HONOLULU – A booming and resilient U.S. economy has helped Hawaii’s largest public pension fund achieve its best year-round return in a decade.
With the number of COVID-19 falling nationwide and a return to normality now clearly visible, the state employee pension system fund has reached three-quarters of its 2021 fiscal year with a gain of 19 , 5% and crossed the threshold of $ 20 billion in assets for the first time, according to a new quarterly report presented to ERS directors by investment adviser Meketa Investment Group. The last time the fund ended a year with a better performance was in 2011 when it gained 20.7%.
The fund’s investments grew 4.1% between January and March, with assets, which include contributions and disbursements, reaching $ 20.6 billion. The fiscal year ends on June 30.
Elizabeth Burton, ERS chief investment officer, said the impact of the coronavirus crisis on markets was unique.
“This was a mandatory business shutdown – not a supply issue, a deleveraging issue, a global depression, brought on by war, etc.,” she said. declared by e-mail. “The nature of this crisis… has resulted in a fundamentally different response from monetary authorities and financial markets. In particular, we have seen the largest US fiscal stimulus outside of wartime. So unlike previous crises, house prices rose, credit card payments stayed on schedule, and consumer incomes rose slightly instead of falling – among other differentiators from past crises. It created opportunities.
Burton said the ERS fund was well positioned to take advantage of the reduced prices.
“This created a buying opportunity in the markets for investors who were not forced sellers,” she said. “The ERS was one such investor, having deliberately positioned the portfolio up front to have liquidity in both expected (eg, elections) and unexpected (eg, coronavirus) market dislocations. . The liquidity in the market provided by the Fed created the opportunity for those with stable balance sheets to buy stocks and credits that had been sold with the general market downturn but which actually had an optimistic long-term outlook. after the pandemic.
The fund’s private growth category, which buys higher-yielding investments that rely on private markets, jumped 14.3% in the January-March quarter to dominate all segments of the ERS portfolio. Public growth, which includes global equities, bonds and global debt, jumped 12.8% in the October-December quarter and 4.6% in the January-March period to boost its gain since the start of the year at 26.3%.
“Our private equity portfolio has had one of its best periods of performance in history,” said Burton.
The ERS has structured its risk-based portfolio so that it outperforms its peer funds during market sell-offs and underperforms during bull markets.
The ERS portfolio outperformed its political benchmark over the one, three, five and 10 year periods and matched the benchmark in the last quarter. The benchmark index is a composite of various sector returns intended to mimic the investments of the ERS portfolio.
The portfolio outperformed the median public fund with assets above $ 1 billion in the last quarter, but underperformed in all other measured periods.
“Our portfolio performed as we expected in fiscal 2020 and 2021,” said Burton. “We capped withdrawals to less than half of peer funds and outperformed on the market close. As expected, we will underperform in bull markets. We focus on risk mitigation and the composition of returns, and 2020 has proven that the safeguards put in place by the board and staff in the portfolio from 2014 are protecting the portfolio during this crisis. “
The pension fund, which benefits more than 148,000 members and beneficiaries, will not be fully funded until June 30, 2046, if all assumptions are met regarding contributions, an annualized average return on investments of 7% and expectations. mortality rate, according to the latest annual report by independent auditor Gabriel Roeder Smith. The portfolio’s capitalization ratio was 55.3% as of June 30, slightly higher than the 55.2% it had a year earlier. The fund’s total shortfall of $ 14.6 billion was somewhat larger, as expected, than the $ 14.08 billion shortfall in the previous year.
ERS Executive Director Thom Williams said it was too early and still difficult to predict how the current performance of the fund’s investments will affect the long-term unfunded liabilities of the fund.
“To be sure, great returns on your investment will come in handy,” said Williams. “Assets will grow at a faster rate than liabilities assuming our results hold until year-end on June 31. But, a lot can happen in the few weeks that remain in our exercise. Volatility has increased in recent weeks. Yes, we have increased by almost 27% for the one-year period ending March 31 and almost 20% since the start of the fiscal year. Of course, I am optimistic, even optimistic, that we will exceed our long-term return target of 7%.