Posted on: Tuesday, June 10, 2003

Adviser critical of ERS portfolio

By John Duchemin
Advertiser Staff Writer

The state Employees Retirement System's $600 million real estate portfolio performed worse than 98 percent of its peers last year, according to an independent adviser's report submitted yesterday to the ERS board.

The pension fund's real estate portfolio eked out a 1.1 percent profit in the past year as poorly performing Hawai'i assets dragged down returns.

The median pension fund made about 7.6 percent on its real estate investments last year, according to ERS investment adviser Callan Associates.

The portfolio represents less than 10 percent of ERS' $7 billion in assets, which finance the pensions of 93,000 state and county workers, retirees and beneficiaries.

The portfolio is being weighed down by poorly performing "legacy" investments made before the pension fund enlisted its current group of real estate managers.

The worst-performing investments include Hawai'i properties such as the Queen Ka'ahumanu Center, said ERS adviser Jaime Kuster, a consultant with San Francisco-based Callan.

ERS is co-owner of the center, a Kahului, Maui, shopping mall that has lost money for years.

ERS still is making a five-year return of 7.1 percent on its real estate portfolio — well above its 6 percent annual target. But its returns rank in the bottom 10 percent of comparable portfolios, Callan reported.

To deal with its portfolio's underperformance, ERS has switched investment advisers and is attempting to unload many of its underperforming Hawai'i properties. For example, ERS and joint venture partner Maui Land & Pineapple Co. are completing a deal to sell Queen Ka'ahumanu Center.