Juneau – The APFC Board of Trustees held its quarterly meeting in Juneau and via webinar on December 7-8, 2022, to review the Alaska Permanent Fund’s first-quarter FY23 investment performance. The Board held discussions on capital markets insights, staff recruitment and retention efforts, insights into the Infrastructure portfolio from internal and external managers, perspectives on risk, and a look ahead to the upcoming portfolio’s annual asset allocation.
Quarter-end financial results
Financial results for the first quarter of FY23, ending September 30th, 2022, showed the Total Permanent Fund portfolio with $73.3 billion in assets, a decrease of 3.8% for the quarter. Despite the downturn, the Total Fund outperformed the performance benchmark by .16% and the passive benchmark by 3.17%, though with persistent inflation, it underperformed the long-term objective of CPI + 5% benchmark. Over the 10- and 20-year periods, the Fund outperformed and was ahead of all three targets. The Fund also saw a year-to-date realized statutory net income of $518 million.
Given the Fund’s current two-account structure, the Principal can only grow through royalty deposits, special appropriations, and annual inflation proofing. During the first quarter of the fiscal year, $369 million of mineral deposits were made to the Principal, which included $200 million for FY18 & FY19 deposits. Inflation proofing has been appropriated for FY23, and the final amount will be calculated at the end of the year.
Investment opportunities and obstacles
APFC’s Chief Investment Officer, Marcus Frampton, presented interesting ideas for retaining investment personnel, portfolio performance and positioning, views on asset allocation, private markets pacing, and other investment actions taken during the quarter.
CIO Frampton led the discussion on a hypothetical lower-risk portfolio construction in anticipation of Callan’s Asset Allocation review, which generally takes place at the Board’s February 2023 meeting, and the development of the Board’s Investment Policy Statement at the May meeting.
Incentive compensation Policy
Top-level talent recruitment and retention continue to be a priority for the APFC Board of Trustees. In FY23, the Board and the Compensation Committee directed staff to expand the existing Incentive Compensation Plan to include operations staff and to make certain modifications as recommended by the CIO.
Changes to the existing policy were adopted by the Board for implementation in the future. A provision was also eliminated where bonuses were zeroed out in a year with a negative Total Fund return. There is Board support to retroactively apply the elimination of the zeroed-out provision to FY22, where APFC’s investment staff significantly exceeded benchmark returns despite ending the fiscal year with a slightly negative return.
At the Board’s request, a review was conducted on the peer group benchmark established in Board Resolution 18-02 and used to set APFC staff compensation. The process was intended to gain a more robust understanding of the ongoing work and identify the most accurate compensation benchmark for APFC staff. The Board will continue this effort with the selected peer group and review the resulting data at a future Board meeting.
Perspectives on Risk
A robust discussion was held highlighting the significance of preservation of the Principal, paramount to risk management, and the importance of being risk aware over risk averse. Further discussions maintained that a defined risk appetite was as important as a target return when formulating an investment strategy.
Through attractive levels of current income and capital appreciation, APFC’s Infrastructure portfolio generates a return between one expected for public equity and fixed income. Ross Alexander, APFC’s Infrastructure Portfolio Manager, provided the Board with an update on the portfolio, an overview, and APFC’s approach to the asset class. Infrastructure partner Stonepeak Partners reviewed infrastructure markets broadly and their firm’s strategies within the market. Energy infrastructure partner EnCap also spoke to the Board, sharing their perspectives on the infrastructure asset class as a whole, the midstream oil and gas markets, and energy transition markets broadly.
At the recommendation of the Governance Committee, the Board will move ahead with the procurement of an independent third-party consultant to complete a review of the Corporation’s governance charters. This process is normally scheduled to occur at least every three years to ensure that their policies remain aligned with best practices. The last review was conducted by APFC staff and the Board in 2020.
Communications and IT Overview
At the two-day meeting, the Board heard from APFC’s Communications team, who led a discussion on upcoming opportunities for outreach and engagement and strategies for Legislative monitoring. APFC’s IT shared a report on recent advances in the Corporation’s IT workplace modernization efforts.
The next regular meeting of the Board of Trustees will be the quarterly meeting on February 15, 2022, in Juneau and via WebEx. Meeting information can be found at https://apfc.org/the-board-of-trustees/board-of-trustees-meetings/.