Pension fund ends decline
By John Duchemin
Advertiser Staff Writer
Assets rose in fourth quarter 2002 for the state pension fund, reversing a long-term slide in which the fund lost billions of dollars in value.
The $7.3 billion State of Hawai'i Employees' Retirement System saw its assets grow 4.6 percent between Sept. 30 and Dec. 31, its investment adviser disclosed yesterday.
The fund, which pays for the pensions of 93,000 current and retired state employees and beneficiaries, is still down 8.7 percent from the same period last year, and has slid about $3 billion since 2000.
But the positive quarterly return, a reflection of a rebound in stocks that make up about 60 percent of ERS' portfolio, was a rare bright note in a litany of losses.
Since the start of 2000, the fund has had positive results in five of 12 quarters, and it lost about 15 percent of its value between April and September last year.
"It was great to see a positive quarter after two horrible back-to-back negative quarters," said Ronald Peyton, chief executive of Callan Associates, ERS' San Francisco-based investment advisory firm, which yesterday presented ERS' results to the pension fund's eight-member board of trustees.
ERS' performance last year placed it at the median for large public pension funds — in other words, half did better and half did worse, according to a Callan report. Most funds lost 5 percent to 12 percent last year, it said.
Still, ERS ranks in the bottom 10th for the past five years, Callan said. Since the late 1990s, ERS has been hit with problems including poor performance by its investment managers, the stock market decline and a move by Hawai'i lawmakers to skim more than $300 million from ERS profits to help balance the state budget. The fund also suffered from a heavier-than-normal concentration in Asian and Pacific Rim assets, which were hit particularly hard in the late 1990s.
Recently, ERS has crept up in its peer rankings. Peyton attributed the gains not only to improved stock performance, but also a changed focus and improvement in the fund's handling of its portfolio managers. ERS in 2002 disposed of a mandate to invest a portion of its portfolio in Pacific Basin equities and shed hundreds of millions of dollars placed with poorly performing Japanese portfolio managers.
Also, the fund has terminated eight underperforming managers since 2000, Peyton said.
"What you're left with is very solid managers, and you're seeing the results of that," he said.
Also at the board meeting, ERS trustees voted to warn portfolio manager Pacific Century Trust, a division of Bank of Hawaii, that it faces termination if it doesn't produce better results.
Pacific Century Trust, which manages about $70 million of ERS assets, was down 33 percent last year, ranking it in the bottom 5 percent of similar portfolio managers, according to Callan.
The firm already was on ERS' watch list after it underwent a management change last year, but ERS trustees declared yesterday they also were unhappy with its financial performance.
"We demand some progress, or we could consider terminating them," said trustee Rick Humphries, head of the ERS investment committee. "But management at Bank of Hawaii knows we're serious, and they will be doing some changes. After talking with them, I'm comfortable they're on top of it and will improve."
Reach John Duchemin at jduchemin@honoluluadvertiser.com or at 525-8062.
