2011-2012 South Carolina Retirement System Investment Commission Annual Investment Report South Carolina Retirement System Investment Commission Annual Investment Report Fiscal Year Ended June 30, 2012 Capitol Center 1201 Main Street, Suite 1510 Columbia, SC 29201 Allen Gillespie, CFA Chairman July 1, 2010-June 30, 2012 Hershel Harper, CFA Chief Investment Officer This page is an addendum and not part of the official 2012 AIR Chairman & CIO Report January 9, 2013 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 South Carolina Retirement System Investment Commission, it is our pleasure to provide the enclosed report on the investments of Commission portfolio for Calendar Year Ending 2012. The trailing one-year period as of December 31, 2012 proved to be a very successful year for long-term investors such as the Commission. Commission investments earned an estimated annual return of over 11.5%, and added approximately $2.8 billion to the System Fund. The Commission portfolio ended 2012 with an estimated market value of an estimated $26 billion. Commission activities have earned an estimated return of 8.1%, or $5.8 billion, over the three- year period to date. The Fund did lose value from the transfer of 3.8% of its assets as support for obligations to beneficiaries. This $1 billion transfer made for a lower net growth in the value of the Fund. The Fund has transferred $3.76 billion since January 1, 2009 as support for beneficiary obligations. Hershel Harper was named Chief Investment Officer in July, 2012, and the Commission recruited a Director of Internal Audit and Compliance and an Internal Audit and Compliance Officer. The latter two are new positions that followed from the recommendations our internal Audit Committee (established in 2011) and the strategic risk assessment completed in 2011 by our outside auditor, Deloitte Touche. The Commission also in 2012 hired a Director of Information Technology. These additions have positively impacted the Commission. The Commission will continue to work toward a more robust operational infrastructure by pursuing both technology and human resource additions. These investments not only will This page is an addendum and not part of the official 2012 AIR Page 2 of 2 The Honorable Nikki Haley, Governor Budget and Control Board Members of the General Assembly of South Carolina January 5, 2013 enhance earnings but also will improve transparency and performance. They also will reduce the fees now paid to contractors for the same functions. For more information about the Commission, such as meeting minutes, investment policies, and report, please visit our website at www.ic.sc.gov The Commission is cautious about investment returns in the upcoming years because of the continued low interest rate environment, low growth across developed countries, expected volatility as the European debt crisis continues, and remaining uncertainty concerning the Fiscal Cliff. We believe that the best opportunities to achieve higher returns without taking on higher risk will be through both continued investment in private markets and real estate as well as maintaining a diversely allocated portfolio, thereby avoiding risk concentration. We also remain committed to continuing our emphasis on controlling the total cost of managing the Portfolio. The value added by Commission staff and their proactive asset management over the long term is a key component of minimizing costs and maximizing returns. We are honored to serve as the Investment Commission’s Chairman and CIO. Sincerely, Reynolds Williams, Chairman Hershel Harper, Jr., CFA Chief Investment Officer Table of Contents Chairman & CIO Report ..................................................................................................................... 1 Consultant’s Report ........................................................................................................................... 4 Overview .......................................................................................................................................... 6 Commission ...................................................................................................................................... 7 Roles & Responsibilities .................................................................................................................. 10 CIO & CEO ..................................................................................................................................... 10 Custodian ...................................................................................................................................... 10 Staff ............................................................................................................................................... 11 Consultant ..................................................................................................................................... 11 Disclosure of Material Interest ..................................................................................................... 11 Investment Plan, Policies, & Objectives ........................................................................................ 11 Total Fund Review ........................................................................................................................... 12 Manager Returns (Net of Fees) ........................................................................................................ 15 Public Equity Review ....................................................................................................................... 19 Fixed Income Review ....................................................................................................................... 21 Private Equity Review ..................................................................................................................... 25 Hedge Funds Review ....................................................................................................................... 28 Global Asset Allocation Review ....................................................................................................... 30 Opportunistic Credit Review ............................................................................................................ 32 Commodities Review ....................................................................................................................... 34 Real Estate Review .......................................................................................................................... 35 Correlation Matrix .......................................................................................................................... 37 Securities Lending ........................................................................................................................... 38 Expenses ......................................................................................................................................... 39 Table of Contents Appendices Appendix A: Summary Schedule of Assets and Derivatives .......................................................... 41 Appendix B: Cash and Cash Equivalent Holdings .......................................................................... 42 Appendix C: Short Duration Holdings ........................................................................................... 44 Appendix D: Fixed Income Holdings ............................................................................................. 49 Appendix E: Equity Holdings ......................................................................................................... 73 Appendix F: Alternative Investments ............................................................................................ 89 Appendix G: Swap Holdings .......................................................................................................... 92 Appendix H: Futures Holdings ....................................................................................................... 93 Appendix I: Option Positions ......................................................................................................... 94 South Carolina Retirement System Investment Commission Chairman & CIO Report November 30, 2012 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 2012 (FYE 2012). 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. FYE 2012 Investment Performance Review The trailing one-year period as of June 30, 2012 proved to be a challenging year for long-term investors as economic growth continued to sputter and stall, as the effects and limited recovery from the financial crisis of 2008-2009 remained evident. Key events such as the continued government interventions through easing monetary policy, the downgrade of the United States’ credit rating, the slowing of global growth, the ongoing debt crisis in Europe, and the instability in the Middle East