South Dakota’s gain of 13.81 percent, compared to other states, ranked tenth for one year, 33 for three years and first for five years, Tammy Otten said.
She is one of three assistant state investment officers. Otten said the retirement system performed better than the capital-markets benchmark in nine of the past 10 years.
Her remarks came Thursday during a presentation at a joint meeting of the retirement system’s trustees and members of the Legislature’s Retirement Laws Committee.
“This is a much more risk-averse portfolio at this point,” she told them.
The SDRS portfolio finished 2.85 percent better than the capital markets benchmark of 10.96 percent growth for the fiscal year that ended June 30, according to Otten
“It all came from the underlying portfolios,” she said.
Global stocks and real estate opportunities performed notably for South Dakota. They finished 1.83 percent and 1.58 percent better than averages for their counterparts.
The South Dakota Investment Council operates on a contrarian strategy, state investment officer Matt Clark said.
That generally has meant buying at low prices and selling when they seem to be peaking.
Two years ago the council began gradually shifting allocations into more cash and cash equivalents.
U.S. stock prices kept climbing, however. South Dakota could have seen 18 percent growth in fiscal 2017 if the council still held those same positions, according to Clark.
The council finished the 2017 fiscal year with 56.7 percent of its portfolio invested in positions other than cash and cash equivalents.
The council’s range is a minimum of 50 percent and a maximum of 85 percent.
“Whether we stay the course will dictate our eventual outcome,” Clark said. “On average it’s been well worthwhile.”
The system has more than 84,000 members, including more than 26,500 retirees. They are current or past employees of state government, state universities, public schools, city and county governments and various special units.
The system added a second retirement program for employees hired after June 30, 2017. The new system features different benefits.
Retirement ages are different too. The original system remains age 65, while the second system is age 67.
Three classes of employees and their government employers pay matching amounts into the system. They contributed $228.5 million in 2016. Benefits totaled $487 million.
Investment earnings cover the difference.
During the past 10 years South Dakota finished an average 1.4 percent above the capital markets benchmark.
That’s according to a report Clark and the investment council’s chairman, Steve Kirby, delivered Aug. 28 to the Legislature’s Executive Board.
The report showed South Dakota finished above the benchmark six years and below four years.
Clark told the system’s trustees and the retirement-laws member Thursdaythat luck plays a considerable part in the performance for any single year.
“At some point there’s going to be some setback that no one can predict,” he said. “We can only be more patient than others.”
Lt. Gov. Matt Michels said the low operating costs for the investment council’s staff are “just incredible.”
“It’s kind of the new big thing now for all of our peers to go after their fees,” Clark said.
Michels is one of the trustees that state law authorizes the governor to appoint. Michels said the office’s efficiency added to the bottom line.
“It’s very important for the membership to know,” Michels said. He added, “I think that report would be valuable at our next meeting.”
Otten said the office saved $48 million in fees last year compared to the average state pension fund.
“We want to be the best long-term,” Clark said. “People that were beating us in 2006, they’re at the bottom now.” He added, “A new crowd has joined us at the top.”
Clark said South Dakota stands alone over the 20-year time frame. “You almost need more than 10 years to really see things play out,” he said.
South Dakota Supreme Court Justice Steve Zinter asked, “How do you end up on top with 25 percent cash?” Zinter is the trustees chairman.
“The rewards are very lumpy,” Clark said.
Approximately $1 billion of the cash is hedged against U.S. stock prices to help protect past gains, according to Otten. “That has benefited the retirement system this year,” she said.
Sen. Jim White said South Dakota’s retirement program is “the envy” of the rest of the nation.
“It’s a partnership, no doubt about it,” said White, R-Huron, who is chairman of the retirement laws committee. “I think it’s an excellent system.”