Hawaii’s largest public pension fund suffered the brunt of three global shocks during the last 12 months to once again fall far short of the returns it needs to meet its financial obligations.

But Chief Investment Officer Vijoy Chattergy said he’s optimistic that the portfolio’s performance since the end of the fiscal year on June 30, plus the restructuring of the portfolio, has the pension fund heading in the right direction.

The state Employees’ Retirement System portfolio missed its targeted return for the second straight fiscal year and suffered a loss on its investments for the second time since 2012, according to a report presented to ERS trustees Monday by Portland, Ore.-based Pension Consulting Alliance Inc.

A 1.6 percent investment gain in the April-June quarter wasn’t enough to prevent the ERS fund from finishing the 2016 fiscal year with a 0.9 percent loss. The fund’s assets decreased $422 million over the past 12 months to $14 billion.

The fiscal-year performance follows a 4.0 percent gain in fiscal 2015.

That means the portfolio’s return for each of the last two fiscal years has lagged the assumed rate of investment return established by the ERS. The fund’s targeted return was 7.65 percent for fiscal 2016 and 7.75 percent for fiscal 2015. Money from the portfolio is used to pay retirement, disability and survivor benefits to 118,993 active, retired and inactive state and county employees.

“This is just a snapshot in time, and the negative return was actually because for the second year in a row, we had a major market event a few days before the end of the fiscal year,” Chattergy said.

He said the sell-off created by the Brexit vote in June caused a 3.5 percent drop in the ERS portfolio, the oil price sell-off in January sent the portfolio down 8 percent and China’s surprise devaluation of its currency in August 2015 caused a 6 percent drop in the ERS portfolio.

“The portfolio came back each time, but unfortunately we ended the year slightly negative at 0.9 percent,” Chattergy said. “You can see the portfolio performed pretty well in those conditions surviving one shock after another. Things have calmed down, and we’ve had a really nice return from the low point. We’re almost a billion dollars higher (in assets) since the end of the fiscal year. Some of that is related to market performance, and some to contributions.”

Chattergy attributed the small gain in fiscal 2015 to concerns just before the end of the fiscal year that Greece wouldn’t be able to pay its obligations within the European community. Prior to fiscal 2016 the last loss for a fiscal year was in 2012 when the fund was down 0.6 percent.

“The beneficiaries should focus on the long term and recognize that the investment portfolio is being restructured in a way to be more robust, more transparent, lower-risk and more diversified,” Chattergy said. “The portfolio is becoming a stronger portfolio than it was a year ago with the changes we are making to be a risk-focused plan. We’ve already made changes to our management lineup that will save the Employees’ Retirement System $1.6 million in fees per year every year.

“We’re also implementing other structural reforms to the portfolio. We’re increasing exposure to the private market. We saw private real estate up 12.5 percent for the year and private equity up 5.2 percent for the year. We think we’ll be able to take advantage of the return profiles in those types of illiquid investments over the long term because we can be patient long-term investors as a pension plan. The third change we’re making in the portfolio is we’re creating a crisis risk offset class. It is designed to perform better in market draw-downs and should mitigate or lessen risk in the overall portfolio over the long term of a market style.”

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, 2015, 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. The actuary will release its new annual report in December.

By major categories, the portfolio’s broad growth investments (includes equities and fixed income) rose 1.9 percent in the fiscal fourth quarter but fell 2.6 percent for the year, principal protection investments (government bonds) increased 1 percent for the quarter and gained 3.1 percent for the year, inflation-adjusted investments (includes inflation-linked bonds) increased 2.8 percent for the quarter and gained 5.4 percent for the year, and real estate gained 3.1 percent for the quarter and jumped 12.5 percent for the year.

The ERS fund’s 1.6 percent return for the fiscal fourth quarter trailed the 1.8 percent return of 75 median public funds with assets greater than $1 billion. For the year, the ERS fund’s 0.9 percent negative return lagged the median public fund’s positive return of 0.4 percent.