State pension fund down 6%

Hawaii’s largest public pension fund declined more than a half-billion dollars in the first quarter of its new fiscal year as a Chinese-led economic slowdown dragged down the performance of the portfolio’s equity holdings in the domestic and international markets.

Investments in the state Employees’ Retirement System fund declined 6 percent in the period ended Sept. 30 as its assets — which include benefit disbursements — fell $561.7 million to wind up at $13.8 billion, according to a report presented to ERS trustees Monday by Portland, Ore.-based Pension Consulting Alliance Inc. It was the fund’s worst quarterly performance in four years since it declined 11.2 percent in the first quarter of fiscal 2012.

But ERS Chief Investment Officer Vijoy “Paul” Chattergy said the fund already has snapped back in the current quarter with assets unofficially at a record $14.5 billion.

“Even though we’re only in the middle of the quarter, I can say that since the end of September until last week — even though we won’t report until February — the portfolio is up about 5 percent,” Chattergy said. “With a strong October and the strong beginning of November, the portfolio has gained back its value.”

Chattergy said a confluence of factors contributed to the portfolio’s poor performance last quarter.

“No single quarter is going to be that important in terms of the health and the ability of the pension plan to continue,” he said. “Having said that, it was a very poor quarter, and we were very disappointed. However, I think it’s important to think about what are the things you can control and not control during the quarter.”

Chattergy said events that the ERS couldn’t control included the elections in Greece related to the country paying back its debt, China suddenly devaluing its currency, the uncertainty about when the Federal Reserve is going to raise interest rates, and conflicting data in the U.S. economy that resulted in weaker-than-expected corporate earnings.

“But among things we could control during the quarter, we made sure that all of our investment managers remained invested in the market,” Chattergy said. “One policy the board of trustees implemented after the third quarter of 2011 is that our equity managers can’t hold more than 5 percent cash. We made sure that none of our equity managers violated that rule (last quarter), and that allowed us to participate in a strong October.”

Chattergy said it’s important for ERS’ equity managers to remain invested in the market.

“If you look at those T-shirts going around that say to remain calm going forward, the message I’d like to send out (after last) quarter is to ‘remain calm, keep investing.’”

Former Wyoming Retirement System Executive Director Thom Williams, who took over that same position in Hawaii on Nov. 2, acknowledges he will have his work cut out for him as he attempts to reduce the unfunded liability of the ERS fund, which provides retirement, disability and survivor benefits to 118,466 active, retired and inactive state and county employees. A December report by actuary Gabriel Roeder Smith & Co. showed the ERS fund had only 61.4 percent of what it needed to pay all the pensions promised as of June 30, 2014, and based on current assumptions wouldn’t be 100 percent funded until fiscal 2040.

An updated actuary report, which will take into account the 4 percent gain the fund made in the fiscal year ended June 30, will be released next month.

“My sense is that a 61 percent funding level is not where we want to be,” he said. “Longer term we’re beginning to pursue some investment strategies and planned design structures to close that gap. We’re not daunted in any way from where we’re at. We’re focusing on the opportunities to improve that funding ratio.”

Last quarter the ERS pension fund’s 6 percent loss trailed the median 4.9 percent decline of 74 public funds with assets greater than $1 billion.

“That’s primarily because the ERS portfolio is more exposed to global equity markets than is our peers, and we’re also less allocated to fixed income instruments than our peer group,” Chattergy said.

International equities represented 21.1 percent of the ERS portfolio last quarter compared with 17.8 percent for the median public fund, while total fixed income represented 20.2 percent of the ERS portfolio compared with 26.1 percent for the median plan. Domestic equities were 34.1 percent of the ERS fund and 32.5 percent of the median public fund.

During the quarter, ERS’ international equity holdings plunged 13.7 percent, domestic equities declined 8.1 percent and total fixed income lost 0.5 percent.