The South Carolina Retirement System Investment Commission (RSIC) is responsible for managing and investing the assets of South Carolina’s public employee retirement system. With over $35 billion in assets under management, the RSIC has a fiduciary duty to generate sufficient long-term returns to ensure retirement benefits can be paid to members of the state’s pension plans. This article provides an overview of the RSIC’s investment strategies, governance, and performance.
The South Carolina public employee retirement system consists of five defined benefit pension plans that cover teachers, state and local government employees. The RSIC was established in 2005 to provide independent, professional investment management of the pension assets. The Commission consists of eight members appointed by the state legislature and governor.
The RSIC has adopted a long-term asset allocation strategy to optimize investment returns at an appropriate level of risk. The current target asset allocation includes allocations to global equities, fixed income, real estate, private equity and other alternative investments. Diversification across asset classes and active management by external investment managers aims to generate higher returns while managing portfolio risk.
The RSIC has established investment policies and procedures aligned with industry best practices for prudent institutional investment management. Rigorous due diligence is undertaken during selection of investment managers. The RSIC also stresses transparency and accountability in its operations and reporting to stakeholders.
Long-Term Asset Allocation Policy Targets Growth to Fund Future Pension Obligations
The RSIC’s asset allocation policy is centered on a diversified portfolio expected to generate long-term returns exceeding the assumed rate of return of 7.25%. The current long-term target asset allocation includes 51% allocation to growth assets such as global equity, private equity, and opportunistic investments. The remainder is allocated to income assets including fixed income, cash and short duration. Real estate and other real assets comprise 12% of the total portfolio providing inflation protection.
This diversified asset mix implements the RSIC’s investment beliefs that long-term equity returns will exceed fixed income and that active risk-based allocation to alternative investments including hedge funds can add value. The long-term focus provides discipline to withstand periodic market volatility. Asset allocation is monitored relative to targets and adjusted based on valuation and forward-looking capital market assumptions.
External Investment Managers Selected to Implement Asset Allocation Targets
The RSIC utilizes external investment management firms to implement its asset allocation policy and invest pension assets. Active equity and fixed income managers aim to outperform market benchmarks through security selection strategies. Passive index funds provide low cost market exposure.
Hedge funds, private equity, real estate and other specialty managers focus on generating returns not correlated to traditional assets. Investment manager searches leverage industry databases and networks to identify promising strategies. Rigorous due diligence examines the manager’s organization, strategy, risk management and performance track record before selection.
The RSIC monitors its investment managers closely through regular calls and meetings. Performance and risk attribution analysis ensures managers adhere to stated mandates and investment guidelines. Underperforming managers are placed on watch and replaced as needed to protect portfolio returns.
Long-Term Performance Meets Targets, Driven by Public Equity Investments
The RSIC produced a return of 9.1% over the 10 years ending June 30, 2022, outperforming its policy benchmark by 0.7%. This long-term return exceeded the actuarial target of 7.25%, providing a buffer against future pension obligations. The outperformance was driven primarily by active equity management, with private equity and tactical allocation decisions also adding value.
Returns were volatile over the shorter 3 and 5 year periods given challenging capital markets. However, the diversified asset allocation provided downside protection during the COVID-induced decline while participating in the subsequent rebound. Ongoing rebalancing and asset allocation adjustments based on forward-looking market views has positioned the portfolio for the current rising rate environment.
Maintaining Long-Term Investment Discipline Critical for Future Success
The RSIC’s long-term investment success is dependent on maintaining discipline around its strategic asset allocation, manager selection and tactical allocation processes. These best practices for prudent institutional investment management must be followed consistently to achieve targeted returns over future periods.
Monitoring asset class valuations and macro-economic conditions will be key to adjusting exposures and positioning during periods of heightened volatility. Selecting high quality active and alternative managers – and quickly replacing those who underperform – can provide incremental returns to meet lofty hurdles.
Adhering to a diversified, risk managed asset allocation aligned to long-term goals will remain the foundation. This provides the best opportunity for the RSIC to meet its mission of funding retirement benefits for South Carolina state pension plan participants.
The South Carolina Retirement System Investment Commission utilizes industry best practices for institutional portfolio management to invest the assets of the state public pension plans. A long-term strategic asset allocation policy combined with rigorous investment manager selection aims to produce returns above a 7.25% target to support future retirement benefits. Discipline in maintaining a diversified portfolio asset mix and focus on long-term results are key principles guiding the RSIC’s investment processes and decision-making.