Ketchikan – The Board of Trustees held its quarterly meeting in Ketchikan and via webinar on May 18-19, 2022, to consider the Alaska Permanent Fund’s third-quarter investment performance, associated capital markets insights, asset class updates, and a pacing plan for alternative markets. Updates to the Investment Policy and Governance Manual were also considered and adopted. In his hometown of Ketchikan, the Board and Corporation also took an opportunity to recognize Trustee Bill Moran’s sixteen years of dedicated service to the Fund, the Corporation and Alaska.
Performance
The investment focus of the Permanent Fund has always been targeted to a long-time horizon and measured against established benchmarks. Through the 3rd quarter, the Fund continued to outperform all targets in the 3-, 5-, 10-, and 20-year periods. The Total Fund outperformed the Performance and Passive Index benchmarks for the quarter while underperforming the Total Fund Return Objective of CPIU+5%. The Total Fund ended the quarter on March 31 with a value of $83.4 billion, a decrease of 1.4% from the previous quarter.
“While we are pleased to have continued delivering performance in excess of the Fund’s performance benchmark, the global markets have turned negative in 2022.” Said Marcus Frampton, APFC’s CIO, “Recognizing that this more difficult environment for stocks and bonds may continue, we are focused on maintaining a conservative posture for the Fund.”
Rules-Based System
A legislative update provided as the 32nd Legislative session adjourned, noted that the operating budget passed by the Legislature adheres to principles set forth for the Fund in Board Resolution 18-04: Adherence, Real Growth, Inflation Proofing, and Sustainability. The outstanding royalties that were not appropriated in FY18 and FY19 have now been appropriated to the Principal, a real growth mechanism has been written into the budget to direct additional revenues to the Principal when ANS exceeds $100 a barrel, and FY23 annual Inflation proofing was appropriated to ensure the Principal’s purchasing power is protected. The draw from the Earnings Reserve Account was based on the established 5% POMV methodology and equal to $3.4 billion.
Chair Richards remarked that “the Board of Trustees is pleased and grateful to the APFC professionals and the members of the Legislature that have worked tirelessly to return to adherence of a rules-based system for Fund transfers. With the appropriation of the $200 million in past due statutory royalties and formulaic application of a 5% POMV draw, Alaska’s policy makers are ensuring the success of the Fund for another generation.”
Investment Pacing
APFC staff provided updates to the Board on current portfolio exposure, targets, and projections for the next fiscal year’s activity in the Private Equity and Special Opportunities, Private Income, and Real Estate portfolios.
The pacing includes a plan to invest or commit approximately $1.2 billion under the Private Equity and Special Opportunities Portfolio and $1.1 billion under the Private Income portfolio to a combination of funds, co-investments, and direct investments in FY 2023. Additionally, $700 million was planned for investments in the Real Estate portfolio across the range of property types.
Fixed Income
The Fixed Income team presented an initiative that would realign the asset class back to the bedrock of the overall APFC portfolio by bringing all remaining externally managed assets in-house and moving management of riskier credit assets to the Private Markets group. Additionally, the total Fixed Income portfolio benchmark would be changed to follow a more conservative mandate in accordance with the overall goals for the asset class with the Total Fund. This initiative is expected to save approximately $7.8 million in fees while giving the team more control, increased transparency, and accountability over the portfolio.
Further Board Consideration
The full two-day agenda provided opportunities for APFC’s staff, consultants, advisors, and external partners to also:
- Award Callan, as the successful proposer of a competitive procurement process, with another eight-year contract for general investment consulting services beginning in July of 2022.
- Affirm the FY23 strategic target remains consistent with the current Asset Allocation approved by the Board in 2020, with a 1% increase in the Private Equity and Real Estate portfolios and a 2% decrease in the Public Equities portfolio.
- Enhance the applicability and effectiveness of the Investment Policy by adopting amendments –
o Increasing the leverage limit in the Real Estate portfolio from 40% to 50%
o Removing AUM limits per manager from the Infrastructure, Private Credit and Income Opportunities Portfolio.
o Decreasing the limit on unfunded commitments in the PESO portfolio to 7% from 10%.
o Discontinuing the Alaska Direct Alternative Credit (ADAC) strategy.
o Proposing guidelines for two new internally managed strategies in the Public Equity portfolio.
o Changing protocols and authorities related to the Investment Committee, manager hiring & termination, and alternative assets.
o Updating benchmarks for the Fixed Income, Private Credit and Absolute Return asset classes. - Consider the status and application of proposed legislative policies related to the Corporation and the Fund.
o The operating budget passed by the Legislature follows the established rules-based methodology for deposits to the Principal of the Fund, including royalties and inflation proofing.
o The 5% annual draw methodology based on the averaged Fund value was adhered to promote Fund sustainability and provide $3.4 billion of predictable and stable revenue to the state for the payment of dividends and to support general services. - Authorize the acting Executive Director to expend the APFC budget authorization as appropriated by the Legislature and enacted into law.
The next regular meeting of the Board of Trustees will be the Annual Meeting on September 21-22, 2022, in Anchorage 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/.
###