Hawaii Public Pension Fund Faces Worst Quarterly Loss in Years

Posted on 07/18/2020

Hawaii Employees’ Retirement System (ERS) has been operating since 1926. It now has 126,000 retirees on its rolls. It pays out US$ 1.4 billion to them annually. The Executive Director is Thomas Williams. Williams worked to calm pensioners after it was announced that ERS was devastated in the first three months of 2020. ERS counts this as the third quarter of the fiscal year. Investments were down 9.5% and overall assets declined by US$ 1.8 billion. The next quarter’s numbers may show a rebound due to a rising stock market, and will be disclosed in or slightly before September. On the illiquid assets front, Hawaii ERS is concerned about its real estate allocation as the COVID-19 situation is impacting real estate markets in ways such as the concern of rent collection or requests for deferrals. The pension’s retail and hotel investment are a risk for the pension investor. Luckily, real estate still remains a small part of the pension’s overall portfolio at less than 4% according to recent public documents. At the end of 2019, Hawaii ERS had just under US$ 1 billion allocated to systematic trend following strategies, another type of hedge fund allocation. Some investments that were impacted in 2020 were the pension fund’s allocation to the Campbell Core Trend Fund, Aspect Core Fund, and the AlphaSimplex ADP Trend Fund. The pension withdrew US$ 325 million from its crisis risk offset allocation asset class in March 2020.

Assets under management heading into the second quarter were tallied at US$ 16.2 billion, noted the fund’s hometown paper Honolulu Star Advertiser, which keeps close tabs on the fund. The Star commented, “It was the largest percentage drop for investments since the third quarter of 2002, when the fund lost 9.7%, and the fourth-largest decline since the third quarter of 1990, when it fell 7.6%.” The loss of US$ 1.8 billion in Q1 2020 is another straw that can be added to the US$ 14.08 billion shortfall ERS identified in 2019. Expected returns of 7% are now appearing to be overly optimistic. The fund was 55.2% funded at year-end 2019.

ERS put out a statement answering common questions, including whether the fund would run out of money. The answer: “No, the ERS will not run out of funds to pay retirement benefits to its current retirees and active members. The ERS investment fund is constructed to modify and adjust over time.” Chief Investment Officer Elizabeth Burton wrote in an update: “We have a very liquid portfolio, with about 75% of our total assets liquid within three trading days versus peers who range from having only 33% to 64% liquid.” Burton is wary of having to sell assets at depressed prices, which she has avoided in 2020.

Investment strategies are set to include an emphasis on supporting Hawaiian enterprise. Williams wrote: “To the extent we can invest locally and support economic recovery we will do so, recognizing that what’s good for our State is good for us and for you.” Hawaiian business leaders have been rallying at the state capital building for more commerce. As in other states, worry is mounting that unemployment benefits are not funded and cannot be paid back if borrowed. Hawaii has a US$ 900 million loan from the federal government currently.

Challenges lie ahead due to a general lack of funding in the state. Hawaii’s Tourism Authority says tourism is its largest single source of private capital, bringing in US$ 17.75 billion per day. Statewide, US$ 48.6 million is spent per day in normal times. The latest numbers coming in are that tourism is down at least 50% in 2020. Bloomberg puts the number as high as 95% in some areas, calling them “deserted.” Tourism will not be fully reopened in the state until certain criteria are met according to the state’s health experts, and those criteria are unfortunately not looking likely to be fulfilled in the near future.

The top four equity holdings at ERS are Microsoft Corporation with 326,027 shares, United Health Group with 163,501 shares, Apple with 149,763 shares, and HCA Healthcare with 268,947 shares.

Keywords: Apple Inc., Hawaii Employees Retirement System (Hawaii ERS).