The Alaska Permanent Fund has several allocation strategies that it defines as portfolios invested in a variety of asset classes with a similar risk/return profile as the entire plan and strategies that have a specific asset allocation or risk management role and impact the entire Fund. The target allocation for these strategies is 6% and as of June 1, 2017, the value of these strategies was $6.1 billion.
Cash investments play an important role within a well-diversified investment portfolio and serve several purposes including protection against potential future increases in inflation, stability for the portfolio, liquidity, and diversification benefits relative to other assets.
A meaningful cash allocation can help with protecting principal avoiding permanent impairment of capital and growing wealth. Cash provides a firm foundation for a portfolio that allows for allocations to other riskier asset classes that focus on potential growth over time. Additionally, a cash allocation helps the Fund to moderate market downturns without having to overreact to short-term movements in the market which may result in the lure to sell in a panic.
Cash tends to do well relative to other asset classes during of periods of rising interest rates and times of stock market instability. Cash has short duration which makes it less sensitive to changes in interest rates. Additionally, cash is the most liquid security and has the lowest price volatility resulting in a relatively low or negative correlation with equity securities. Nevertheless, cash may underperform in a very low interest rate environment.
Cash is categorized within the tradable income category and generally represents money market investments or fixed income securities with weighed average maturities of no greater than 24 months which a dd stability and diversification relative to other asset classes. The amount of cash held is determined by APFC’s investment goal, time horizon and risk tolerance. Cash is benchmarked to the Barclays 3-Month T-Bills and is managed internally.
REAL RETURN MANDATE
The design of the Real Return mandate consist of partnering with “best in class” institutional asset management firms to be the Fund’s “external CIOs.” There are several objectives related to the Real Return mandate. First and foremost, the external CIOs will strive to produce the Fund’s 5 % real return objective, while operating within the Fund’s overarching risk guidelines. The expectations are that they will produce superior risk-adjusted returns with lower volatility, smaller drawdowns and higher liquidity. The external CIOs are responsible for setting the asset allocation, active risk budgeting and hiring internal management teams.
Another role of this program is the Fund’s ability to build and extend APFC’s investment team beyond the internal staff. Trustees and Staff have the opportunity to work and learn from the external CIOs in many ways: what risks they monitor and how often; their varied approach to asset allocation; and their process of allocating risk between the markets and manager’s skill. Their portfolios consist of investments that spread risk over many different areas, capturing returns from multiple asset classes while reducing volatility of individual return streams. Their primary goal is to create an asset mix that will provide with the optimal balance between risk and return while employing sophisticated analytical tools to properly align an investment strategy.
The managing partners in this program have worked with staff by providing expertise on special projects and topics that include among others:
- Asset allocation modeling
- Expertise in evaluating and managing asset classes and related investment strategies
- FX hedging
- Factor analysis
- Capacity to implement complex investment strategies
- Rigorous risk management analytics
- Robust systems to manage operations
- Internal trading
- Back-office services
- Reporting design
- Experience in managing relationships with investment managers, auditors, custodians, and other service providers
Real return manager’s objective is to outperform CPI+5% overtime and to target a sharpe of 0.5. As of June 1, 2017, this portfolio was 2.4 billion.
As an enhancement to its risk management program, the Alaska Permanent Fund Corporation is implementing an actively managed currency overlay strategy for a portion of its total foreign currency exposure. As of June 1, 2017, the APFC portfolio represented approximately $60 billion in total assets with total foreign currency exposure of roughly $20 billion across its fixed income, public equity, real estate, infrastructure, and private equity portfolios.
The objective of the program initially will be to dynamically overlay approximately $2 billion in total foreign currency exposure allocated roughly in line with the exposures of the MSCI ACWI IMI ex-US index. The limits on the hedging program will range from 0% to 100% of the underlying currency exposure. The program will be actively managed, and will be primarily focused on risk mitigation, meaning that it is expected to add to return during periods of weak foreign currencies, while detracting as little as possible from return during periods of strong foreign currencies. Currently this program is managed by a single manager.