There was political uncertainty and a spike in COVID-19 cases.

But the state’s largest public pension fund, with more than 140,000 members and beneficiaries, overcame those head winds in the July-September quarter and posted a 5.3% investment return to begin a new fiscal year on a strong note, according to a report presented to ERS trustees last week by investment adviser Meketa Investment Group.

The state Employees’ Retirement System portfolio — which includes contributions and distributions — rose by more than $900 million to finish the quarter that ended Sept. 30 at $18 billion and mark its second robust quarter in a row after posting a 6.2% return in the quarter that ended June 30.

“I am very pleased with the fund’s 5.3% return for the quarter,” ERS Executive Director Thom Williams said in an email. “This positions us well to achieve our target annual return (of 7%) but the markets are known to surprise. Considering our purposeful portfolio construct and market conditions, the fund is performing pretty much as expected. Notably, our longer-term 5 and 10 year returns meet, and even modestly exceed, our target.”

Over the last five years, the pension fund has averaged an annual return of 7.9%, and over the last 10 years has an average return of 7.8%.

“There are always areas of the portfolio we would like to improve, like any institutional investor, but we are producing strong results across time periods,” ERS Chief Investment Officer Elizabeth Burton said.

Last quarter, the pension fund exceeded the median return of its peer funds with more than $1 billion in total assets. The peer return was 5%.

The pension fund’s broad growth category, which makes up 76.2% of the overall fund, rose 6.8% last quarter while a subset of that category, private growth, rose 10.8% and another subset, public growth, increased 7.1%.

Even though the pension fund is well on its way to achieving its 7% annual target, Williams said the path may not be easy.

“Based on near-term capital market forecasts it’s going to be a challenge, but our focus is squarely and consistently on the long term,” he said. “Fundamentally, achieving a 7% average annualized return isn’t the hardest part. The challenge as a public pension plan is to do so while attaining an acceptable and appropriate level of risk and diversification, amortizing an unfunded liability of over $14 billion and honoring our commitment of lifetime income to over 140,000 members and beneficiaries.”

The pension fund had a $14.08 billion shortfall entering the 2020 fiscal year, which began July 1, 2019, and its actuary, Gabriel Roe­der Smith, projected in January that it would take until June 30, 2045, for it to become 100% funded. That forecast was predicated on the fund averaging a 7% annualized investment return and on legislation passed in 2017 to close funding shortfalls by having state and county employers increase their contribution percentage over a four-year period. At the start of the 2020 fiscal year, the portfolio was only 55.2% funded. Gabriel Roe­der Smith won’t finalize its numbers and forecast for the fiscal year that ended June 30 until January.

“The liability side of our balance sheet is relatively well understood,” Williams said. “It is responsive to benefit adjustments, either up or down. The Legislature made a commitment most recently beginning in 2017 to increase employer contributions to a level deemed sufficient to fully fund our plan within the parameters set in statute. To date, that commitment has been met.”

“Continuing to do so is particularly challenging during periods like the present and we understand that,” Williams added. “So long as our contributions are not materially impaired I am confident that we will be able to achieve our goal.”

Williams said the pension fund’s performance is affected more by its long-term strategic asset allocation and selection of investment managers than any episodic events.

“Questions about COVID’s global economic impact and the outcome of the U.S. presidential election served to increase overall market volatility,” he said. “We monitor actual results and impacts and model a variety of outcomes for each. COVID- related market dislocations and election outcomes create tactical opportunities around the margins.”

Burton echoed that sentiment and said the performance of the U.S. equity market is unlikely to be so much influenced by who is president, but more by who is holding the local positions — such as mayor, school superintendent, police chief, etc. — due to the differing reopening policies.

“Much of the performance of the United States will depend upon the extent to which we can get back up to full capacity quickly (full capacity meaning 2019 levels), and that is very much localized,” she said. “Therefore, it is hard to predict what the outcomes will be when one considers rolling each county, city, state up to a national level.”

Williams said the prospect of a divided government under President-elect Joe Biden suggests nothing dramatically different from has been the recent norm.

“One might expect an emphasis on controlling the pandemic, preserving and expanding health care, a new round of fiscal stimulus and investment in infrastructure,” he said. “Each would support economic recovery. I’ll note however that business cycles and market repricing tends toward non-partisanship and relies more heavily on fundamentals.”