Hawaii ERS fund up 10.6% last year

The state employees' retirement system still managed a 10 percent gain for calendar 2007

The Hawaii Employees' Retirement System pension fund posted a 0.4 percent loss in its fiscal second quarter -- its first losing period in 1 1/2 years -- but for the full calendar year chalked up a 10.6 percent gain that beat other large public pension funds and its policy benchmark.

Assets slipped to $11.63 billion for the quarter ended Dec. 31 from a record $11.67 billion at the end of the fiscal first quarter, according to data presented to the ERS board of trustees yesterday by Portland, Ore.-based Pension Consulting Alliance Inc.

FULL STORY »

The state's largest pension fund wrapped up 2007 with its first losing quarter since mid-2006, but still ended the calendar year with a double-digit gain that trounced its peers and exceeded its policy benchmark.

In a year plagued by a nationwide mortgage meltdown created by risky lending practices, the Hawaii Employees' Retirement System, which provides retirement, disability and survivor benefits to 106,000 people, saw the investments in its portfolio slip 0.4 percent in its fiscal second quarter, which ended Dec. 31. For the calendar year, though, the fund was up 10.6 percent, outperforming the median large pension fund, up 8.6 percent, and the ERS benchmark, up 9.4 percent.

Neil Rue, managing director of Portland, Ore.-based Pension Consulting Alliance Inc., called the one-year performance by ERS' domestic-equity managers "phenomenal" after 12 of the 13 accounts beat their benchmarks. ERS' domestic-equity investments were up 7.5 percent over the past year, beating its benchmark's 5 percent gain.

"One would not expect that to happen all the time," said Rue, who presented the data yesterday to the ERS board of trustees. "Those are phenomenal results."

Even though the ERS fund had a negative return last quarter, it was just one-tenth of a percentage point worse than the benchmark return of negative 0.3 percent, and exceeded the median return for ERS' peers -- 50 other public pension funds with assets over $1 billion -- of negative 0.7 percent.

The last time the ERS portfolio had a negative return was in the fiscal fourth quarter that ended June 2006, when the fund fell 0.1 percent.

Assets slipped at year-end to $11.63 billion, down $37 million, or 0.3 percent, from the record level of $11.67 billion at the end of the fiscal first quarter that ended Sept. 30. At the end of 2006, the asset level stood at $10.73 billion.

Rue said the ERS fund "did pretty darn good in a difficult market" by staying very close to its benchmark return. He said any direct exposure in the fund to the subprime situation was "immaterial if any at all."

"During a difficult market, nothing went out of whack," Rue said. "You're pretty close to your long term-strategy. ... We're all long-term investors, and long term, the ERS portfolio the last five years has done pretty great. These are very good numbers."

The ERS portfolio has averaged a 13.4 percent gain over the last five calendar years to beat both its benchmark (13.2 percent) and the median of its peers (12.9 percent).

Last quarter, the ERS generated its biggest gains from its fixed-income investments. International fixed income rose 3.3 percent (trailing the benchmark gain of 3.9 percent) and domestic fixed income rose 2.6 percent (trailing the benchmark gain of 3 percent).

Even though ERS' domestic equity funds had a down quarter with a negative return of 2.9 percent, they outperformed the benchmark return of negative 3.4 percent. International equity was down 0.8 percent, slightly better than the benchmark of negative 0.9 percent.

Rue, whose firm began advising the ERS board of trustees on Jan. 1, 2007, said over the next couple of months the ERS will be restructuring its fixed-income portfolio by reallocating capital across its fixed-income managers to create just one fixed-income category.

"It has nothing to do with the performance," Rue said. "We're trying to position the managers with the appropriate benchmarks and an appropriate structure to allow them to be more globally oriented going forward, to give them broader mandates so they can have more tools that they can use to add value."