South Carolina, which only five years ago, opened the door for its public pension plan to invest in hedge funds, private equity and other complicated bets, has now nearly half its assets in such investments. Curtis Loftis, the 53-year-old pest-control company owner, who was electedSouth Carolina’s treasurer in 2010, and overlooks the $26 billion pension fund, is apprehensive about its over-reliance on hedge funds and private equity, and is trying to cut back on such “alternative” investments”. Curtis has called for a review ofSouth Carolina’s existing deals with hedge funds and private equity players, and intends cutting by half, its pension plan’s exposure to such investment vehicles. He is also bothered by the ever increasing investment management fees, which rose 11%, from a year earlier, to $344 million. Owing to the extremely tepid equity and bond market returns, most public pension funds in the country are struggling to hit annual returns of about 8%.
As of June 20, 2011,South Carolina’s pension plan had a 20% exposure in hedge funds. According to Wilshire Trust Universe Comparison Service, as of September 30, that was more than six times the average large public pension fund’s hedge-fund exposure. South Carol in a pension fund had a return of about 18.6% before fees, in the fiscal year ended June 30. That, according to data available with Wilshire, lagged behind the gross median return among large public pensions of 21.4% during that period. Pension officials attribute last year’s below average performance to having a relatively small portfolio of stocks, and instead maintaining large amounts of cash, which made them miss the strong equity market returns during the first part of fiscal 2011.
South Carolina, like most other public pension funds, has to satisfy pension obligations to thousands of teachers, clerks and other state employees. The fund, which has a $13 billion deficit, faces added pressure to hit annual return targets, so that it does not have to put extra burden on the state exchequer. And according to Wall Street experts, hedge funds, private equity and other non-traditional investments offer the best hope to meet the deficit. Inspite of Mr. Loftis wanting to cut back on equity investments, and roll-back to the pre-2000 days, when the South Carolina pension plan could only invest in bonds, the Federal Reserve’s decision to keep interest rates near historic lows until at least 2014, has taken the sheen off bond investments. According to Allen Gillespie, chairman of South Carolina’s pension investment commission, it is too early to tell whether the hedge-fund, private-equity and other non-traditional investment strategies are working, because they often involve less-liquid assets that can take years to yield big returns.
South Carolina’s pension fund ventured into more-complex, higher-return investments about five years ago, after the arrival of its first full-time chief investment officer, Robert Borden.