ERS fund lags most peers in last quarter

The 5.6% gain will give the fund a double-digit increase for the fiscal year

The state's largest pension fund, riding the strong finishing kick of the U.S. stock market, ended the December quarter with a 5.6 percent gain that put the fund on track to post its fourth consecutive double-digit increase for a fiscal year.

But the Hawaii Employees' Retirement System fund trailed its 5.8 percent benchmark for the quarter and was beaten in its peer group by 69 percent of the approximate 40 large pension funds tracked by Callan Associates Inc., the San Francisco-based consultant that lost its contract with ERS at the end of December. It was replaced on Jan. 1 by Portland, Ore.-based Pension Consulting Alliance Inc.

"Large-cap equity managers have led the ERS to solid results in recent years, but they did not contribute in the fourth quarter on a relative basis," Callan wrote in a letter to the ERS board of trustees ahead of an investment presentation at yesterday's board meeting.

Still, ERS' performance pushed its six-month return for the 2007 fiscal year ending June 30 to 9.2 percent and the fund's total assets to a record $10.7 billion.

The fund, which posted fiscal year losses of 6.7 percent and 5.5 percent in 2001 and 2002, respectively, eked out a 3 percent gain in 2003 before double-digit gains of 15.5 percent in 2004, 10.2 percent in 2005 and 10.7 percent in 2006.

For the calendar year, the ERS fund posted a gain of 14.6 percent, just behind its benchmark of 14.7 percent. The ERS return ranked it in the 48th percentile -- first is the best -- among its peers.

By comparison, the Dow Jones industrial average was up 19 percent in 2006, while the Standard & Poor's 500 index rose 15.8 percent and the Nasdaq composite index gained 10.4 percent. All the returns included reinvested dividends.

"2006 was a particularly difficult period for active managers versus market benchmarks," wrote Callan.

Although the ERS' domestic stocks rank in the 47th percentile over the last five years, they were last among their peers last quarter, dragged down by a 1.9 percent gain from Ark Asset Management in the large-cap growth category. Ark Asset manages $523.4 million, or 4.9 percent, of the ERS portfolio.

Domestic stocks in the ERS fund were up 6.4 percent last quarter, with small-cap equity leading the way with a gain of 7.5 percent and large-cap value close behind with an increase of 7.4 percent. Nuuanu-based CM Bidwell had a particularly strong quarter, as its portfolio in the large-cap core sector rose 7.9 percent to rank in the 11th percentile among its peers.

International stocks in the ERS portfolio gained 10.5 percent to finish in the 66th percentile. Domestic fixed-income gained 1.3 percent to finish in the 44th percentile. And international fixed income rose 2.4 percent to land in the 34th percentile. In other areas, real estate rose 4.5 percent and alternative investments gained 2 percent.

The ERS provides retirement, disability and survivor benefits for more than 100,000 people, including more than 63,000 active members.