The Hawai'i Employees' Retirement System, the state's largest pension plan, surpassed its investment target for a third consecutive year as the fund grew by $650 million.

The ERS earned a 10.7 percent return on its investments in the fiscal year ended June 30, fund consultant Callan Associates Inc. reported yesterday. That was better than the 8 percent annual goal set for the $9.85 billion fund.

The pension plan that benefits more than 100,000 state and county workers and retirees has worked to get rid of unproductive investments and investment managers since it lost money in fiscal years 2001 and 2002 and failed to meet the 8 percent benchmark in 2003.

"It's clear evidence of the improved performance," said Callan's Matthew Beck in a presentation to ERS trustees yesterday. He said the gain could be revised upward once real estate appraisals are finished for the fund's properties.

The annual performance overshadowed a decline in the latest quarter, when the April-to-June return fell 0.5 percent. At the start of the three-month period the ERS had been on track for an 11 percent annual increase.

But rising interest rates, declining consumer sentiment and a weaker dollar compared to foreign currencies weighed on the ERS' investments during the quarter. Returns for the ERS investment managers concentrating on large growth-oriented companies; middle-size and small company stocks declined, as did some emerging market investments.

The pension fund invests in a range of vehicles, including stocks, bonds and real estate. The source of its funds comes from the state, counties and their workers. It invests this money so that it has funds to pay retiree benefits.

The fiscal fourth-quarter return was below a benchmark set for itself during the period, though better than the negative 1.44 percent in the Standard & Poor's 500 index.

"Relative to what happened in the market we had a pretty good return," said T. Kimo Blaisdell, ERS chief investment officer.

Bishop Street Capital, a unit of First Hawaiian Bank, has resigned management of $112.5 million of stocks for the state Employees' Retirement System, saying it wants to focus on the fixed-income portfolio it manages for the pension plan.

The ERS trustees voted yesterday to accept the resignation immediately and divide the money overseen among three other current managers. Bishop Street Capital's equity management had performed well in the latest quarter but had been on its "watch list" investment managers for the past five months.

First Hawaiian Executive Vice President Robert Fujioka said the resignation also came after Bishop Street decided to shift strategies with its large-company equity investments, including the one managed for the ERS. Instead, the company is offering strategies from managers such as BNP U.S. Core Growth Equity and Lotsoff Capital Management.

The company said the change won't affect staffing at the Bishop Street unit.

Bishop Street, which actively manages more than $4 billion, will continue to oversee $154.3 million of fixed-income investments for the ERS.

Reach Greg Wiles at gwiles@honoluluadvertiser.com.