Hawaii ERS Misses Benchmark, Target Rate With 2.6% Return in Fiscal 2023

The Hawaii Employees’ Retirement System reported a 2.57% gain for its fiscal year that ended June 30 to raise its asset value to almost $22.3 billion. The results fell short of its 7% assumed rate of return, its benchmark’s 4.48% return and last year’s return of 3.66%.

“The last fiscal year presented a few notable challenges for allocators across the national pension industry,” CIO Kristin Varela, who was named to the position in December 2022, wrote in the pension fund’s most recent newsletter. “The markets did not provide a smooth path forward last fiscal year, particularly as we assessed the magnitude of month-over-month movements in equities and commodities.” She added that, “given our risk-focused strategy, we do anticipate lagging growth markets in times like these.”

Varela said the fiscal challenges were mainly due to three key economic factors: global inflation, Federal Reserve interest rate increases and regional banking disruptions. “Despite this volatility, the fund generated nearly half a billion [dollars] in capital appreciation,” she said.

The return for 2023 was buoyed by the final quarter of the fiscal year, April through June of this year, when the ERS portfolio returned 2.07%. Public growth investments were the top performing asset class for the pension fund during the fiscal year, returning 10.63%, but fell short of their benchmark’s 13.71% return. Liquid diversifying investments earned 4.38% for the fund, compared with a 6.21% return for their benchmark, and broad growth investments returned 3.93%, below their benchmark’s return of 5.68%.

Liquid defensive investments were the ERS’ worst performing asset class for the year, losing 5.51%, compared with their benchmark’s loss of 3.73%. They were followed by private growth investments, which lost 3.80% but outperformed their benchmark’s loss of 5.68%.

The pension fund reported a three-year annualized return of 10.54%, a five-year return of 7.71% and an 8.57% return over the past seven years, in addition to a 7.85% return since its inception in 1990. In each case, that outperformed the ERS’ benchmark, which returned 8.35% over three years, 6.02% over five years, 7.08% over seven years and 7.71% since inception.

Varela said the pension fund continues to keep pace with three long-term strategic goals. The first is that its returns continue to outpace its benchmark over all longer time horizons. The second is that all long-term horizons continue to display results that exceed broad market benchmarks. The third is that the ERS continues to rank in the top decile for all long-term time horizons among public pensions with at least $1 billion in assets.