Hawaii’s largest public pension fund rode the U.S. bull market to a strong finish during the final three months of 2019.

The state Employees’ Retirement System fund achieved a 3.6% return in its fiscal second quarter to boost its assets to a record high of $17.98 billion, according to a report presented to ERS trustees Monday by its investment adviser, Meketa Investment Group. Halfway through fiscal year 2020 the fund is up 5.3% — a pace well ahead of its 7% annualized long-term return target needed for the fund to meet its financial obligations.

For the 2019 calendar year, the ERS pension fund jumped 15.7%.

“We’re understandably pleased with the quarter’s investment performance but … our eyes and efforts are focused on the long term,” ERS Executive Director Thom Williams said in an email. “We look much further down the road. Quarterly results are like passing roadside scenery, interesting but potentially distracting.”

The pension fund, which provides retirement, disability and survivor benefits to 125,589 beneficiaries, has been under the microscope in recent years as its shortfall climbed to a record $14.08 billion as of June 30. Its funded ratio — what is needed to meet future pension obligations — is at 55.2%.

But legislation passed in 2017 to close funding shortfalls is expected to make the pension fund whole by June 30, 2045, due to state and county employers increasing their contribution percentage over a four-year period.

In the October-December quarter, the pension fund beat its policy benchmark return by 0.2 percentage points — 3.6% from 3.4% — and over the last year is up 2.9 percentage points over its benchmark — 15.7% from 12.8%. The policy benchmark is a composite of various market-sector returns that are meant to emulate the investments in the ERS portfolio.

The pension fund, which is designed to minimize risk, trailed its peer funds with $1 billion or more in assets by 1.4 percentage points last quarter (3.6% to 5%) and by 1.5 percentage points (15.7% to 17.2%) over the last 12 months.

ERS Chief Investment Officer Elizabeth Burton said the pension fund’s outperformance over its benchmark has been driven primarily by its staff’s ability to select top tier managers, execute investment ideas and take modest overweight and underweight positions in its holdings. Consequently, Burton said its underperformance in a bull market against the ERS’ peers has performed as expected.

“Our explicit risk focus which employs, among other strategies, low volatility equities and our Crisis Risk Offset strategies, is designed to protect in negative markets — but there is no free lunch,” Burton said in an email. “This means in strong equity markets we will likely underperform peers slightly, as expected. We believe managing volatility and preserving our asset base is the best way to maintain our path to full funding. We do not know what 2020 and beyond will look like, but we are very pleased that almost all of (our) underlying portfolios are outperforming their benchmarks.”

The pension fund’s performance last quarter and over the last 12 months has been powered by its broad-growth stocks, which returned 6% and 18.8%, respectively. Broad growth represented 71.6% of the pension fund in the October-December quarter and 70.5% over the last 12 months.

“The consultant report shows how strong we have performed, particularly versus our benchmark,” Burton said. “While 2019 in retrospect seemed rosy, there were pockets of volatility — and yet we outperformed our benchmark by a tremendous 300 basis points (3%).”

Burton said the ERS staff has been “actively stress testing the portfolio to assess potential impact” of the coronavirus, while as far as the elections are concerned, the focus has been on “the fundamentals.”

“We adjust our investment decision-making to reflect market conditions, not political outcomes,” Williams said.

President Donald Trump has been clearly focused on the U.S. economy and the stock market and Williams said he expects that to continue through the rest of this year.

“I suspect the administration will seek to maintain the positive economic growth and stock market momentum we’re presently experiencing,” he said. “That said, I revert to the traditional wisdom which suggests in matters of the markets, we should expect the unexpected.”