ERS on pace for one of its best years
The state's largest pension fund, closing in on its third double-digit return in the last three fiscal years, posted a 4.8 percent gain in the third quarter to match its highest asset level ever.
Through nine months, the Employees' Retirement System had a return of 11 percent, easily above its full-year target of 8 percent and within reach of its best finish in the last nine years. The only two better performances during that time were a 15.5 percent return in 2004 and a 16 percent gain in 1998.
Barring a market setback this quarter, the ERS fund also is poised to exceed its highest asset level ever, which was $9.9 billion in the quarter ending June 30, 2000.
The ERS fund finished the quarter in the top 14 percent of the large-public-fund group of 40 to 50 funds tracked by adviserCallan Associates, the San Francisco-based company that makes recommendations to the ERS board.
The performance improved on the ERS' trailing one-year peer performance, which ranked in the 55th percentile. The 4.8 percent return also beat Callan's ERS benchmark of 4.5 percent.
"It's better that they beat their 8 percent target than have a high ranking in the database because all of the funds in the database have different investment objectives than ERS," said Janet Becker-Wold, senior vice president at Callan. "It's more important for (the ERS) on a year-to-year basis and a longer-term basis to beat an actual 8 percent rate of return because that is what is going to keep the fund being able to pay the benefits they are committed to make."
The ERS provides retirement, disability and survivor benefits for more than 100,000 people, including more than 63,000 active members.
Equity investments fired on all cylinders last quarter with five of seven large-cap equity managers -- including three local managers -- outperforming their peer-group medians.Bank of Hawaii and Nuuanu-basedCM Bidwell were in the first percentile of their large-cap core peer group with gains of 10.2 percent* and 9 percent, respectively, to easily beat the median of 4.4 percent. Honolulu-based Bishop Street was in the 36th percentile of its large-cap growth peer group with a gain of 3.8 percent, ahead of the large-cap growth median of 3.4 percent.
The ERS mid-cap managers posted an 8.1 percent return to rank in the 42nd percentile while small-cap managers, continuing to defy skeptics for that high-flying group, returned 13.4 percent to rank in the 28th percentile.
"There's been a feeling in the marketplace with GDP strong in the U.S. and the global economy doing well, that higher-risk, higher-beta, lower-quality stocks, including small-cap, high yield and lower-quality high-cap stocks, have done very well," Becker-Wold said.
"But that leadership has started to shift and in this quarter, and even in last quarter, you saw the large-cap quality stocks starting to make a run for it. As the Fed continues to increase interest rates, which there's a feeling now that they will, returns of some of the higher-risk stocks and the higher-risk bonds should abate a bit and you should see the leadership come back to the large caps."
International equity, which has been a strong performer the last several years, continued to shine and posted a 10.5 percent gain to rank in the second percentile.
On the fixed-income side, rising interest rates contributed to the ERS fund's U.S. fixed-income investments slipping 0.4 percent. Foreign fixed income edged up 0.4 percent.
Separately, the ERS board decided yesterday to keep Bishop Street Fixed Income and Bishop Street Equity funds on the watch list for both organizational and performance reasons.Bishop Street has undergone several changes during the last two years, which include CIC/HCM's merger with Bishop Street in June 2004 and the departure last spring of Bishop Street Chief Investment Officer Greg Ratte.
The state pension fund places market managers on the watch list to warn them they may be in danger of having the ERS withdraw its assets if their performance or organizational structure doesn't improve.
CLARIFICATION
Thursday, May 11, 2006
» Nuuanu-based CM Bidwell & Associates manages a large-cap core equity portfolio in alliance with the Bank of Hawaii for the state Employees' Retirement System. CM Bidwell also solely manages a second account in that investment style for the ERS. A story on Page C1 on Tuesday mentioned that Bank of Hawaii and CM Bidwell were in the first percentile of their peer group last quarter with gains of 10.2 percent and 9 percent, respectively. The story did not mention that CM Bidwell collaborated with Bank of Hawaii for the 10.2 percent return.
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