ERS posts best
return in 6 years

The state pension fund ended
the fiscal year with a flat 4th quarter

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The state Employees' Retirement System pension fund barely budged in the fourth quarter, but its returns from the previous nine months more than made up the difference as it ended fiscal 2004 with its best return in six years.

The 15.47 percent gain for Hawaii's largest pension fund was the largest since a 16 percent rise in 1998 and marked the second year in a row it finished with an increase after being dragged lower in 2001 and 2002 by the bear market.

Overall, the fund gained 0.08 percent for the fiscal fourth quarter.

Total assets in the fund, which is also effected by benefit payouts and administrative expenses, slipped to $8.57 billion from $8.65 billion in the quarter ended June 30.

"Given the extremely poor conditions of the capital markets in April and the overall weak quarter from fixed income, the slightly positive return from the total fund in the ... quarter was just that, a positive," investment consultants Matthew Beck and Janet Becker-Wold wrote in a performance review letter to the trustees.

Fixed-income managers, hurt by rising interest rates, all showed negative returns for the quarter. But six of the seven managers in that area outperformed the benchmark Lehman Brothers Aggregate index, which lost 2.4 percent.

Among equities, the ERS' large-cap value managers had the best return in the quarter with a 2.6 percent gain followed by small-cap equity managers with a collective 2.2 percent increase. For the fiscal year, though, small-cap equity led the way with a 31.4 percent rise.

The Nasdaq (up 2.8 percent), Standard & Poor's 500 (up 1.7 percent) and Dow Jones industrial average (up 1.2 percent) all had small gains for the quarter.

Kimo Blaisdell, chief investment officer for the ERS, said he was pleased with the overall fund's performance. The double-digit gain pushed the 10-year performance up to an average 8.37 percent yearly return, putting it ahead of ERS' 8 percent target. The ERS provides retirement, disability and survivor benefits for 97,000 city, county and state retirees and their beneficiaries.

The eight-member board of trustees, who were briefed on the results yesterday by investment consultant Callan Associates Inc., also voted 5-3 to terminate emerging markets manager Capital International. The ouster came despite a recommendation by Callan to keep Capital Investment on a watch list.

Rick Humphreys, chairman of the ERS investment committee, argued yesterday that Capital International's history of underperformance should warrant its removal from the ERS portfolio. Capital International, which had been on the watch list since May 2003, had $250.9 million, or 2.9 percent, of the ERS portfolio under management as of June 30. Capital International lost 10.8 percent last quarter to place in the bottom quarter of its peers.

Callan had recommended keeping Capital Investment under watch, saying it had confidence in the managers and that Capital's investments would soon pay off.

Among other managers on the watch list, the ERS board voted to continue monitoring two Hawaii managers -- Bank of Hawaii and Bishop Street.

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