Hawaii’s largest public pension fund, which has an unfunded liability of $8.4 billion, began the new fiscal year on a positive note as its return on investments rose 5.3 percent in the July-September quarter.

The strong performance boosted the assets of the state Employees’ Retirement System portfolio to a record $12.9 billion.

The ERS fund — which provides retirement, disability and survivor benefits to 113,282 active, retired and inactive state and county employees — was only 59 percent funded as of the June 30, 2012, cutoff date of the previous actuarial report.

The ERS said in December its unfunded liability was $8.4 billion. The fund will update that number next month. Last quarter’s 5.3 percent return won’t be included in the new report because the results were achieved in the new fiscal year. The report will be based on the ERS portfolio’s 12 percent gain in the fiscal year that ended June 30, as well as the number of eligible employees, employee and employer contributions, and mortality tables.

"My expectations based on what I know is that the unfunded liability for fiscal 2013 should be about the same as in the previous year because there’s still carryover investment losses from 2009," ERS Administrator Wes Machida said Wednesday during a phone interview from the ERS’ quarterly performance board meeting. "This is the last year it would be carried over, so that needs to be accounted for."

Machida said without the carryover investment losses, the ERS fund should be able to start lowering the unfunded liability beginning with the fiscal year that just started. He said the 5.3 percent return in the just-concluded quarter "definitely would have an impact" on the unfunded liability if similar or slightly lower returns can be maintained. The annual return that the ERS targets is 7.75 percent.

"Just by looking at the quarter alone would not necessarily indicate how we would do for the remainder of the year, but hopefully it would remain at least in that positive direction," Machida said.

The value of the ERS fund increased by $600 million last quarter from the April-June period and beat the 4.9 percent return of 63 median public funds with assets greater than $1 billion. The ERS return also beat its 5.2 percent benchmark, which is composed of indexes invested in a similar way to ERS’ portfolio managers.

"We feel very good anytime we get an excess performance," ERS Chief Investment Officer Vijoy "Paul" Chattergy said. "There were a lot of unusual things going on in the quarter, including the gridlock that happened in Washington, D.C. The portfolio performed very well compared to a similar period in 2011 when there was also a lot of concern going on in Washington and the portfolio struggled. Since that time we made changes in the types of investments we have and they have done a better job in a very similar, but not the same, environment in 2013."

International equities were the star performers for the portfolio last quarter as they rose 10.3 percent while domestic equities were close behind with an 8.1 percent return. Total fixed income, which includes both domestic and international holdings, edged up just 0.9 percent.

In other categories, private equity increased 4 percent; covered option calls (equities with downside protection) edged up 1.8 percent; inflation-adjusted returns linked to bonds and timber increased 0.3 percent; and real estate, which is reported on a one-quarter lag, fell 2.9 percent.

Overall, the portfolio is up 10.3 percent through the first nine months of this calendar year and ahead 12.6 percent over the past 12 months.