State pension fund
gains 8.9%

The Employees' Retirement System
posts its seventh straight positive
quarter and beats its benchmark

The state's largest pension fund grabbed Wall Street's bull by the horns last quarter and hung on for an 8.9 percent gain that marked the portfolio's best performance in 18 months.

A stock market rally in November and December helped the Employees' Retirement System finish the calendar year with a gain of 13.1 percent and increase its portfolio's market value to more than $9.2 billion. It was the seventh straight positive quarter for the fund and raised its gain for fiscal 2006 to 9.4 percent. The quarterly gain was the fund's best performance since it rose 11.2 percent in the quarter that ends in June 2003.

"To attribute this renaissance in the (fund's) performance, a lot of credit has to go to the proactive nature of the board in the last three to four years in taking a stance and cleaning up some structural issues and some of the underperforming manager issues that we've had," said Matthew Beck, a vice president with Callan Associates, the San Francisco-based firm that helps ERS manage its investments. "Along with our analysis and the board making the right decision, you've seen some clear, clear improvement in performance during this time."

The fund's performance last quarter beat its benchmark return of 8.7 percent and ranked in the top 5 percent in that period for the 45 large public funds covered by Callan. The ERS fund also ranked in the top 2 percent of large public funds for the last six-month and one-year periods.

By comparison, the Standard & Poor's 500 index rose 9.2 percent in the quarter and the Dow Jones industrial average gained 7.6 percent. The tech-heavy Nasdaq composite index gained 14.9 percent.

The California Public Employees' Retirement System, the biggest U.S. pension fund, rose 13.5 percent last year while U.S. pensions and endowments had investment returns of 11.6 percent last year, according to a report by Wilshire Associates.

"We are very excited about the steady improvement of our portfolio, as evidenced by the improvement by our three-years returns, which are now above median," said Kimo Blaisdell, the ERS' chief investment officer.

The ERS fund's 7.9 percent annualized three-year performance ranked in the top 44 percent of funds.

U.S. stocks, which represent 45.7 percent of the ERS fund, gave the portfolio a big boost last quarter with a 10.5 percent gain. The leaders were mid-cap funds, which rose 13.7 percent, and small-cap funds, which gained 13 percent.

"The move you made a couple years back to bring in the risk in small-cap has worked out quite nicely for you," Beck said.

Callan's advisers, who repeatedly have commended the ERS board for being ahead of the crowd in investing overseas, said that strategy paid dividends again last quarter.

International fixed income, which comprises 7.3 percent of the fund, gained 11.2 percent as it benefited by the dollar's weakness. International equity, which makes up 19 percent of the ERS fund, rose 15.1 percent in the quarter but just missed hitting its benchmark return of 15.6 percent.

Domestic fixed income rose 1.3 percent but beat the benchmark Lehman Brothers aggregate index of 0.95 percent.

"There's nothing we think you ought to be doing," Callan Senior Vice President Janet Becker-Wold told the ERS board yesterday.

"The board has been very disciplined in sticking to a long-term investment strategy, and it's paid off very well. We think you're perfectly balanced and there's no need to change anything that you're doing right now," she said.

The ERS provides retirement, disability and survivor benefits for about 99,000 city, county and state retirees and their beneficiaries.