Trustee Jason Brune has been appointed by Governor Dunleavy to the four-year public seat on the Alaska Permanent Fund Corporation’s Board of Trustees. We welcome the continuation of Trustee Brune’s support of APFC and the investment of Alaska’s largest renewable financial resource.
We also extend our sincere appreciation to outgoing Trustee Steve Rieger for his dedicated service to generations of Alaskans in stewardship of the Permanent Fund.
The Alaska Permanent Fund Corporation is moving forward with a long-standing policy decision to open a satellite office in Anchorage as soon as possible to support the retention and recruitment of professional staff.
Recruitment and retention have been challenging for many employers, including APFC. Opening an additional office in Anchorage, the state’s largest city will broaden the playing field by providing another option for potential employees.
APFC is in the process of securing space in the Cordova Building located in downtown Anchorage.
We look forward to this new opportunity to recruit and retain world-class talent in Alaska.
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The Board would like to ensure Alaskans that APFC is committed to generating a maximum risk-adjusted return to benefit generations of Alaskans through prudent investments across a number of asset classes. Despite difficult market conditions, the Fund has earned positive returns this calendar year.
Alaskans may not realize that the Earnings Reserve Account supports inflation-proofing the Principal for the future and currently supports more than 50% of the state’s operating budget to support essential services and programs, including the dividend program, through the annual percent of market value draw.
In anticipation of a market cycle such as the one we are currently in, the Board of Trustees has been on record for more than 20 years to transition the Fund from its current two-account system to a one unified account system, which would protect the intergenerational sustainability of the Fund to provide for all generations.
The Board of Trustees held a meeting in Anchorage and via webinar on July 12, 2023, to hear updates on portfolio activity, discuss the Anchorage office proposal, review the updated Personnel Management Plan, interview and select an Investment Advisory Group member, and further a strategic planning initiative.
Financial results for the first two months of the fourth quarter were reflective of ongoing market volatility. As the fiscal year has recently ended on June 30, the financial and performance results will be presented at the annual meeting in September once the independent audit and performance reporting are complete.
Given the current high inflationary environment, relatively flat markets, and lower gain realizations, the Board expressed interest in evaluating and addressing the dual issues of how to balance ERA durability in providing an annual draw for state revenue with the need to inflation-proof the Principal to preserve purchasing power and ensure intergenerational benefit. The Board approved staff to develop a Trustee Paper to address some of these issues as an effective tool to inform ongoing conversation and policy dialogue related to the Alaska Permanent Fund.
The Board reiterated its aim to establish an APFC satellite office in Anchorage to support the retention and recruitment of professional staff. In full recognition of the Board’s direction, staff will continue to work to ensure successful implementation including a timeline and process to bring forth funding, while addressing details essential to guaranteeing operational and staff success.
The Corporation’s Personnel Management Plan (PMP) was reviewed as an essential document for ensuring that policies are in place to align with organizational culture and the expectations of accountability for a public corporation. An essential element of the PMP is compensation and salary structure. APFC strives for competitive pay and compensation decisions rooted in a multifactor review of each candidate/staff member. The Board will establish a working group to bring forth pay band compensation recommendations to inform the budget process in September. The same group will also assess alternative work policies outlined in recognition of the modern workplace.
The Board selected Britt Harris, Acting CEO of Texas Permanent School Fund Corporation and Former Chief Executive Officer & President of UTIMCO, to join APFC’s Investment Advisory Group. The purpose of this group, consisting of three advisors, is to provide Trustees with further insights and professional knowledge in the areas of investment management based on proven experience.
Looking forward, the Trustees directed staff to coordinate a strategic planning session in the coming months to ensure alignment in direction.
The Board will be holding a budget work session on September 7 in Juneau. The Annual Meeting of the Board of Trustees will be held on September 27-28 in Anchorage.
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The Alaska Permanent Fund Corporation’s (APFC) Board of Trustees will hold a regular meeting on July 12, 2023 from 8:30 am – 4 pm in Anchorage (for location, please see the agenda) – The public is invited to attend this meeting in person, via Webinar (information listed in the agenda below), or telephonically.
Please see the agenda for more details.
Tatum Hines – Finance
Ellie Knapp – Investments
We are delighted to have two fellow Alaskans join us as our 2023 summer interns. We look forward to supporting your learning experience in stewardship of the Alaska Permanent Fund.
HR Director Chad Brown shares, “The intern program here at APFC is something we’re incredibly proud of. It provides a truly unique learning experience to work with world-renowned professionals and positions students for future success while doing work that benefits all Alaskans.”
Kenai-Soldotna – The APFC Board of Trustees met in Kenai-Soldotna and via webinar on May 17-18, 2023 to adopt an update to APFC’s Asset Allocation and Investment Policy. Additionally, the Board discussed relevant risk parameters, the Private Equity asset class and private market pacing, the FY23 and FY24 operating budgets, an analysis of opening an APFC office in Anchorage, and consideration of Governance Committee recommendations.
The Permanent Fund finished the quarter ending March 31 with $76.5 billion and a year-to-date return of 3.12%. Statutory net income through the same period is $1.6 billion, which is significantly below Callan’s low forecast and nearly $3 billion below the level at the same time in the prior year.
The Alaska Permanent Fund Corporation’s (APFC) Board of Trustees will hold an Audit Committee Meeting and a regular Quarterly Meeting on the following dates:
May 17, 2023 – Audit Committee Meeting – 8:15-10:15 a.m. – The public is invited to attend this meeting in person, via Webinar (information listed in the agenda below), or telephonically.
May 17-18, 2023 – Quarterly Meeting – (times vary, see agenda) – The public is invited to attend this meeting in person, via Webinar (information listed in the agenda below), or telephonically.
Please see the agendas for more details.
May 17, 2023 APFC Board of Trustees Audit Committee Meeting Agenda
May 17, 2023 APFC Board of Trustees Audit Committee Meeting Packet
May 17-18, 2023 APFC Board of Trustees Quarterly Meeting Agenda
May 17-18, 2023 APFC Board of Trustees Quarterly Meeting Packet – Revised
If there were a risk-free investment allocation in which the Alaska Permanent Fund could achieve its long-term return objective of 5% plus inflation, the Fund’s investment management would be relatively straightforward. Realistically, it is not possible to achieve this targeted return safely through any single investment or asset class.
Before the 1980s, governments generally had more regulations related to investment options for their public funds. In the 1950s, with higher interest rates and bond yields available, more than 95 percent of public fund investments were in fixed income and cash. In the late 1980s and 1990s, as it became more difficult to achieve targeted returns through only fixed income, governance restrictions relaxed and funds transitioned portfolios from solely fixed income to include stocks. By the 1990s, the average fixed income allocation had decreased to nearly 45 percent, and other more risky assets were included. By the 2020s, the average public fund portfolio held approximately 23 percent of fixed income and cash assets.
Portfolio Progression
Investment strategy for the Alaska Permanent Fund has mostly followed that same path over the years. When first established in 1976, the Fund was invested in only one asset class, US treasuries. When APFC was created to manage the assets in 1980, the Corporation worked with the State Legislature to identify in statute the allowable investments for the portfolio.
In 2005, as the Fund grew, the Legislature put more trust in the Corporation to make sound financial decisions by following the prudent investor rule. With the increased latitude provided to the Board, they began to develop a more diversified and sophisticated portfolio, including traditional and alternative assets, intended to generate higher returns associated with higher risk.
Informed by advice from staff and investment consultants, the Board of Trustees maintain a long-term, 10-year horizon when making allocation adjustments every year as part of their annual Investment Policy review. To best protect the Principal and diversify the portfolio to maximize risk-adjusted returns over time, APFC’s Board of Trustees considers all possible portfolio construction options.
APFC portfolio construction over time
“Over the history of the Corporation, the Board has built an increasingly diverse Fund portfolio to maximize returns while remaining conservative enough to protect the Principal, our primary duty. Maintaining a long-term perspective helps ensure that the modest portfolio adjustments, thoughtful guidance, and direction we develop will consistently support the Fund’s ability to generate a valuable return for Alaskans,” observes Board of Trustees Chair Ethan Schutt.
Portfolio Optimization and Implementation
Since target asset allocation changes aren’t made in reaction to daily market news, as investment managers of the Permanent Fund, APFC remains focused more on improving execution rather than predicting what markets might look like over the near term. Execution describes APFC’s pursuit of individual strategies with discipline and skill, such as backing alternatives’ managers with specific characteristics based on rigorous analysis, or maintaining strong underwriting discipline on new real estate acquisitions.
The practical approach to implementing a strategic asset allocation is the responsibility of APFC’s Chief Investment Officer, Marcus Frampton, who starts with a theoretical exercise called portfolio optimization.
“Optimization is a complex statistical process that models a variety of portfolio options with different characteristics against predicted future returns,” explains Marcus, who uses the tool to produce a type of chart called an efficient frontier. The efficient frontier projects the maximum expected returns for various portfolios at any given risk threshold. Each asset class has three variables used for optimization; expected return; standard deviation – a measure of volatility; and correlation to each asset class included in the optimization.
The theory for the efficient frontier is attributed to Harry Markowitz, an economist awarded the Nobel Prize for his revolutionary work developing the Modern Portfolio Theory. Markowitz’s strategy recognized that the performance of individual assets within a portfolio was not necessarily as important as the performance or composition of the total portfolio. Markowitz said, “A good portfolio is more than a long list of good stocks and bonds. It is a balanced whole, providing the investor with protections and opportunities with respect to a wide range of contingencies.”
Defining the parameters used for optimization takes considerable experience, skill, and access to good data. Based on the investor’s views on market conditions and asset class characteristics, the optimizer uses historical performance, cyclical business activity, and future projections to generate an outlook for a portfolio’s characteristics.
Another calculation APFC uses to model projected returns is the Shiller PE Ratio. It considers the valuation of a stock or a market versus its earnings, adjusted for the business cycle over a 10-year period. The long-term perspective of this measurement helps smooth out short-term volatility fluctuations giving investors a better understanding of the current value of an individual stock or the overall market.
Conservative positioning
The Shiller PE Ratio shows that the stock market is currently considered expensive by historical standards. The Shiller PE levels that have prevailed in the past few years have only been seen twice– in 2000 and 1929. Significant market disruptions and large economic recessions followed both of those years.
“As far as I can tell, virtually everyone in the industry has progressively built riskier and riskier portfolios over the last 20 years,” says Marcus Frampton. “I can’t think of a single major plan that reduced risk during my professional career.”
Having recently been in a bull market that lasted more than ten years, many economists and governments predict a recession within the next year. Frampton believes that certain asset classes will be impacted more than others and that public funds, especially those that experience higher than tolerable losses in the next cycle, will move towards more conservative portfolios.
Despite the industry-wide trend to shift towards more risky assets, over the past five years, APFC has attempted to err on the side of conservatism. For example, the Corporation has materially reduced annual commitment volume to riskier areas such as private equity and infrastructure investments.
“Swimming against the current for the last five years, I’m surprised that we’ve had as strong of relative performance as we have,” says Frampton, “We’ve generally held extra cash cushion in our portfolio and maintained discipline in the annual deployment to riskier areas. I believe we can continue to deliver performance in excess of our benchmark and top quartile among peer plans through strong execution.”
Through a well-positioned portfolio, invested across eight diverse asset classes, Frampton and his team continue to identify investments with expected returns that meet the Fund’s long-term objectives. With the diversified portfolio, the Fund has also felt less impact from increasing interest rates over the past year. Furthermore, the Fund’s allocations to gold and other real assets are expected to help protect it from the long-term impacts of inflation.
“With the strategy that we’ve developed,” says Marcus, “I believe that the Fund can stand out as a top-performing institutional investor even in quite difficult market scenarios.”
Anchorage – The Governance Committee of the APFC Board of Trustees met in Anchorage and via webinar on May 9, 2023, to consider the initial recommendations of a contracted third-party advisor’s review of APFC’s governance policies.
The purpose of the review by Funston Advisory Services is to ensure that the Board’s existing governance policies remain consistent with best governance practices for an endowment fund of similar size and purpose to the Alaska Permanent Fund (Fund).
The Funston Advisory Services Group identified and recommended practical improvements to the governance policies that guide how APFC conducts its business; sets direction and delegates authorities; approves key decisions; oversees the execution of its direction within the policy; and verifies the reliability of the information it receives and it reports to stakeholders.