The Alaska Permanent Fund Corporation’s long-term goal for the Fund is to achieve an average real rate of return of five percent (CPI+5%) or better. It is recognized that there may be years, or a period of years, when the Fund does not achieve this goal followed by years when the goal is exceeded. Yet, over one or more business cycles the Board seeks to achieve an average annual real rate of return of at least CPI+5% at risk levels broadly consistent with large public and private funds. To do this, APFC must identify, measure, and manage the risks it faces, using various approaches.
The Fund’s risk profile is primarily determined by the composition of the Board’s investment allocation. While the Fund targets equity risk as the dominant driver of returns, other risk factors including interest rate, credit, liquidity and foreign exchange are also targeted to deliver a diversified aggregate return profile.
The Alaska Permanent Fund Corporation categorizes the principal risks entailed as follows:
MARKET RISK: the possibility of loss from changes in value of financial instruments, resulting from an adverse change in market factors. (equity risk, interest rate risk, currency risk).
CREDIT RISK: the risk of economic loss that might arise from the failure of a counterparty to fulfill its contractual obligations.
LIQUIDITY RISK: the possibility investments cannot be traded at fair value and/or funds cannot be raised, at reasonable costs, to meet obligations.
INFLATION RISK: the potential loss of purchasing power due to the value of investments not keeping up with an increase in prices.
OPERATIONAL RISK: the risk of loss resulting from inadequate or failed processes, people, or systems, either internally or externally, and unexpected significant and unusual one-time events.
The risk management process is enabled by a combination of experienced staff, quantitative tools, collaborative investment processes and robust control frameworks. While diligent investment teams form the first line of defense, independent risk and control functions further strengthen the risk management framework. Some of the risk parameters monitored include value at risk, tracking error, Sharpe ratio, stress & scenario impacts and concentration levels. Staff monitor and report quarterly on risk assessment to the Board of Trustees.
The Board has defined and approved an Investment Policy Statement, including guidelines to clearly delineate the amount of absolute and relative risk the Staff may take to achieve the investment objectives.