State pension fund pulls $43M from Bankoh's control
By Deborah Adamson
Advertiser Staff Writer
The Employees' Retirement System, the state pension fund, decided yesterday to take away half of the $86 million managed by Bank of Hawaii, citing lagging returns and the departure of several key professionals.
In the quarter ended March 31, pension funds managed by Bank of Hawaii lost 0.65 percent, which placed its performance in the bottom 10 percent of its peers in U.S. large-cap growth stocks. The bank was the only ERS investment manager out of 26 to report a loss in the quarter. In the past five years, it had lost an average of 3.33 percent annually.
"To address the concerns expressed by the ERS ... we recently implemented initiatives which we expect to strengthen our position as an investment manager," Bank of Hawaii said in a statement. "We look forward to continuing to work with the ERS and a stronger performance in the future."
The ERS board, which met yesterday in executive session to discuss Bank of Hawaii, said it will also keep the bank on its watch list where it has been since November 2002. The list is where investment managers land for underperformance or making changes the pension believes could affect future returns.
The money taken away from Bank of Hawaii's management will be reallocated to another money manager, which has not yet been chosen. Roughly half of the $86 million staying with Bank of Hawaii will be co-managed by the bank and another Honolulu firm, CM Bidwell & Associates.
The board's action came after Callan Associates, a San Francisco-based pension consultant, recommended the ERS stop using Bank of Hawaii because investment performance has been "troubling" since the exit of Roger Khlopin, lead portfolio manager for large-cap growth stocks, three years ago.
In February, John Fujiwara of the risk and analytics team left, as did Terry Yee in research. As of early May, Bank of Hawaii had three main portfolio managers and four research analysts — three are temporary — to perform the "daunting task" of covering all U.S. large-cap stocks, the report said.
Also, while Bank of Hawaii is working with Chicago Equity Partners to share research, the delineation of both firms' roles is unclear. Callan's report said that members of the bank's investment team had "difficulty explaining their process" and how they integrate their research with the Midwest firm.
"Given the combination of recent underperformance and the continuing lack of stability within the equity management team, we recommend that ERS terminate the portfolio at this time and divide the portfolio's assets among two other local equity managers, Bishop Street and CM Bidwell," Callan wrote.
Bishop Street Capital Management, which is part of First Hawaiian Bank, handles $63 million of the pension fund. CM Bidwell manages $63 million.
The decision on Bank of Hawaii comes at a time of improving performance by the pension fund. In the quarter ended March 31, which was the fund's fiscal third quarter, the ERS reported a 3.02 percent return compared to the prior quarter, landing it among the top 11 percent of its peers. Total assets rose by $150 million to $8.65 billion. The fund was up 28.3 from a year ago, compared with a 27.94 percent annual return for its peer group.
The nine-month return fell just below the median for its peers, at 15.42 percent compared with 15.57 percent.
"Emerging markets as well as international equity had very strong returns over the last year," said ERS Chief Investment Officer Kimo Blaisdell. "We have also seen strong positive returns from our domestic equity managers."
In the quarter, emerging markets led the pack with a return of 9.28 percent followed by small cap stocks, up 6.33 percent. U.S. stocks returned 2.69 percent compared with a median of 2.45 percent among domestic equity investments of large public funds.
About 35 percent of the pension fund is invested in U.S. large-cap growths, 10 percent in small and mid-cap, 18 percent in foreign stocks, 20 percent in U.S. fixed income securities, 7 percent in international fixed income, 7 percent in real estate and 3 percent in alternative investments.
Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.
