International
investments
bolster ERS
The state pension fund
eked out a 0.67 percent
gain in the latest quarter
A once-overweight investment in the international market is paying off for the state's largest pension fund.
Coming off its best fiscal year in six years, the ERS fund chalked up its sixth straight positive quarter as its international equity investments rose 1.2 percent to rank in the 20th percentile -- lower is better -- of its peer group of nearly 50 large public funds. The pension fund's international fixed-income investments gained 2.8 percent.
Total assets in the fund, which is affected by benefit payouts and administrative expenses, slipped to $8.55 billion in the quarter ended Sept. 30 from $8.58 billion in the previous quarter.
"We're very pleased with the performance, especially given the fact that the domestic equity market was down for the quarter," ERS Chief Investment Officer Kimo Blaisdell said.
The ERS peer group had a gain of 0.23 percent last quarter while the S&P 500 index fell 1.87 percent for its worst performance since the first quarter of 2003.
In its past fiscal year, which ended June 30, the ERS fund had a 15.67 percent gain for its best performance since a 16 percent rise in 1998.
The ERS provides retirement, disability and survivor benefits for about 99,000 city, county and state retirees and their beneficiaries.
"You guys used to be pretty high in terms of your international allocation relative to your peer group," adviser Janet Becker-Wold told the board yesterday. Becker-Wold is with Callan Associates Inc., the San Francisco-based firm that helps ERS manage its investments.
"Your peer group has now caught up with you and you're now a little bit below the median. You were on the leading edge of both the emerging markets and developed markets, which has put you in very good stead."
International equity represents 17.8 percent of the ERS portfolio while international fixed-income makes up 7.1 percent.
Meanwhile, the ERS board voted yesterday to terminate investment manager Bank of Ireland, which invests in Europe, Australia, Asia and the Far East. Bank of Ireland, which ranked in the 78th percentile last quarter with a 1 percent loss, recently lost four of its key investment managers to a rival firm. The ERS board said it would move the $417 million invested in Bank of Ireland to the State Street EAFE index until another manager with a similar investing style can be found.
The ERS fund's domestic equity investments, which represent 45.5 percent of the overall portfolio, fell 1.8 percent in the quarter although five of its seven large-cap portfolios beat the median return of their peer groups.
Domestic fixed-income investments, which make up 19.2 percent of the fund, rose 3.1 percent to match the peer group median return. Excluding mortgages, however, the ERS domestic fixed-income return was below its peer-group median as all four active managers underperformed.
That was because all of ERS' fixed-income managers had short-term securities in a quarter when the longer-end securities were strong due to uncertainty over the presidential election, high oil prices and the Iraq war.
"The long end of the market was not expected to rally, and it did as a flight to quality because of the global uncertainty," Becker-Wold said. "That caused the longer duration bonds to perform better than the shorter-term duration bonds. A lot of active managers got caught on this because they were preparing for a rise in long-term interest rates when interest rates ended up falling on the long end."
Among other sectors, real estate gained 6.3 percent while alternative investments, such as timber, increased 1.3 percent.