Feuding fiduciaries in South Carolina

A row over the South Carolina Retirement System’s private equity allocation – both in terms of fees and performance – has led to an official censure for state treasurer Curtis Loftis

There’s a very ugly and very public battle going on inside the South Carolina Retirement System Investment Commission – and private equity is at the heart of it.

In April, the $26.6 billion retirement fund’s investment commission filed a lawsuit against state treasurer Curtis Loftis for refusing to sign off on a capital call to Warburg Pincus. Loftis had refused to authorise an approved $50 million commitment until the investment commission provided signed legal documents stating the terms of the investment, including investment fees and the length of the contract.

The treasurer received the necessary documentation and signed the $11.7 million capital call on 15 April, one day before the system would have defaulted on its investment. South Carolina’s Supreme Court dismissed the lawsuit two days later.

This is just the latest spat in an ongoing feud between Loftis and his fellow commissioners.  In February, the commission voted to censure Loftis for a series of critical public statements the treasurer had made about its investment practices, dating back to 2009. The commission’s 5-1 vote to censure – the treasurer being the only vote in opposition – accused Loftis of “engaging in false, misleading, and deceitful rhetoric” and of displaying “a false understanding of the scope of his fiduciary obligations”, according to a resolution introduced by the commission.

Loftis had previously argued publicly that the retirement fund performs poorly relative to other state pensions, pays too much in fees and has a portfolio that is too complex to manage given South Carolina’s existing staff and resources. The system started investing in alternatives in 2007 and has more than 25 private equity general partner relationships, according to its most recent annual report.

Chairman of the investment commission Reynolds Williams has disputed Loftis’ claims, describing them in an email as “examples of abuse of his constitutional office to the detriment of the fund”.

The censure of Loftis, who became a member of the investment commission upon being inaugurated in 2011, is the first in the history of the South Carolina Investment Commission (although it carries no actual penalty, according to Danny Vartas, a spokesperson for the commission).


South Carolina had a target allocation to private equity of 10 percent and an actual allocation of 9.1 percent as of June 30 2012, according to the retirement system’s most recent annual report.  The system has existing investments with managers including Apollo Global Management, GSO Capital Partners, Oaktree Capital Management, Lexington Partners and Warburg Pincus.

One of Loftis’ central criticisms of the investment commission has concerned what he calls its “fast” diversification into alternatives, without the system having adequate resources to manage and report on such investments.

“I’m a big fan of alternative investments, and I particularly like private equity – but those investments do require a heightened level of initial and ongoing due diligence, manager monitoring and compliance,” Loftis says. “We do not have the ability to do that. We’ve been told by two different national consulting firms that we don’t; three, if you count our annual auditor.”

In a 2012 strategic assessment, Deloitte stated: “While the commission has made progress towards enhancing and improving its due diligence processes, based on our meetings and walk-throughs of the due diligence procedures, the commission has not consistently maintained or followed the procedures outlined in the DD Guidelines.”

However, Darry Oliver, chief operating officer of the investment commission, says that Loftis is putting words into the consulting firms’ mouths.

“We asked for recommendations for improvement, and when I read the report, that’s what they’re giving us,” he says. “I didn’t see any statement that says we do not have adequate resources to manage and report on our investments.”


In terms of performance, the retirement system generated a return of 12.4 percent during 2012.

“The important point is our return was nearly five points above our benchmark that we set,” Oliver says. “That’s important to make sure we keep pace with unfunded pension liability.” Williams has also described this as a “fine return”.

But Loftis begs to differ.“When they beat their chests and say 12.4 percent was our calendar year number for 2012, what they don’t tell you is the average large state plan was at 13.4 percent,” he says. “So we were one full percentage point off the average plan. And the average plan is not paying anywhere near the fees we’re paying.”

The commission paid $296 million in investment fees in 2012 and earned $125 million, placing it in the bottom 20 percent in the Wilshire TUCS Master Trust Universe for funds larger than $5 billion, according to a statement Loftis issued in February. Wilshire TUCS is a benchmark for the performance and allocation of institutional assets and includes nearly 1,570 plans, with more than $2.75 trillion in assets.

“We are in the bottom 20 percent in returns and in the top 1 percent of fees,” Loftis has said.

However, at the 28 February investment commission meeting, Hewitt EnnisKnup stated that “on an asset-class-by-asset-class basis, [the system’s] fees are generally low relative to peers”.

“What Hewitt EnnisKnup really said was our fees are reasonable for our asset allocation. Those are two different things,” argues Loftis, adding that not all fees were included in the EnnisKnup study, which looked at fees but not in relation to rates of return or performance. “I don’t mind paying fees. I just want performance.”

In an email, Williams wrote: “The commission is very comfortable with its fee structures and very proud of its transparency in reporting its fees.”


Despite the ongoing feud between the treasurer and investment commission, Loftis says the system is making progress toward adopting better investment practices.

“As we speak, the investment commission is renegotiating fees [and] eliminating costly investment structures. We’re altering our investment plans so we rely more on passive management and less on active management. And we’re going to have greater and more detailed reporting for 2013 than we did [in] 2012.”

Loftis still maintains, however, that despite being a “triple fiduciary” – he is a member of the board that owns the system’s funds, a member of the voting commission and the custodian to the funds – he is often denied information related to the retirement system’s investments.

“It’s a thick notebook of things,” he says. “From very simple questions I should be able to get answered by simply a two- or three-sentence email, to pushing a button and forwarding information to me – such as ‘Please let me see the underlying computations used by the consultant that shows us what the alternative asset allocation is.’ I just want to see the underlying math. Haven’t gotten it.”

Oliver disputes these claims. “Treasurer Loftis is entitled to all information that’s presented to all the commissioners, and he’s had access to that. We don’t believe he’s been denied information.”

One thing’s for sure: if the aim of the censure was to discourage Loftis from his quest to overhaul the system, it clearly hasn’t worked.  “I framed it and put it in my office,” he grins.