The state Employees' Retirement System pension fund, which grew by 3.7 percent in the fiscal second quarter, is off to its best six-month return in 27 years.

In regaining the $10 billion asset level, the portfolio posted a 15.3 percent return at the Dec. 31 halfway point, its best performance since rising 18.2 percent in a similar period in 1982.

“;Obviously, it's very good,”; said Neil Rue, managing director of Portland, Ore.-based Pension Consulting Alliance Inc., the financial adviser to the ERS board of trustees. “;We'll have to see how the rest of the fiscal year plays out, but based on this trend, to the extent that the ERS can maintain this return, that will be very helpful for the ERS system.”;

The pension fund provides retirement, disability and survivor benefits to about 108,000 active and retired state employees. In the fiscal year that ended June 30, the portfolio finished with its worst-ever loss of 18.7 percent.

However, for calendar-year 2009, the portfolio finished up 17.9 percent, half a percentage point ahead of its policy benchmark of 17.4 percent but 1.8 percentage points behind the 19.7 percent return of its 28 peers that have assets greater than $1 billion. The portfolio ended last quarter at $10.2 billion, up $442.1 million from the previous quarter and ahead by $1.5 billion over the past 12 months.

“;The median fund was up almost 20 percent and Hawaii was up almost 18 percent over the past year,”; Rue said yesterday after a presentation before the ERS board. “;The ERS portfolio tends to be more conservatively positioned (with more fixed-income investments) than their peer funds, so throughout the crisis they outperformed and during the rebound they're going to under-perform. Over the three-year period ended Dec. 31, they outperformed their peers by almost 100 basis points (0.7 percent) a year.”;

Last quarter, the portfolio's domestic equity holdings outperformed the policy benchmark, 6.1 percent to 5.9 percent; international equity topped the policy benchmark, 4.5 percent to 3.1 percent; and total fixed income was up 1.4 percent compared to its benchmark of 0.5 percent. Overall, the portfolio's 3.7 percent return last quarter beat its policy benchmark of 3 percent and matched the median fund return.

For the last 12 months, the ERS' domestic equity gain was 30.5 percent, international equity was up 39.6 percent and total fixed income rose 12.9 percent.

“;All the major public market portfolios—domestic equity, non-U.S. equity and fixed income, which together comprise close to 90 percent of the portfolio—produced significant double-digit returns and outperformed their commensurate benchmarks,”; Rue said.

In fiscal 1983, which included the 18.2 percent return in the second half of 1982, the portfolio finished with a 29 percent gain coming out of the 1980s recession.

Rue said that might be hard act to follow.

“;I would not expect that to happen,”; he said. “;That's a doubling from here. And the equity markets in January and February are down almost 10 percent, so we just don't know how the second half of the year will play out.”;