Empirical evidence shows that Public Equities investment outperformance is challenging to generate and sustain long-term. It requires a certain degree of skill, market perspective, and time. As with all of the Alaska Permanent Fund Corporation’s asset classes, the key objective of the Public Equities portfolio is to outperform its benchmark over time and across market cycles. Investing for the long run enables the Corporation to design and implement well-thought-out strategies and then let them play out over several years.
Over the past ten years, Fawad Razzaque, APFC’s Director of Public Equities, has been progressively incorporating more active management externally and internally throughout the portfolio to optimize its long-term returns. A key part of the management strategy is gauging market conditions and assessing how much risk is appropriate and where to allocate that risk budget. “If you’re too conservative, you could be leaving some returns on the table,” Fawad recognized, “if you’re too aggressive you are taking too much risk, and it may come back to bite you. There’s a fine line in between.”
Building capacity in Juneau
APFC was established in 1980 to manage and invest the assets of the Permanent Fund. By the mid-1980’s, the Corporation had begun to diversify from solely investing in US Treasuries and corporate bonds. Today in 2022, the assets are invested across eight classes comprised of public and private securities. Building up institutional knowledge, experience, and stability in APFC’s investment teams over the years has been essential to the Fund’s growth. “APFC has built a very good team,” says Fawad, “the people who drive the returns really care about the Permanent Fund’s performance. To them, it’s not just a job – but a passion.”
Though he wakes up at 5:30 am to monitor the markets as they open in New York, Fawad finds APFC, and Juneau, a great place to work. Like many others in town, he prefers the quiet natural beauty of Alaska’s Capital city.
Since its establishment, the Public Equities team has been small; however, they have always made a big impact. Often staffed with the Director and an analyst – in 2020, it was down to just Fawad, with CIO and Board oversight, who was responsible for managing one of the Permanent Fund’s most valuable asset classes. Over the past year, the team has started to grow again, with quantitative analyst Sang Won Song being brought on as a portfolio manager and long-time APFC staff member Joe Shinn as a portfolio analyst.
Someone walking into APFC’s office in Juneau, Alaska, might not believe that there is a team there actively managing billions of dollars of investments in the stock market. Opposite of most movies that depict a trading room as full of noise and commotion, APFC’s team calmly and competently discusses their work while drinking tea. Along with managing their internal portfolios, the team accomplishes a lot from the Juneau-based headquarters, actively communicating with their external portfolio managers on Wall Street and in financial centers around the world, including London, Sydney, and Shanghai. These calls take place regularly to ensure the external managers stay true to their investment strategy, philosophy, and process, as fiduciary partners for Alaskans.
Inside looking out
Since joining APFC in 2012, one objective for Fawad has been to optimize the external management program by partnering with active external managers who could generate positive returns and, in the aggregate, maintain the stability of the targeted return profile over time. Overall, in the ten years he has been at APFC, Fawad has added 24 new external managers. This effort has helped increase APFC’s Public Equities active exposure to about 66% while lowering the risk by reducing the total amount allocated to each mandate from around $1 billion in 2012 to $500 million in 2022.
“You should only do things you think you can do better than the index; otherwise, you could just follow the index,” says Fawad, “That’s why you choose managers who you believe can do better than the index, and that’s why you pay the fees for that advantage.”
Despite APFC’s overall increase in external managers over the years, the amount of fees paid by the Corporation has remained about the same. This is because most managers receive performance-based fees – meaning if they beat the benchmark objective, they earn higher fees, but if they do not hit their established goals, they receive considerably reduced or no compensation.
At the same time as Fawad was expanding APFC’s external active management, he began looking to the Corporation’s internal capacity as well. In 2015, with about $300 million, Fawad established the Fund’s internal Tactical Tilt portfolio.
Unlike the work being done by external managers, the Tactical Tilt strategy is not about picking individual stocks. Instead, its stock selection is exposed to a set of factors – geographical, sector, or style. This top-down approach is implemented through Exchange-Traded Funds (ETFs), which hold a basket of companies and provide strategic exposure in a desired area compared to a benchmark. The Tactical portfolio is now seven years old and has grown from its initial 1% to nearly 10% of the total Public Equities portfolio.
Over the past five years, and even through the recent downturn in public markets, the Tactical Tilt strategy has continued to significantly outperform the Global Equity benchmark. It has been the highest alpha-generating strategy of the portfolio over the same time period. Actively managing the Tactical Tilts strategy has sharpened the focus of APFC’s Public Equities portfolio and enhanced the allocation through the balance of internal and external management.
Structured for success
The scale, structure, and long-term investment horizon of the Corporation differentiate APFC’s institutional investment approach from individual investors. The longer time horizon increases the ability to generate more money over time through compounding and appreciation. This also means that when markets go down, APFC is not thinking about selling to protect the Fund today but instead buying for the future.
The risk tolerance of APFC, as an institutional investor, also plays an essential role in its success. Ensuring that the returns are commensurate with the well-defined risk metrics is necessary. With minimum and maximum thresholds set by the Board, APFC investments are only allowed to drift a certain amount from the benchmark.
Since the goal is not to take considerable risks to achieve the highest returns but instead to maximize risk-adjusted returns compared to the benchmarks, APFC employs several strategies to outperform the benchmark while reducing the portfolio risk. The benchmarks APFC follows are comprised of indexes, and through internally actively managed portfolios, the Corporation uses ETFs to diversify, lower costs, ensure liquidity and reduce risks. “They are the same ETFs that anyone can buy,” says Fawad, “It’s what you buy, when you buy, how much you buy, and how you change your allocation mix over time, which makes a difference.”
For the long-run
The internally managed program has been continuing to expand with the recent inception of a low price-to-earnings portfolio and low volatility US domestic portfolio, and nearly 15% of the total Public Equities portfolio is being internally managed today. In the future, Fawad hopes to gradually grow the internal program up to around 25%, to better complement the decisions made by external managers.
“Public Equities as the largest asset class and one of the most volatile is a critically important area for APFC staff to optimize as we seek to drive value and performance for the Fund’s stakeholders,” says APFC’s Chief Investment Officer, Marcus Frampton. “Over the past several years, Fawad and his team have added substantial value over passive indices both in strong up markets, like 2021, as well as in very difficult markets like March 2020 and 2022 year-to-date. This is an accomplishment that few investors are able to achieve.”
Fawad says he is grateful to have had the opportunity to contribute to growing the Fund for the benefit of all Alaskans. After ten years under his stewardship, the portfolio has increased from around $17.2 billion to nearly $30 billion. Even though the portfolio performance has exceeded his expectations over the past five years, Fawad feels there is still more to do. “A lot of things are not in your control,” he says. “But the question is, have you done the best you can with what is in your control? I feel fortunate that, on the whole, things have been good.”