Pension fund hurt by poor investing
By Dan Nakaso
Advertiser Staff Writer
Two out of four investment managers dealing in real estate assets for the state Employees' Retirement System have performed poorly and probably will not meet the system's goal of a 6 percent return above inflation, an independent adviser told the ERS board yesterday.
Representatives from the San Francisco firm Callan Associates also recommended the board decrease ERS' portfolio target ranges for retail, Midwestern and Southern real estate holdings, and increase the target range for apartments, in response to market changes.
The board agreed with Callan Associates' recommendations: increase the investment target range of 10 to 30 percent for apartments to 10-40 percent; decrease the 10-40 percent range for retail to 10-30 percent; decrease the Midwest target range from 10-30 percent to 5-30 percent; and decrease the South's target range from 10-40 percent to 10-35 percent.
The $8.4 billion ERS fund oversees benefits for more than 90,000 state employees, retirees and beneficiaries. It has lost $2 billion with the drop in the stock market and is the focus of a lawsuit by the State of Hawai'i Organization of Police Officers, which accused the Legislature of draining the fund to help balance the state budget in the 1990s.
Yesterday, Jamie Kuster of Callan Associates told the ERS board the performance of two fund managers — Clarion Partners and INVESCO Realty Advisors — had been "disappointing."
Clarion, hired in 1997 after a Callan search, has invested $189 million of an available $238 million. The account manager's total return for the year has been only 3.8 percent, mostly because of a retail shopping center in Del Mar, Calif., that lost its grocery store anchor tenant and is being sold. That probably will mean a capital loss for ERS, Kuster told the board.
Since 1997, Clarion has had a 7.93 percent return, or 5.35 percent real return.
But it has been placed on an ERS watch list because it "stepped outside of ERS' guidelines in terms of portfolio leverage," Kuster said in her report to the board. "If Clarion successfully disposes of the Del Mar asset, it will return to compliance with the guidelines and will be removed from the watch list. In the meantime, Clarion's remaining allocation of $49 million has been frozen, allowing no new acquisition activity."
INVESCO, also hired in 1997, has had a negative 0.82 percent return over the last fiscal year, mostly because of a Silicon Valley office property that lost its value and is still owned by ERS.
"With the collapse of the high-tech industry, the San Jose market has been hit especially hard," Kuster said in her report. "INVESCO took a write-down on this asset of approximately 21 percent."
Since 1997, INVESCO's average annual return has been 7.79 percent, or 5.16 percent real return.
Heitman Capital Management, with approximately $240 million in its ERS investment account, has posted a return this fiscal year of 10.81 percent, or 6.4 percent real return, Kuster said. Heitman sold an East Coast apartment complex in 2000 and reinvested some $95 million in two more apartment complexes and a retail center.
PMRealty Advisors, hired in 1999, is ERS' newest account manager, with the smallest allocation, $100 million. PMRealty is meeting its performance objectives, Kuster told the board, but is being sold by its parent company, Pacific Life, which is in negotiations with a prospective partner. The board agreed with Kuster's recommendation that it allocate no more money to PMRealty until that sale closes.
A fifth ERS fund manger, CB Richard Ellis Fund VI, is in the process of liquidation.
Reach Dan Nakaso at dnakaso@honoluluadvertiser.com or 525-8085.
