Annual Investment Report

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Annual Investment Report 2010-2011 South Carolina Retirement System Investment Commission Annual Investment Report South Carolina Retirement System Investment Commission Annual Investment Report Fiscal Year Ended June 30, 2011 Capitol Center 1201 Main Street, Suite 1510 Columbia, SC 29201 Allen R. Gillespie, CFA Chairman Table of Contents Chairman & CEO/CIO Report ....................................................................................................................... 1 Consultant’s Report ...................................................................................................................................... 5 Overview ....................................................................................................................................................... 7 Commission .................................................................................................................................................. 8 Roles & Responsibilities ............................................................................................................................. 11 CEO/CIO................................................................................................................................................... 11 Custodian ................................................................................................................................................ 11 Staff ......................................................................................................................................................... 12 Consultant ............................................................................................................................................... 12 Disclosure of Material Interest ............................................................................................................... 12 Investment Plan, Policies, & Objectives .................................................................................................. 12 Mission........................................................................................................................................................ 13 Values ......................................................................................................................................................... 13 Vision .......................................................................................................................................................... 13 Goals ........................................................................................................................................................... 13 Total Fund Review ...................................................................................................................................... 14 Manager Returns (Net of Fees) .................................................................................................................. 18 Public Equity Review .................................................................................................................................. 22 Fixed Income Review ................................................................................................................................. 25 Private Equity Review ................................................................................................................................ 29 Hedge Funds Review .................................................................................................................................. 32 Global Asset Allocation Review ................................................................................................................. 34 Opportunistic Credit Review ...................................................................................................................... 36 Commodities Review ................................................................................................................................. 38 Real Estate Review ..................................................................................................................................... 40 Securities Lending....................................................................................................................................... 42 Expenses ..................................................................................................................................................... 43 Table of Contents Appendices Appendix A: Summary Schedule of Assets and Derivatives .................................................................... 44 Appendix B: Cash and Cash Equivalent Holdings .................................................................................... 45 Appendix C: Short Duration Holdings ..................................................................................................... 47 Appendix D: Fixed Income Holdings ....................................................................................................... 49 Appendix E: Equity Holdings ................................................................................................................... 70 Appendix F: Alternative Investments ...................................................................................................... 86 Appendix G: Swap Holdings .................................................................................................................... 88 Appendix H: Futures Holdings ................................................................................................................. 89 South Carolina Retirement System Investment Commission Chairman & CEO/CIO Report November 7, 2011 The Honorable Nikki Haley, Governor Budget and Control Board Members of the General Assembly of South Carolina Dear Ladies and Gentlemen: On behalf of the Retirement System Investment Commission (RSIC), it is our pleasure to provide the enclosed report on the investments of the South Carolina Retirement Systems’ (Retirement System) portfolio for Fiscal Year Ending 2011 (FYE 2011). The RSIC was created in 2005 as a fiduciary for the Retirement System to assume full responsibility of investing and managing all assets of the Retirement System. Capital Market Summary FYE 2011 was another year of government intervention as fears of a “double dip” recession resurfaced later in the year and discussion of the US debt ceiling became a central topic for policymakers. In August 2010, Federal Reserve Chairman Ben Bernanke hinted that the Federal Reserve may implement additional monetary stimulus in order to kick start a somewhat stagnant economy. In November 2010, Chairman Bernanke officially announced a second round of quantitative easing where the Federal Reserve would purchase $600 billion of Treasury securities by the end of the second quarter in 2011. Furthermore, concern over the health of the European financial system came to the forefront again as default risk increased in Greece and several other European countries. Yet, while economic uncertainty loomed, the global financial markets rallied as interest rates remained at or near historical lows in hopes that this would lead to a more robust recovery. However, after the close of the fiscal year, our macro-economic concerns were borne out as volatility in risk assets increased and their values declined from June 30, 2011, through September 30, 2011. During this period, the S&P 500 Index was down 13.9%, the MSCI EAFE Index fell 19.0%, and the BarCap US High Yield Index dropped 6.1%, giving back much of the ground that had been gained during the fiscal year. We anticipate the markets to remain volatile over the coming year as fears of an economic slowdown and the potential for a European sovereign debt default remains high. For FYE 2011, small-mid cap growth equity was the best performing asset class, returning 44.7% as measured by the Russell 2500 Growth Index; and the Barclays Capital US Aggregate Index (core fixed income) was the worst performing, returning 3.9%. However, other fixed income markets hit double digit returns: US High Yield was up 15.6%; Emerging Markets Debt was up 11.4%; and Global Fixed Income returned 10.5%. Large cap US stocks (S&P 500 Index) were up 30.7% and Emerging Market Equity (MSCI EME Index) gained 27.8%. 1 2010 - 2011 Annual Investment Report FYE 2011 Investment Performance Review The Retirement System investment portfolio (Portfolio) returned 18.3%, net of fees, for FYE 2011, exceeding the Policy benchmark return of 17.1% by 1.2%. As of FYE 2011, the Portfolio’s market value was $26.2 billion, up from $22.9 billion a year earlier. The net increase of $3.3 billion included the impact of $897 million of net cash outflows for retiree obligations. The Portfolio’s positive performance relative to the Policy and Strategy Benchmarks was primarily due to superior investment manager performance. It is important to note that the Portfolio tends to have substantially less equity risk and a higher cash allocation than the average public pension fund. The alternatives portion of the Portfolio continues to perform well. The RSIC’s Opportunistic Credit portfolio was up 12.4%, while the Hedge Fund portfolios returned 10.9% in aggregate. On a relative basis, the Portfolios significant underweight to real estate was a detractor to returns as the NCREIF Property Index was up 16.7%. Asset Allocation Targets On November 18, 2010, the Commission made several changes to the asset allocation targets, which
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