ERS gains for quarter Hawaii's largest pension fund, which came under fire in December from a state auditor for its performance and other issues, ended a two-quarter slide by rebounding 4.6 percent in its fiscal 2003 second quarter.
The 4.6 percent growth
ends a 2-quarter slide
By Dave Segal
dsegal@starbulletin.comBut the Employees' Retirement System fund still has some catching up to do if it is going to avoid a third consecutive fiscal year of losses.
The fund, whose assets rose $240 million to $7.34 billion in the quarter from the previous three-month period, is still down 5.2 percent for the first half of this fiscal year after a disastrous first quarter that saw the fund plunge 9.8 percent.
However, the head of the consulting firm that advises the ERS board said yesterday the fund may have turned the corner.
"You've terminated eight (fund) managers in the last three years," Ron Peyton, president and chief executive officer of San Francisco-based Callan Associates Inc., told the ERS board yesterday. "I feel like there's fine-tuning going on now."
While the ERS fund was able to bounce back into the black with its 4.6 percent return in the quarter, it wasn't an extraordinary feat since the Nasdaq composite index (14.1 percent), the Dow Jones industrial average (9.9 percent) and the Standard & Poor's 500 index (8.4 percent) all posted solid gains. In fact, the ERS fund fell short of its benchmark return of 5.94 percent.
For the calendar year, though, the ERS fund's negative return of 8.73 percent surpassed the benchmark's negative 9.36 percent return and ranked in the 50th percentile of other large public funds. Its fiscal year ends June 30.
Two of the complaints voiced by state auditor Marion Higa involved the ERS board's investment strategy and Callan's objectivity, due to its financial relationships with some investment managers that it has recommended to the board. But the board, upon the recommendation of Callan, decided to keep its target allocation the same for this year.
"If the targeted level of return you're seeking is 8 percent, you may have to put more risk in your portfolio to get there," said Jay Kloepfer, Callan's senior vice president and director of capital market research. "If you decided that the risk as it stands in your portfolio for how much stocks and bonds is appropriate, you have to accept less return."
The board voted to maintain 32 percent of its assets in large-cap domestic equities, 21 percent in domestic fixed income, 17 percent in international equities, 9 percent in small-cap domestic equities, 9 percent in real estate, 7 percent in non-U.S. fixed income and 5 percent in alternative investments.
Peyton, while acknowledging that it might take 15 to 20 years for the pension fund to make up the losses it incurred in the 3-year-old bear market, advised the board that it's wise to stick to a five-year plan when making investment decisions due to the ups and downs of the market.
"The key to success is maintaining a strategy," Peyton said. "All strategies that are prudent tend to work and pay off over time."
The ERS board also opted to keep CIC/HCM Asset Management, AllianceBernstein, Bank of Hawaii's Pacific Century Trust and TCW on its watch lists while removing Denver Investment Advisors and adding Pacific Income Advisors. The board also voted to place Pacific Century Trust, which had been under scrutiny due to its organizational changes, on the watch list for performance reasons. Pacific Century had a 4.4 percent return in the quarter to place it in the 66th percentile of the large-cap growth style group and in the 95th percentile for the past year. However, Pacific Century underperformed the S&P 500 by 4.0 percent for the quarter and underperformed by 11.2 percent for the last year.
The ERS provides retirement, disability and survivor benefits for 96,000 city, county and state retirees and their beneficiaries.
