The state Employees' Retirement System pension fund chalked up a 3.3 percent gain last quarter en route to its best nine-month, fiscal-year return in more than two decades.

With the stock markets bouncing back following a global recession, Hawaii's largest public pension fund increased its asset level by $308.3 million in the January-March period to $10.5 billion.

The fund was up 19.1 percent through nine months of the 2010 fiscal year that ends June 30. The last time the fund had a larger return during a similar stretch was 24 years ago in the nine-month period ended March 30, 1986, when the fund rose 20 percent. It finished that fiscal year up 24 percent.

“;The trustees are very pleased at the performance that we've earned off our investments,”; ERS Chief Investment Officer Rod June said yesterday. “;We look forward to continued volatility in the market, but we remain optimistic that the market will continue to improve.”;

Over the last 12 months, the ERS portfolio investments have risen 29.6 percent, and the fund's asset level has increased by $2.4 billion. The fund is coming off its worst-ever loss when it declined 18.7 percent in fiscal-year-2009.

“;The one-year return came from predominantly the equity markets, and over the last quarter much of our return came from fixed income,”; June said. “;So I think it's a testimony that diversification really benefits the fund because the different asset classes move at different times up and down.”;

The pension fund provides retirement, disability and survivor benefits to 110,900 active, retired and inactive vested state and county employees.

Last quarter, the fund's 3.3 percent return beat its policy benchmark of 3.0 percent but trailed the 3.6 percent return of its median fund, which encompasses 29 funds (as measured by custodian bank Northern Trust) that have assets greater than $1 billion. Over the last year the ERS portfolio trailed its benchmark by 0.3 percentage points and the median fund by 2.6 percentage points.

“;The reason they underperformed the median fund (last quarter and over the last 12 months) is because Hawaii tends to be more conservatively positioned than their peers,”; said Neil Rue, managing director of Portland, Ore.-based Pension Consulting Alliance Inc., the financial adviser to the ERS board. “;They tend to hold a little more fixed-income investments than their peers do.”;

He said that over the last year Hawaii held an average in excess of 30 percent fixed income while the median fund it's compared against held probably 20 to 25 percent of fixed income.

“;So in a rebound, Hawaii is going to underperform more,”; Rue said. “;That's a reflection of risk tolerance of the Hawaii portfolio versus a poor performance by any particular set of managers. That same risk tolerance proved to benefit the ERS very well during the crisis in the sense that over the last three years the ERS portfolio has been a top quartile investment performer versus their peers.”;

Last quarter the portfolio's domestic equity holdings posted a 6.1 percent return to beat its policy benchmark return of 5.9 percent, and the portfolio's total fixed income return of 2.5 percent topped its benchmark of 2.0 percent. International equity edged up 0.7 percent but trailed its benchmark of 1.1 percent.

The ERS' real estate investments, which are reported on a one-quarter lag, lost 1.0 percent but outperformed the minus 2.4 percent return of its property index gauge.

Alternative investments lost 0.6 percent.