SOUTH CAROLINA RETIREMENT SYSTEM INVESTMENT COMMISSION 2018-2019 ANNUAL INVESTMENT REPORT South Carolina Retirement System Investment Commission Annual Investment Report Fiscal Year Ended June 30, 2019 Ronald Wilder, Ph.D., Chairman Capitol Center 1201 Main Street, Suite 1510 Columbia, SC 29201 2018-2019 ANNUAL INVESTMENT REPORT RETIREMENT SYSTEM INVESTMENT COMMISSION TABLE OF CONTENTS CHAIR REPORT RONALD P. WILDER, PH. D REBECCA M. GUNNLAUGSSON, PH. D CHAIR VICE-CHAIR Chair Report ................................................................................................................................ 1 PEGGY G. BOYKIN, CPA ALLEN R. GILLESPIE, CFA Consultant Letter ......................................................................................................................... 3 COMMISSIONER COMMISSIONER WILLIAM (BILL) J. CONDON, JR. JD, MA, CPA WILLIAM (BILL) H. HANCOCK, CPA Overview ..................................................................................................................................... 7 COMMISSIONER COMMISSIONER Commission ................................................................................................................................. 9 EDWARD N. GIOBBE, MBA REYNOLDS WILLIAMS, JD, CFP COMMISSIONER COMMISSIONER Policy Allocation ........................................................................................................................ 14 _____________________________________________________________________________________ Manager Returns........................................................................................................................ 15 Securities Lending ...................................................................................................................... 20 December 9, 2019 Expenses ................................................................................................................................... 21 The Honorable Henry D. McMaster, Governor Delegation Authority ................................................................................................................. 23 Members of the State Fiscal Accountability Authority Members of the General Assembly of South Carolina Risk ........................................................................................................................................... 24 RE: 2018-2019 Annual Investment Report Appendices: Dear Ladies and Gentlemen: 1,2 Appendix A: Summary Schedule .......................................................................................... 26 On behalf of the South Carolina Retirement System Investment Commission (RSIC), it is my pleasure to Appendix B: Cash and Equivalents 1,2 ....................................................................................... 28 provide the enclosed report on the investments performance of the South Carolina Retirement Systems portfolio for Fiscal Year Ended 2019. Appendix C: Short Duration 1,2 ................................................................................................. 33 For the Fiscal Year Ended June 30, 2019, the RSIC’s investment portfolio performance achieved a 5.84 1,2 percent return net of management fees. Although the return for this past fiscal year did not exceed the Appendix D: Fixed Income ................................................................................................... 37 assumed rate of return of 7.25, it did follow two fiscal years of strong performance which have resulted in a three-year rate of return of 8.48 percent. 1,2 Appendix E: Equity ............................................................................................................... 68 The portfolio’s positive investment performance resulted in a $31.98 billion ending value of the portfolio 1,2 Appendix F: Infrastructure ................................................................................................. 151 versus an ending value of $31.3 billion for the previous fiscal year. The increased total asset value resulted from a $1.76 billion net inflow from investment performance which was offset by an outflow of $1.08 Appendix G: Public Real Estate 1,2 .......................................................................................... 154 billion in net benefit payments. Appendix H: Alternative Investments 1,2 ................................................................................ 156 The portfolio did experience the resurgence of market volatility during the fiscal year, most notably during the market downturn in December of 2018. However, markets quickly recovered during the first half of Appendix I: Futures 1,2 ............................................................................................................ 160 calendar year 2019, more than erasing the losses experienced in December. Due to the market recovery, the portfolio was able to finish the year in positive territory, an outcome that seemed unlikely during the Appendix J: Swaps & Options 1,2 ............................................................................................. 161 December 2018 sell-off. Equity markets have continued to rise during the second half of 2019 and the portfolio has benefited from this strong performance. 1201 MAIN STREET, SUITE 1510, COLUMBIA, SC 29201 // (P) 803.737.6885 // (F) 803.737.7070 // WWW.RSIC.SC.GOV iv 2018-2019 ANNUAL INVESTMENT REPORT RETIREMENT SYSTEM INVESTMENT COMMISSION CHAIR REPORT RONALD P. WILDER, PH. D REBECCA M. GUNNLAUGSSON, PH. D CHAIR VICE-CHAIR PEGGY G. BOYKIN, CPA ALLEN R. GILLESPIE, CFA COMMISSIONER COMMISSIONER WILLIAM (BILL) J. CONDON, JR. JD, MA, CPA WILLIAM (BILL) H. HANCOCK, CPA COMMISSIONER COMMISSIONER EDWARD N. GIOBBE, MBA REYNOLDS WILLIAMS, JD, CFP COMMISSIONER COMMISSIONER _____________________________________________________________________________________ December 9, 2019 The Honorable Henry D. McMaster, Governor Members of the State Fiscal Accountability Authority Members of the General Assembly of South Carolina RE: 2018-2019 Annual Investment Report Dear Ladies and Gentlemen: On behalf of the South Carolina Retirement System Investment Commission (RSIC), it is my pleasure to provide the enclosed report on the investments performance of the South Carolina Retirement Systems portfolio for Fiscal Year Ended 2019. For the Fiscal Year Ended June 30, 2019, the RSIC’s investment portfolio performance achieved a 5.84 percent return net of management fees. Although the return for this past fiscal year did not exceed the assumed rate of return of 7.25, it did follow two fiscal years of strong performance which have resulted in a three-year rate of return of 8.48 percent. The portfolio’s positive investment performance resulted in a $31.98 billion ending value of the portfolio versus an ending value of $31.3 billion for the previous fiscal year. The increased total asset value resulted from a $1.76 billion net inflow from investment performance which was offset by an outflow of $1.08 billion in net benefit payments. The portfolio did experience the resurgence of market volatility during the fiscal year, most notably during the market downturn in December of 2018. However, markets quickly recovered during the first half of calendar year 2019, more than erasing the losses experienced in December. Due to the market recovery, the portfolio was able to finish the year in positive territory, an outcome that seemed unlikely during the December 2018 sell-off. Equity markets have continued to rise during the second half of 2019 and the portfolio has benefited from this strong performance. 1201 MAIN STREET, SUITE 1510, COLUMBIA, SC 29201 // (P) 803.737.6885 // (F) 803.737.7070 // WWW.RSIC.SC.GOV 1 2018-2019 ANNUAL INVESTMENT REPORT RETIREMENT SYSTEM INVESTMENT COMMISSION As always, we continue to be mindful that despite short-term volatility in the markets, we are long term investors charged with earning an investment return that not only helps provide promised benefits to our current retirees, but also to our future beneficiaries. We believe that our portfolio is well positioned to meet this long-term objective. We continue to be humbled by the faith and trust placed in RSIC to invest and manage the assets of our State’s retirement plans and the over 500,000 plan beneficiaries. We also greatly appreciate the support that you have provided not only to RSIC, but more importantly to the public servants of South Carolina we are privileged to serve. Sincerely, Ronald P. Wilder, Chair 1201 MAIN STREET, SUITE 1510, COLUMBIA, SC 29201 // (P) 803.737.6885 // (F) 803.737.7070 // WWW.RSIC.SC.GOV 2 2018-2019 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, 2019 Re: Fiscal Year Ending June 30, 2019 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, 2019. FISCAL 2019 MARKET ENVIRONMENT REVIEW While the early start of fiscal 2019 may have been characterized by worries of rising interest rates globally, this quickly shifted throughout the fiscal year as increasing concerns of a slowing global growth – made worse by trade tensions