Juneau – The Board of Trustees held its quarterly meeting in Juneau and via webinar on February 16-17, 2022, to consider the Alaska Permanent Fund’s second-quarter investment performance, associated capital markets insights, updates on the Public Equities portfolio from internal and external managers, perspectives on risk and associated thresholds, and a discussion on the portfolio’s annual asset allocation.
The Alaska Permanent Fund ended the quarter on December 31 with $82.5 billion. The trailing quarter performance placed the Total Fund below-median relative to other large public funds and above-median relative to a large endowments/foundations peer group. For the quarter, the Total Fund outperformed the CPIU+5% return target but fell short of the Performance and Passive Index benchmarks. Over the 1-, 3-, 5-, and 10-year periods, the Fund outperformed and was ahead of all three targets.
A robust discussion on risk highlighted the importance of this function to provide appropriate signals to the Board of Trustees, especially in instances where exposure levels come close to risk thresholds. The risk overview included a scenario analysis showing the impact of market movements on the Private Equity & Special Opportunities (PESO) allocation weight, a review of two Investment Policy Statement (IPS) limits and the main measures of risk for the Fund. The Board approved a request, extending the existing waiver to operate above the 20% limit (as stipulated in the IPS) pertaining to the proportion of publicly listed holdings within the private equity portfolio for the next 12 months.
APFC’s Investment Advisory Group member, Ken Frier, led a discussion on risk management and highlighted that the risk required to achieve a return of 6% over cash (5% over inflation) is approximately 15%, provided the Fund can realize a Sharpe ratio of 0.40. The 15% would be on the high end of the peer group of large allocators, nearly the risk of a 100% allocation to global equities. It was noted that raising risk usually increases long-term returns and magnifies drawdowns, thus the need for ongoing discipline in overall management practices.
Inflation and Capital Markets Overview
The Board heard about inflation rebounds from APFC consultant Callan. They noted that the COVID-19 pandemic has not had a material impact on their long-run projections, which are much more influenced by GDP, inflation, current yield, and valuations. The recovery to pre-pandemic levels in the Consumer Price Index required a 2.6% year-over-year change.
The headline 7% CPI-U spike in inflation has been expected. It continues to work itself out at different rates and levels of pervasiveness across commodities, materials, goods, manufacturing, and services. Another contributing factor is the current labor market which has suffered significant disruptions over the past two years and will likely take the longest to iron out the kinks.
As part of APFC’s annual preparation of an asset allocation plan, Callan emphasized that Private Equity and Public Equities will continue to be strong in the upcoming year. They recommended that the FY23 strategic target remain consistent with the current Asset Allocation approved by the Board last year, with a 1% increase in the Private Equity and Real Estate portfolios and a 2% decrease in the Public Equities portfolio.
Callan projected that a modest increase in the inflation expectation would result in a reduction in real return projections for all asset classes. Thoughtful discussion was held on adapting long-term investment management under these conditions. No action was taken at this meeting with regard to the asset allocation.
Viewpoint on Public Equities
APFC External Manager, Richard Bernstein Advisors (RBA) shared some insights and investment viewpoints from a macro and global equity strategy. Bernstein highlighted the fundamentals of their portfolio, which focus on Global Profit Indicators, Liquidity, Inflation & Nominal Growth, and market sentiment.
APFC launched its internally managed public equities portfolio in June 2015. Since that time, the internal mandates have grown to comprise 15% of APFC’s largest asset class by value. Fawad Razzaque, APFC’s Director of Public Equities, and Sang Won Song, APFC Portfolio Manager, presented an overview of the internal mandates, an increasingly important driver of APFC public equities’ performance.
At the request of the Board of Trustees, APFC staff worked with Callan to review different types of governance structures that are being utilized across pension, endowment and sovereign wealth funds. Callan’s Chief Executive Officer and Chief Research Officer, Greg Allen, presented the project’s findings.
As part of the Governance review, the Board of Trustees led a thoughtful discussion in which Trustees shared their perspectives on the delegations of authority and appropriate organizational control structures. The Board will be holding a special meeting in the coming month for further discussion on this topic and its relation to APFC’s Governance documents and the search for a new Executive Director. The special meeting will be publicly noticed and posted on APFC’s website once a date and location are determined.
The next regular meeting of the Board of Trustees will be the quarterly meeting on May 18-19, 2022, in Ketchikan and via WebEx. Meeting information can be found at https://apfc.org/the-board-of-trustees/board-of-trustees-meetings/.
Archived video recordings of all Board of Trustees meetings can be found on our website at https://apfc.org/bot-video-archive/.
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