State pension fund loses 6% in stock sell-off

Hawaii’s largest public pension fund lost about 6 percent of its value in the recent stock market correction.

“From the market peak on Jan. 26 to Feb. 8 (the most recent down day), we probably lost about 6 percent compared to the equity market losing about 12 percent,” the Employees’ Retirement System chief investment officer, Vijoy Chattergy, said Monday in a phone interview. “We’re kind of performing in line with our expectations, so we lost about half as much as the market did overall.”

The ERS pension fund provides retirement, disability and survivor benefits to 122,079 active, retired and vested former state, city and county employees.

Chattergy said the pension fund survived the recent sell-off in good shape because the fund is now better designed with “lower fees, less risk, greater transparency and better performance.”

Chattergy said that from Jan. 1 through Feb. 9, the pension fund was down a little over 1 percent.

“We’re investing for the long term, and people shouldn’t get too excited about big moves in the short term,” he said. “We’re comfortable with the risk that we’re taking, and we’re comfortable with the market exposure we’re at currently. We’re in line with our board of trustees’ policy and our expectations for the portfolio’s performance.”

Chattergy views the recent market sell-off as a “technical-type correction that’s only focused on the equity market.”

“We’re starting to be in a different market condition than what came out of the great financial crisis,” he said. “During the great financial crisis, central banks supplied a lot of liquidity to the system. Now those central banks, like the U.S. Federal Reserve, are starting to increase interest rates. And we see that tendency globally as well. Markets are reacting to the changes in inflation expectations, tighter labor markets and healthy growth.”

Chattergy said because of this period of uncertainty and changes in conditions, markets are having to react more quickly.

“That’s more of a condition of moving out of a recovery phase and into a healthy growth change,” he said. “You’ve also had in a certain quarter of the market very leveraged products — exchange traded notes — which are highly sensitive to small changes in market value and have caused the bigger impact that we’ve seen.”

The ERS fund posted a 4.2 percent investment return in the October-­December period to reach the midpoint of its fiscal 2018 year with a 7.7 percent return, according to a report presented to ERS trustees Monday by Portland, Ore.-based Pension Consulting Alliance LLC.

That performance puts the fund, which now has a record $16.9 billion in assets, ahead of its fiscal year targeted rate of return of 7 percent.

On a calendar-year basis, the ERS fund finished 2017 with a 16.1 percent gain.

In the fiscal second quarter, the pension fund’s broad growth investments (equities, option-writing strategies, private equity, private real estate and fixed-income corporate bonds) rose 4.4 percent with the pure equities portion of that category gaining 5.8 percent. Crisis risk offset, a new category that is designed to appreciate materially when equities experience extended declines, increased 7.5 percent. The principal protection category, which is made up of U.S. government-backed bonds, rose 0.5 percent, and inflation-adjusted investments (inflation-linked bonds) gained 2.5 percent.

The ERS had a $12.93 billion shortfall as of June 30 and a funded ratio — what is needed to meet future obligations — of 54.9 percent. But steps have been taken in the Legislature to close the funding shortfall by increasing the required contributions by employers, whose money comes from taxpayers.

Actuary Gabriel Roeder Smith projects it will take 26 years, or until June 30, 2043, for the pension fund to become whole because employers began increasing their percentage of contributions of an employee’s pay starting July 1.