ERS loses in quarter but gains for the year
The pension fund missed its benchmark for the fourth quarter
The state's largest pension fund posted a 0.5 percent loss last quarter but still ended its fiscal year with a 10.7 percent gain that easily beat its actuarial target, the Employees' Retirement System reported yesterday.
Meanwhile, the fund's trustees voted yesterday to terminate a subsidiary of First Hawaiian Bank as manager of one of its accounts, effective immediately, after it announced its intention to resign.
In a year of rising interest rates, the Employees' Retirement System fund outpaced its fiscal 2006 objective of 8 percent for the third straight 12-month period. In fiscal 2005, the fund returned 10.2 percent and in fiscal 2004 it gained 15.5 percent.
The fund, which ended the 2006 fiscal year with total assets of $9.9 billion, finished in the 29th percentile of large public funds last quarter.
That means the fund beat nearly three-quarters of the approximate 40 funds in its universe with total assets of $1 billion or more.
However, the fund missed its own benchmark for the quarter of minus 0.1 percent.
For the year, the ERS fund trailed the median of the large public funds with a ranking in the 74th percentile, though it had better rankings over the past two years (38th percentile) and three years (47th percentile). The ERS fund was in the 58th percentile over the last five years.
"If you go back into that last three-year period where a lot of restructuring and manager changes have taken place with the work of the (ERS) trustees and the staff, you can see very much improved results going back over that time period," said Matthew Beck, vice president of Callan Associates, the San Francisco-based adviser that makes recommendations to the ERS board. "We're really pleased at where it's performed versus both its benchmark and other large public funds."
Another such managerial change took place at yesterday's ERS board meeting when the trustees voted to terminate Bishop Street Equity. The subsidiary of First Hawaiian Bank had been on a watch list for long-term subpar performance and organizational changes.
Bishop Street Equity had notified the ERS after the quarter ended June 30 that it intended to resign from the equity account it managed for ERS because it has decided to outsource three of its equity investment strategies. That account, a large-cap growth portfolio, had a value of $112.5 million at the end of June.
"They told us they're going to concentrate their resources on the fixed-income account they have with us," ERS Chief Financial Officer Kimo Blaisdell said. The value of the fixed-income account was $154.2 million at the end of June.
The trustees of the state Employees' Retirement System pension fund voted yesterday to immediately accept the resignation of First Hawaiian Bank subsidiary Bishop Street Capital as manager of a $112.5 million domestic large-cap growth fund it manages for ERS.* The company, dealing with the departure of Chief Investment Officer Greg Ratte in spring 2005, saw its large-cap growth portfolio decline 3.1 percent last quarter. The assets in the Bishop Street Equity account will be equally divided between ERS large-cap growth portfolio managers Ark Asset and Goldman, Sachs & Co., as well as the large-cap core portfolio that Nuuanu-based C.M. Bidwell & Associates manages in alliance with Bank of Hawaii.
The ERS provides retirement, disability and survivor benefits for more than 100,000 people, including more than 63,000 active members.
Beck said part of the reason that the ERS fund trailed its peer group over the last fiscal year was because it had a significant allocation to international fixed income, which struggled in the first half of the year. But, he said, the exposure to international fixed income is one of the aspects that has allowed the ERS fund to outperform its peer group over time.
During the quarter, the ERS' domestic stock funds fell 2.8 percent, with small caps (down 5.5 percent) and large-cap growth (off 5.1 percent) taking the brunt of the punishment. Domestic fixed income slipped 0.1 percent.
Elsewhere, international equity lost 0.3 percent while international fixed income rose 3.8 percent.
Real estate, which is reported on a one-quarter lag, was the shining star with a 5.3 percent gain that ranked it in the fourth percentile. The results likely will be revised upward once fiscal fourth-quarter numbers are available, Callan said, because most of ERS' real estate managers appraise properties during that quarter. The revised numbers will boost the ERS' total return, Callan said.
Beck said he's still looking overseas for growth opportunities as well as in domestic large-cap growth stocks.
"Both international fixed income and international equity, we believe, still have a lot of room for growth, especially given the fact that a lot of people are calling for the dollar to decline," Beck said. "Of course, as U.S. investors, when you hold international investment and the dollar declines, that benefits you."
On the domestic side, Beck also sees large caps taking control of the market from small caps. He said that small caps, which had been the leaders over the past five or six years, appear to have relinquished that role.
"We've seen some weakness in the small-cap area and large caps are really reassuming the leadership in the domestic equity market," Beck said. "That's exactly why we counsel ERS to hold diversified positions in all these areas. We don't want to have to try to time whether small cap or large cap is going to outperform. We want exposure in all the areas so that when a reversal takes place, like what has happened, the ERS is well-positioned."
CORRECTION
Wednesday, August 16, 2006
Monday to immediately accept the resignation of First Hawaiian Bank subsidiary Bishop Street Capital as manager of a $112.5 million domestic large-cap growth fund it manages for ERS. A story in yesterday's morning edition said the fund had been terminated.
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