South Carolina must modernize investments to compete
Commentary by
Kevin Hall

It's been more than half a century since Nobel Prize winning economist Harry Markowitz pioneered the field of modern portfolio management, proving that diversification reduces risk and maximizes reward.

The concept, which is probably familiar to anyone who has ever used E-Trade or any other online brokerage, boils down to a simple rule of thumb - "don't put all of your eggs in one basket."

In recent decades, the rest of the nation has reaped billions of dollars in financial reward applying Markowitz's modern diversification techniques. Sadly, due to the short-sighted approach favored by State Treasurer Grady Patterson and other leaders, South Carolina refused to embrace these successful ideas and continued to put all of our eggs in the same basket. As a result, one of the largest economic expansions in the history of modern civilization passed us by.

In the summer and fall of 1996, then-State Treasurer Richard Eckstrom recognized what was happening and decided to do something about it. Armed with a briefcase full of compelling charts and graphs, Mr. Eckstrom held dozens of meetings with key legislative leaders and editorial boards across the state in an effort to convince them of the need to diversify.

In 1999, due in large part to Mr. Eckstrom's efforts, South Carolina finally began investing a portion of its retirement fund in the stock market, becoming the last state in the nation to do so.

Unfortunately, our fund managers were - and are still - severely restricted both in the amount and type of assets in which they could invest. When Governor Sanford appointed me to serve as Chairman of the Retirement Systems Investment Panel in 2004, it was immediately clear that we needed additional reforms. Despite continued resistance from Treasurer Patterson, we were able to work effectively with the General Assembly and were successful in freeing up a larger percentage of our state's assets to invest in equities.

Much work remains to be done, however.

Currently, our retirement system does not invest a single dime in international equities, real estate investments, private equities, hedge funds, commodities or global fixed income funds. By contrast, comparable pension funds put nearly 30% of their assets into these different investment options.

Thomas Ravenel, the Republican nominee for State Treasurer, has done our state a tremendous service by focusing on this glaring lack of diversification. A successful businessman and advocate of modern portfolio management, Mr. Ravenel has shown conclusively that South Carolina's continued failure to diversify keeps our risk level high and our rewards low.

Mr. Ravenel says - and state investment data supports him - that if South Carolina's retirement fund had simply achieved a median rate of return over the past three years, we could have eliminated roughly $5 billion of our retirement system's $9 billion unfunded liability.

Not only would this have tremendously benefited thousands of teachers, police officers and state employees directly, it also would have protected taxpayers by reducing the "bailout burden" associated with keeping the fund solvent.

Yet instead of protecting our retirees and taxpayers, South Carolina aimed low and achieved even lower with its depression era investment strategy. In fact, we currently rank in the bottom 1% of all large public pension funds according to the most recent three-year analysis.

We have a rare opportunity in the upcoming November elections to put our state's investments on the right track. In addition to supporting pro-diversification candidates like Mark Sanford, Thomas Ravenel and Richard Eckstrom, casting a "Yes" vote on Ballot Question #3-A would enable our fund managers to invest in global equities as they do in the vast majority of states.

South Carolina cannot afford to let another economic boom pass us by. Modernizing and diversifying our investments will pay huge dividends for our state in the long run - enhancing our returns, our credit worthiness and the financial stability of our retirees and taxpayers.

Kevin Hall is an attorney in Columbia. He has served as chairman of the State Retirement System's Investment Panel and was co-chairman of Gov. Mark Sanford's Task Force on Government Restructuring and Campaign Finance Reform.