It was another turbulent quarter for financial markets, but the state’s largest public pension fund weathered the wild ride with minimal damage.

As inflation surged and the Russia-Ukraine war intensified, the Hawaii Employees’ Retirement System pension fund’s investments dipped just 1.4% in the first three months of its new fiscal year, according to a recent report from investment adviser Meketa Investment Group.

The fund’s risk-averse strategy, which limits losses in volatile times but doesn’t gain as much during prosperous periods, paid off as a bear stock market — a loss of 20% or more from a recent high — ravaged investors.

“We continue to be gratified that our portfolio is performing as designed and as intended,” ERS Executive Director Thom Williams said. “We’re not thrilled with the current quarter’s volatile and largely declining values, but we are very pleased with our investment performance during the period. We are pleased because we structured our portfolio to lose less than our peers, or the broad markets, during periods of decline. And, that’s what happened.”

The ERS performance in the July-September period followed an investment return of 3.7% for the year that ended June 30 in what also was a rocky time for stocks and bonds. The ERS was one of only seven public pension funds nationwide to achieve a positive return for fiscal year 2022.

As of Sept. 30 the ERS fund had $21.6 billion in assets, down nearly $400 million from where it stood at the end of the previous three months. The asset total is affected not only by the investment return, but also by contributions and distributions.

How the ERS fund performs is of utmost concern for current and future state and county beneficiaries. The ERS pension plan provides retirement allowances and other benefits to more than 149,000 retirees, beneficiaries, inactive vested members and active public employees working for the state and its counties.

Irving, Texas-based actuary Gabriel, Roeder, Smith &Co. is estimating that the ERS pension fund in fiscal 2022 improved its funding ratio — what is needed to meet its financial obligations — to 61.2% from 58.3% in fiscal 2021 and that its unfunded liability, or shortfall, declined by about $500 million to $13.7 billion as of June 30.

The actuary expects the ERS portfolio to be fully funded by June 30, 2044, rather than June 30, 2045, as it had forecast in 2021, due to recent legislative steps that increased state and county employer contributions. Final actuary numbers for fiscal year 2022 will be presented to the ERS board of trustees in January.

ERS interim Chief Investment Officer Howard Hodel, who had been filling in for Elizabeth Burton after she resigned June 30, noted that stocks and bonds have experienced significant losses for three consecutive quarters.

“Although our quarterly return was slightly negative, we are very pleased with how well the portfolio performed on an absolute basis, as well as versus our policy benchmark (exceeded by 2.4% for the quarter and 7.1% over the past year) and our peers (top percentile for both the quarter and past year),” he said. “The results validate our risk-aware, diversified approach to managing the portfolio that allows us to successfully navigate through challenging capital market environments like we are experiencing this year and keeps us close to our path to become fully funded.”

The ERS has set a 7% annual average target, or assumed investment return, to meet its financial obligations. The pension fund uses a four-year smoothing strategy — an actuarial strategy generally employed by public pension funds that use either a three- or four-year smoothing method — to dampen the volatility in funding requirements year to year, either up or down.

Hodel said ERS trustees have taken precautions to guard against the effect of soaring interest rates on investments.

“We have significantly reduced our exposure to interest rate risk over the past 2-1/2 years, so although that part of our portfolio detracted from performance, it was not as significant as what most of our peers experienced and what we would have experienced had we not made that decision,” he said.

Hodel said he is not overly concerned about a possible recession.

“Under current conditions with very high, but falling inflation and an economy that is struggling with supply-chain issues and higher interest rates, a recession is certainly possible, probably even likely,” he said. “But if it occurs, we expect it to be mild and short-lived unless a major crisis event occurs.

“We think that the rate increases on the shorter end of the yield curve will peak early 2023 as the Fed slows and then pauses its rate increases, and that longer-term rates will stay range bound. 2023 is probably going to be a chaotic year with economic conditions changing and capital markets reacting quickly.”