategy, managed by the RREEF Americas unit of Deutsche Asset Management.

The strategy focuses investment in “pure-play” public companies, which get a majority of their cash flow from investment in transportation, regulated utilities and communications infrastructure, which will be a good complement to private infrastructure investments her team likely will make as they build out the new portfolio, Ms. Aslin said.

Advantages of investing in listed infrastructure companies include returns similar to those of median private infrastructure funds, scalability, liquidity, asset diversification, lower fees, upside participation and significant downside protection, Ms. Aslin added.

In February, the commission — which oversees investment of pension fund assets for the South Carolina Public Employee Benefit Authority, a separate administrative agency — approved a portfolio model that in addition to creating the equity options and infrastructure targets also carved out portable alpha and opportunistic allocations.