Pension fund
gains 10.2 percent

The Employees' Retirement System
has topped its 8 percent actuarial
target for two years in a row

The state pension fund posted a 10.2 percent return for the fiscal year, marking the second straight year that the fund's investments have exceeded the 8 percent target established by actuaries.

The Employees' Retirement System also posted a 1.8 percent return for the quarter ended June 30. The gains marked the fund's eighth positive return in nine quarters and its second consecutive double-digit annual return. The fund also had its third straight positive yearly return.

The pension fund, which is the state's largest, provides retirement and survivor benefits for city, county and state retirees and their beneficiaries. The pension system has approximately 99,000 members, including about 33,000 retirees and beneficiaries who are receiving payments.

The fact that the fund has been beating actuarial targets suggests its investments are providing ample returns to meet the demands of future retirees.

To manage risk and maximize returns, the retirement system relies on fund managers employed by more than a dozen private investment firms in Hawaii and on the mainland. Matthew Beck, an analyst with Callan Associates Inc. of San Francisco, attributed the strong quarterly performance to these fund managers.

"The managers really came through," said Beck, who advises the board that oversees the pension fund on behalf of members.

Beck pointed to funds that invest in stocks of big companies with large market capitalization, as well as mid- and small-cap funds. Large-cap growth funds owned by the retirement system posted a 2.9 percent return, while small-cap equity funds posted a 4 percent return.

The retirement system's performance came alongside a mixed performance in the U.S. stock market, which was weighed down by rising crude oil prices and inflation fears. The Dow Jones industrial average declined 1.6 percent in the quarter, while the broader S&P 500 index rose 1.4 percent and the Nasdaq composite index climbed 3.1 percent.

Meanwhile, domestic bond funds bounced back from a poor first quarter, which also helped pension plan participants. Although Beck said only one of four of the retirement system's domestic bond funds "was able to beat the Lehman Aggregate and peer group median for the quarter," these funds still returned 2.8 percent on the pension system's investment for the quarter.

International stock and bond funds were hurt by a rising U.S. dollar, which translated into lower yields from overseas firms whose returns previously had benefited from a softer greenback, Beck said.

Nonetheless, Beck noted, the ERS' international stock investments managed to eke out a gain of 0.3 percent.

The system's international bond investments, however, were down 2.8 percent. The performance marked the second-straight decline from international fixed-income investments for the ERS, which Beck said had been hurt more than its peer pension funds because of the Hawaii pension system's relatively large investment in international markets.

The ERS board also voted to keep three managers on its "watch list." Bishop Street Equity and Bank of Hawaii funds remain on the list because of organizational changes, and Bishop Street's fixed income portfolio remains on the watch list for organizational change and performance reasons.

The system's assets were worth a total of $9.1 billion as of June 30, essentially unchanged from March 31.