The state Employees’ Retirement System pension fund grew by 3.8 percent last quarter as assets increased to near-record levels and the nine-month return remained on track for the best fiscal year since 1997.

Assets in Hawaii’s largest public pension fund climbed to their highest level in nearly four years at $11.5 billion during the fiscal third quarter that ended March 31, according to a report issued yesterday by Portland, Ore.-based Pension Consulting Alliance Inc., which advises the ERS board.

Despite global conflicts and the disaster in Japan, the fund’s portfolio increased by $350.2 million last quarter and is approaching the fund’s highest asset level ever on Sept. 30, 2007, when it stood at $11.7 billion.

For the first nine months of the fiscal year, the fund is up 19.4 percent, its largest gain since it rose 18.8 percent 14 years ago at the height of the U.S. technology bubble.

Over the past 12 months, the ERS portfolio gained 12.2 percent, and its assets increased by just more than $1 billion.

The ERS fund provides retirement, disability and survivor benefits to more than 111,000 active, retired and inactive state and county employees.

"It was another strong quarter," said Neil Rue, managing director of Pension Consulting. "Up 4 percent in one quarter, up 19 percent fiscal year to date and up about 20 percent two years in a row. The board should feel good about it."

It was also the third straight positive quarter for the portfolio and the seventh gain in the last eight quarters.

Last quarter the ERS fund matched its benchmark return but trailed the median public fund’s return of 4 percent. The median fund comprises 29 funds with assets of $1 billion or more.

Rue said the ERS portfolio would have outpaced its peer group had it not been for the underperformance of the fund’s two large-cap growth managers, who account for nearly $1.2 billion of the assets and underperformed the benchmark Russell 1000 Growth Index by more than 10 percentage points each last quarter.

"That was very disappointing," Rue said.

The ERS fund’s domestic equity sector was the top performer last quarter with a 6.1 percent return, followed by a gain of 3.5 percent by international equity. Total fixed income, which includes both domestic and international holdings, edged up 1 percent. Real estate, which is reported on a one-quarter lag, rose 3.7 percent. Private equity gained 2.2 percent, and returns linked to oil and other commodities rose 1.5 percent.

The report said the vast majority of volatility has since dissipated in the market, although concerns over inflation, Japan’s recovery, European debt issues and rising commodity prices still remain.

"The economy has continued to slowly rebound on top of positive economic news, but has been hindered by continually high unemployment and a depressed housing sector," the report said.

Rue said holdings in the ERS portfolio currently are being reallocated and that the new weightings will show up in the current quarter’s performance. Some of the portfolio’s assets are being moved out of bonds and domestic stocks and into more international stocks, according to the ERS report.

The board lowered its domestic equity target allocation to 35 percent from 41 percent, increased its international equity allocation to 21 percent from 17 percent and lowered its total fixed income allocation to 24 percent from 28 percent. In other areas, real estate was reduced to 7 percent from 9 percent, private equity was doubled to 5 percent from 2.5 percent, real return also rose to 5 percent from 2.5 percent and covered option calls (equities with downside protection) received 3 percent of the portfolio as opposed to no previous representation.