The market value of the state Employees' Retirement System's assets climbed by more than a half-billion dollars in the final three months of 2006, helped by investments in smaller publicly traded companies and international companies.

Callan Associates Inc., an adviser to the pension fund, said the 5.6 percent investment gain during the quarter brought the pension fund's total assets to $10.7 billion. That was an increase of almost $511 million from the total at the end of September.

"When everything is running on all cylinders, you're going to get a half-billion in gains," said Callan Vice President Matthew Beck in a presentation to ERS trustees yesterday. Callan's report shows there was a 7.2 percent return on investments in small- and medium-sized companies, while money in international stocks rose by 10.5 percent.

The 5.6 percent gain was a little shy of the 5.8 percent benchmark indicated for the fund during the quarter. Beck said there were several reasons why the pension fund didn't achieve the target rate for the quarter, including underperformance by one of its investment managers, Ark Asset Management. But overall the fund continued to do well, he said.

During the first six months of the ERS's fiscal year, the fund has risen 9.2 percent. The fund has a goal of achieving at least an 8 percent return each year. The pension fund benefits state and county retirees and is the largest investment fund in Hawai'i.

While the ERS has been receiving healthy returns on its investments, and the fund has no problem paying retirees' current pensions, it is projected to face a shortfall in meeting its obligations to future retirees. That shortfall, known as an unfunded liability, rose 25 percent to $5.13 billion last year. Only 65 percent of its liability is funded, one of the lower percentages among state pension funds.