Asset Allocation, Defined Benefit, Governance, Institutional Investors, Pension Funds, Private Equity, Public Funds

South Carolina Seeks Shaved Fees through Co-Investments; Considers Simplified Asset Allocation

The approximately $31 billion South Carolina Retirement System Investment Commission (RSIC) is moving to embark on a private equity co-investment venture with an asset management firm to reduce the cost of its private equity portfolio. Also, the RSIC’s consultant, Meketa Investment Group, is working with the fund’s staff on an asset allocation review with the goal of simplifying the system’s investment portfolio, according to fund documents.

“During the April 12, 2019 Commission meeting we announced that the RSIC is partnering with Chicago-based Grosvenor Capital Management for a co-investment platform. We expect this partnership to meaningfully improve our private equity returns by reducing fees. We are planning to give a comprehensive presentation during our June 13 Commission meeting to fully explain the details,” wrote Geoff Berg, chief investment officer in an emailed response to questions from IA on the co-investment initiative.

RSIC’s participation in an investment joint venture seeking lower investment management fees, among other perceived benefits, makes the system the latest public fund to embark on a growing trend. See related stories: IA,10/15/18; IA,10/29/18; IA, 12/17/18

At the RSIC’s meeting in February, Frank Benham, a Meketa managing principal, observed that one of the best methods of simplifying the asset allocation is to reduce the number of asset classes within the system’s investment portfolio, according to meeting minutes. He added that currently, the RSIC’s portfolio has four buckets of asset classes: fixed-income securities, equity and equity-like assets, real assets, and a catchall for other categories. At the meeting, Benham led a discussion on ways to simplify the portfolio’s allocation from its current 17 asset classes. While no decision has yet been made, the Commission has discussed two main approaches to simplifying the portfolio, referred to in the meeting as Mix A and Mix B.

Regarding Mix A, Benham said this portfolio combines investment grade bonds into core bonds with a single target. Mix A also combines U.S., developed non-U.S., and emerging market public equities into a public-equities allocation. Both public and private real estate and infrastructure are combined into a real estate and infrastructure asset class. Global Tactical Asset Allocation and the other opportunistic classes are rolled into a single line. Benham surmised that Mix A would reduce the number of asset classes in the Portfolio to 11.

Mix B combines all public market fixed income, including high yield, bank loans, and emerging markets debt into a single asset class. All global public equity is combined into a single asset class. Mix B does not alter the private equity asset class but combines real estate and infrastructure into a single real assets allocation. In addition, the GTAA asset class is reallocated into public stocks and bonds.

“We are taking a thoughtful and measured approach to the concept of simplifying the asset allocation, with the ultimate goal of ensuring that we establish a framework by which we can reasonably expect additional return from implementation decisions that add complexity to the portfolio,” Michael Hitchcock, RSIC Chief Executive Officer, told IA in an email. The Commission expects to continue the asset allocation discussion at its June meeting.

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