Struggling U.S. and international stock markets are dragging down Hawaii’s largest public pension portfolio.

The state Employees’ Retirement System fund eked out a 0.6 percent gain in the first three months of 2016 but is in danger of finishing the fiscal year ending June 30 with its first loss since 2012, according to a report presented to ERS trustees Tuesday by Portland, Ore.-based Pension Consulting Alliance Inc.

Hawaii’s ERS pension fund, which provides retirement, disability and survivor benefits to 118,993 active, retired and inactive state and county employees, was down 2.5 percent through the first nine months of the fiscal year. The last time the pension fund finished with a fiscal-year deficit was four years ago when it lost 0.6 percent. Before that the pension fund hadn’t incurred a loss since 2008 when it declined 3.4 percent.

Despite the investment gain last quarter, the market value of the ERS fund dipped by approximately $135 million, to $14 billion from $14.1 billion as of Dec. 31, because of benefit distributions.

“We had one of the worst starts for equity markets in any calendar year,” ERS Chief Investment Officer Vijoy “Paul” Chattergy said. “The markets were off and the ERS portfolio was down. In February the markets calmed down a bit, and we had a very flattish type of occurrence. And in March equity markets really started to perform well, so we made up basically all the ground we lost in January and ended up basically flat for the quarter.”

Chattergy acknowledged that it’s unlikely the portfolio will meet its assumed rate of return this fiscal year of 7.65 percent. The assumed rate of return is one of the factors that the actuary uses to calculate how long it will take before the pension plan is fully funded. Other factors include employer and employee contributions, mortality tables and reduced overall benefits for newer members. Dallas-based actuary Gabriel Roeder Smith &Co. said in its report in December that it expects the ERS fund to be 100 percent funded by June 30, 2041.

As of June 30 the ERS pension fund was underfunded by $8.77 billion, according to the actuary. The portfolio had a funded ratio of 62.2 percent. If it was fully funded, the ratio would be 100 percent.

Chattergy said the portfolio is struggling again this quarter.

“This quarter we started out very strongly, but some of that ground has been given up in early May,” he said. “So if you want to measure expectations, this is likely to be a very challenging year, and it’s very unlikely we will reach our expected rate of return of 7.65 percent this year (the fiscal year ending June 30).”

During the fiscal third quarter that ended March 31, the portfolio’s broad growth investments (includes equities and fixed income) were unchanged, principal protection investments (government bonds) rose 1.6 percent, inflation-adjusted investments (includes inflation-linked bonds) increased 3.3 percent and real estate gained 3.8 percent.

“Overall we were slightly up for the quarter,” Chattergy said. “What caused us to underperform our policy benchmark and peer universe is we had four U.S. equity managers that underperformed. It’s a very tough environment for active managers to perform. The first quarter’s market was marked by a choppy return environment with bouts of uncertainty, which created a very challenging environment for active managers to perform.”

Last quarter the ERS pension fund’s 0.6 percent gain trailed the median 1 percent increase accomplished by 67 public funds with assets greater than $1 billion, and trailed the 1.2 percent gain of the ERS policy benchmark, which is a combination of different indexes that correspond with the underlying strategies of the ERS investments.