South Carolina Retirement System Investment Commission 2017-2018 Annual Investment Report South Carolina Retirement System Investment Commission Annual Investment Report Fiscal Year Ended June 30, 2018 Capitol Center 1201 Main Street, Suite 1510 Columbia, SC 29201 Rebecca Gunnlaugsson, Ph.D. Chair for the period July 1, 2016 - June 30, 2018 Ronald Wilder, Ph.D. Chair for the period July 1, 2018 - Present 2017-2018 ANNUAL INVESTMENT REPORT RETIREMENT SYSTEM INVESTMENT COMMISSION TABLE OF CONTENTS CHAIR REPORT Chair Report ............................................................................................................................... 1 Consultant Letter ........................................................................................................................ 3 Overview ................................................................................................................................... 7 Commission ............................................................................................................................... 9 Policy Allocation ........................................................................................................................13 Manager Returns (Net of Fees) ..................................................................................................14 Securities Lending .....................................................................................................................18 Expenses ...................................................................................................................................19 Delegation Authority .................................................................................................................21 Risk ...........................................................................................................................................22 Appendices: Appendix A: Summary Schedule1,2 .............................................................................................24 Appendix B: Cash and Equivalents1,2 ..........................................................................................25 Appendix C: Short Duration1,2 ....................................................................................................30 Appendix D: Fixed Income1,2 ......................................................................................................34 Appendix E: Equity1,2 ..................................................................................................................66 Appendix F: Infrastructure1,2 ....................................................................................................139 Appendix G: Public Real Estate1,2 .............................................................................................140 Appendix H: Alternative Investments1,2 ...................................................................................141 Appendix I: Futures1,2 ...............................................................................................................144 Appendix J: Swaps & Options1,2 ...............................................................................................145 iv 2017-2018 ANNUAL INVESTMENT REPORT RETIREMENT SYSTEM INVESTMENT COMMISSION CHAIR REPORT iv 1 2017-2018 ANNUAL INVESTMENT REPORT RETIREMENT SYSTEM INVESTMENT COMMISSION 2 2017-2018 ANNUAL INVESTMENT REPORT RETIREMENT SYSTEM INVESTMENT COMMISSION CONSULTANT LETTER MEMORANDUM To: The Honorable Henry McMaster, Governor State Fiscal Accountability Authority Members of the General Assembly From: Meketa Investment Group Date: September 10, 2018 Re: Fiscal Year 2018 Review As the general investment consultant for the Retirement System Investment Commission (RSIC) of South Carolina, Meketa Investment Group is pleased to present this summary of the fiscal year events and investment performance of the South Carolina Retirement System (SCRS) investment portfolio for the fiscal year ending June 30, 2018. FISCAL 2018 MARKET ENVIRONMENT REVIEW The fiscal year was largely a story of two environments. In 2017, we saw synchronized global growth, low volatility, tax cuts in the U.S. at year-end, and a weak U.S. dollar. During the last two quarters of 2017 most asset classes were up, particularly riskier ones. Emerging market stocks led the way in Q3 (+7.9%) and Q4 (+7.4%). U.S. and developed international equities also posted strong returns over both quarters, while fixed income assets were largely up but with more modest returns in the “risk on” environment. The trends of 2017 persisted into early 2018, but the environment quickly changed. In 2018, we have seen volatility increase from its very low levels, interest rates and inflation rise, the U.S. dollar rebound, and trade tensions between the U.S. and others heat-up. In this environment, U.S. equities were one of the few asset classes to perform well, while international equities and most fixed income asset classes fell. High yield bonds did post a modest gain (+0.2%) in the first two quarters of 2018. The net result of the two environments on the fiscal year returns ending June 2018 was that equities increased, particularly in the U.S., while TIPS and high yield bonds posted relatively modest gains. Emerging market bonds fell and the broad U.S. bond market slightly declined. For the fiscal year, U.S. equities, as represented by the Russell 3000, rose 14.8%. The trend of U.S. growth stocks outperforming value stocks persisted and small capitalization stocks (+17.6%) outperformed large capitalization (+14.5%) and mid-capitalization (+12.3%) stocks. The MSCI EAFE, representing foreign developed markets, increased at less than half the rate of U.S. equities, up 6.8%. Emerging market equities’ strong returns in 2017 were balanced by an 8.0% decline in the second quarter of 2018 as a stronger dollar and trade tensions weighed on results. The MSCI Emerging Markets Equity index gained 8.2% for the full fiscal year. 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