A surging and resilient U.S. economy has put Hawaii’s largest public pension fund on pace to achieve its best fiscal-year return in a decade.

With COVID-19 counts dropping nationwide and a return to normality now in clear view, the state Employees’ Retirement System fund reached the three-quarter mark of its 2021 fiscal year with a 19.5% gain and topped the $20 billion threshold in assets for the first time, according to a new quarterly report presented to ERS trustees by investment adviser Meketa Investment Group. The last time the fund finished a fiscal year with a better return was in 2011 when it gained 20.7%.

The fund’s investments rose 4.1% in the January-­March period as assets, which include contributions and disbursements, climbed to $20.6 billion. The fiscal year ends June 30.

ERS Chief Investment Officer Elizabeth Burton said the impact of the coronavirus crisis on the markets was unique.

“It was a mandated business shutdown — not a supply issue, a deleveraging issue, a global depression, war-induced, etcetera,” she said via email. “The nature of this crisis … translated into a fundamentally different response from both monetary authorities and the financial markets. Most notably, we experienced the largest U.S. fiscal stimulus outside of war-time eras. Thus, unlike prior crises, home prices increased, credit card payments remained on schedule, and consumer incomes inched higher, not lower — among other differentiating factors versus past crises. This created opportunities.”

Burton said the ERS fund was well positioned to take advantage of discounted prices.

“It created a buying opportunity in the markets for those investors who were not forced sellers,” she said. “The ERS was one of those investors, having purposefully positioned the portfolio in advance to have liquidity in market dislocations both expected (e.g., the elections) and unexpected (e.g., coronavirus). The liquidity in the market supplied by the Fed created the opportunity for those with stable balance sheets to purchase equities and credits that had been sold off with the broader market downturn but in reality had an optimistic long-term outlook post-­pandemic.”

The fund’s private growth category, which purchases higher-returning investments that rely on the private markets, jumped 14.3% in the January-March quarter to lead all segments in the ERS portfolio. Public growth, which includes global stocks, and global bond and debt, jumped 12.8% in the October-­December quarter and rose 4.6% in the January-March period to bring its fiscal year-to-date gain to 26.3%.

“Our private equity portfolio experienced one of its best performance periods in history,” Burton said.

The ERS has structured its risk-focused portfolio so that it outperforms its peer funds during market sell-offs and underperforms them in bull markets.

The ERS portfolio outperformed its policy bench mark over the trailing 1-, 3-, 5-, and 10-year periods and matched the bench mark last quarter. The bench mark is a composite of various market-sector returns that are meant to emulate the investments in the ERS portfolio.

The portfolio outperformed the median public fund with assets greater than $1 billion over the recent quarter but underperformed across all other time periods measured.

“Our portfolio behaved as we expected it to over 2020 and 2021 fiscal years,” Burton said. “We capped drawdowns at less than half that of peer funds and outperformed during the market sell-off. Equally as expected, we will underperform in bull markets. We are focused on risk mitigation and compounding of returns, and 2020 proved that the safeguards the Board and Staff implemented into the portfolio beginning in 2014 protected the portfolio during this crisis.”

The pension fund, which benefits more than 148,000 members and beneficiaries, won’t be 100% funded until June 30, 2046, if all assumptions are met regarding contributions, an average annualized investment return of 7% and mortality expectations, according to the latest annual report by independent auditor Gabriel Roeder Smith. The portfolio’s funded ratio was 55.3% as of June 30, slightly better than the 55.2% it was at a year earlier. The fund’s total shortfall of $14.6 billion was a little wider, as expected, than the $14.08 billion shortfall from the previous year.

ERS Executive Director Thom Williams said it’s too early and always difficult to predict how the fund’s current investment performance will affect the fund’s long-term unfunded liability.

“To be certain, great investment returns will help,” Williams said. “Assets will grow at a faster rate than liabilities assuming our results stand up through the end of the fiscal year, June 31. But, there is a lot that can happen in the few weeks remaining in our fiscal year. Volatility has been up in recent weeks. Yes, we’re up almost 27% for the one year period ending March 31, and almost 20% fiscal year to date. Of course, I’m hopeful, and even optimistic that we will exceed our long-term target return of 7%.”