GEORGE F. LEE / GLEE@STARBULLETIN.COM Rod June, the new chief investment officer for the Hawaii Employees' Retirement System, says he wants to grow the system's investment office to help serve the 106,000 people who rely on the $11.7 billion pension fund for retirement.

New ERS chief hits ground running

Rod June began oversight of the state's pension fund Jan 16 after a yearlong search by its trustees

Rod June has some new ideas to boost the return of the state's largest pension fund. The new chief investment officer of the Hawaii Employees' Retirement System wants to pursue such investments as long/short strategies, buyouts, venture capital, distressed debt, mezzanine financing, derivatives and buying into private infrastructure.

He's also considering searching for equity managers who take a more activist approach with corporations, and advising the ERS trustees to seek out "under the radar" successful managers.

June also wants to grow the ERS investment office to help serve the 106,000 people who rely on the $11.7 billion pension fund for retirement, disability and survivor benefits.

June, who has family members in Hawaii, began his new job on Jan. 16. He previously worked for about nine years as one of six investment officers with the Los Angeles City Employees' Retirement System.

He said taking a long-term view will allow the ERS fund to overcome any short-term gyrations in the market, even in the face of a recession.

"(A recession) concerns me, but as far as the ability to make money in the market, it's not dependent on if the market goes up or down as much as having a good long-term investment strategy in place. Because the markets will always go up and down, we have to position our portfolio to be able to accommodate the volatility."

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The new chief investment officer of the Hawaii Employees' Retirement System said he has some innovative ideas, including long/short equity strategies, that can boost the returns of the state's largest pension fund.

Rod June, who began oversight of the $11.7 billion portfolio on Jan. 16 following a yearlong search by the ERS trustees, said the eight-member board needs to look at other investment options.

"I think the returns they've had recently have been on par with other major public pension funds, but I think they may be able to earn additional returns by looking at some newer strategies," June said.

The ERS, which will release its fiscal 2008 second-quarter and calendar-year 2007 earnings today, has had double-digit gains for the last four fiscal years, including a 17.7 percent increase in the fiscal year ended June 30 2007. The ERS fund had a gain of 3.3 percent in the fiscal 2008 first quarter that ended Sept. 30.

While those returns certainly are nothing to scoff at, June, who came to Hawaii after a 17-year career with the City of Los Angeles, said he has some investment ideas he intends to present to the board over the next several years to increase returns.

One of them is a so-called 130/30 strategy in which a portfolio manager takes a long position in his top-ranked stocks up to 100 percent of the portfolio's value and then takes a short position in his lowest-ranked stocks up to 30 percent of the portfolio value. A short position in an investment is a bet that the stock will decline in value.

"Some of the existing (ERS) managers already manage 130/30 strategies and are already capable of that strategy, as well as managers we don't have under contract," June said. "It's not a quick-turnaround type of strategy, and you would need to stay in a stock long enough to realize the benefits of a decline. Many public pension funds are using the strategy."

June, one of six investment officers for the Los Angeles City Employees' Retirement System, or LACERS, ended his nine-year career there for the opportunity in Hawaii to be the chief investment officer and lead the investment program. The funds are similar in size, he said.

Before working with LACERS, June was project manager for the Los Angeles Housing Department, which administers the U.S. Department of Housing and Urban Development grant money for affordable housing.

June said the investment allocations of the Hawaii portfolio are similar to the Los Angeles fund except that Los Angeles has some innovative investment strategies "that probably have not been brought forth to this board for consideration," he said.

Among them, he said, are a corporate-governance program in which equity managers take an activist approach with the companies they hold in their portfolio, and will go to a particular company's board or that company's executives if there is a concern.

Another strategy currently being used by the L.A. fund is a fund-to-funds program in which smaller, unknown managers with good track records are sought who "are not on the radar screen of institutional investors."

GEORGE F. LEE / GLEE@STARBULLETIN.COM Rod June, the new chief investment officer of the Hawaii Employees' Retirement System, has some ideas for strategies that can boost the returns of the $11.7 billion state pension fund.

» Expansion of the alternative investment asset class: Alternative investments such as buyouts, venture capital, distressed debt and mezzanine financing (a hybrid of debt and equity financing) that produce above-average returns but assume more risk.

» Portable alpha: A strategy that uses some form of derivative such as futures, swaps, options or short selling to capture alpha (market outperformance).

» Infrastructure: With the increase in privatization of public works projects, investments can be made in value-increasing assets that include toll roads, bridges, airports and seaports, or other public projects that generate revenue and also provide a steady source of income.

Pili Lee Loy, chairwoman of the ERS investment committee, said one of the reasons that June was selected was his vision for growing the size of the investment office and his idea about going to the University of Hawaii to get students for internships.

She said another positive was that he had Hawaii roots because some of his family members live here.

"Also, the area that he was covering in Los Angeles the last few years was private equity, and we thought that was something he could bring to the board with things that were going on," Loy said.

Loy said the search for a chief investment officer lasted a year because there were three rounds of selections. Candidates who were chosen in each of the first two rounds ultimately turned down the position because there was a $100,000 salary cap, she said.

"This (third) time, legislation said there didn't have to be a salary cap and people were very serious about wanting to accept the job," she said.

Jackie Ferguson-Miyamoto, chairwoman of the full board, said the trustees were concerned about selecting a chief investment officer who wanted to come to Hawaii and was willing to stay and commit to the board's system. She said June was very sincere on that front.

In addition, she said he had the type of background the board was seeking.

"He already had the experience with a government pension fund and we felt that was going to be invaluable to us," Ferguson-Miyamoto said. "We also liked that he was familiar with the process of building up the investment office. And he was very experienced in his investment background and really had some great ideas for the future. We really liked that a lot, and that was the frosting on the cake. He has good ideas and he can clearly convey them to us."

Ferguson-Miyamoto said June received a salary in excess of $100,000 but wouldn't disclose the exact figure.

June takes over during a tough time in the U.S. stock market when it appears the economy is either in a recession or headed for one.

"The retirement system is not a market timer and (the ERS trustees) have a long-term strategy in place," June said. "The recommendation from myself, and probably the consultant (Pension Consulting Alliance of Portland, Ore.), is to stay with the (long-term) strategy, which helps us ride out the volatility of the market."

June, who moved to Hawaii with his wife and 2-year-old son, replaced Kimo Blaisdell, who stepped down on Jan. 31, 2007, to accept a position as senior vice president in the Honolulu office of New York-based Robeco Investment Management. Blaisdell had been with the ERS since September 2000.

Robeco Investment Management oversees more than $350 million in assets statewide and has nearly 20 clients, primarily consisting of unions.