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Sovereign Wealth Funds

Alaska Permanent working with another wealth fund to develop emerging markets equity fund

The Alaska state flag flies at the Robert B. Atwood Building in Anchorage.

Alaska Permanent Fund Corp., Juneau, is partnering with another sovereign wealth fund to develop a closed-end emerging markets equity fund that will trade on the New York Stock Exchange and the Abu Dhabi Securities Exchange, said Russell Read, chief investment officer for the $64.5 billion sovereign wealth fund, speaking Thursday on a panel at the Pension Bridge annual conference in San Francisco.

The emerging markets equity fund will be focused on investing in high-growth markets with high population growth, Mr. Read said. He did not name Alaska's sovereign wealth fund partner.

Overall, Alaska Permanent officials are looking to form more partnerships with other asset owners, including U.S. pension plans and money managers, Mr. Read said. He said forming partnerships is a way for Alaska Permanent to compete with large pension funds and other sovereign wealth funds that have investment staffs with more than 1,000 people.

The other speakers on the panel were Mansco Perry III, executive director and CIO of the $64.1 billion Minnesota State Board of Investment, St. Paul; Scott C. Evans, deputy comptroller, asset management and CIO, New York City Office of the Comptroller, Bureau of Asset Management, with manages the $194.7 billion New York City Retirement Systems; and Craig Husting, CIO at the $44 billion Missouri Public School and Education Employee Retirement Systems, Jefferson City.

All agreed that diversity of their staff, including gender diversity, was important to them. However, Messrs. Read and Husting noted that when it came to diversity in their money managers, private equity managers had the least diversity among their manager ranks.

At Alaska Permanent, the executive director and two investment officers are women, Mr. Read said. "The part of the industry (private equity) has not seen the same type of gender diversification," he said.

The panelists also supported considering environmental, social and governance criteria in their investing but said the social part is tricky.

"ESG has become a misnomer of sorts, but we are very compassionate about the components," Mr. Evans said.

The issue with the social element is that the five retirement boards that make up the New York system don't always agree on values. For example, three of the five boards do not invest in companies that manufacture guns but two of the boards, the ones running pension plans for the police officers and firefighters are "vehemently against" a ban on investing in gun manufactures because they use guns in their jobs, Mr. Evans said.

"We have to look at our fiduciary duty. Those values can't conflict with our fiduciary duty," he said. "We are lucky with guns. If you take them out of the index, there is no tracking error."

However, the issue of fossil fuels is a different story. Several board members have said publicly that they would seriously look at divesting from fossil-fuel companies, which could create a large — more than 50% — tracking error, Mr. Evans said.

So, officials at the pension funds will be studying how to balance the pension funds' values of divesting from fossil fuel-related companies with their fiduciary obligation, Mr. Evans noted.

Mr. Husting agreed with Mr. Evans regarding the social part of ESG and said his board has adopted a policy against social investing.

Mr. Read said Alaska Permanent officials are focusing on ESG in private equity, venture capital and real estate, areas in which the fund "can change the landscape" such as investing in biotechnology related to Alzheimer's disease and cancer.

In a separate panel, Aoifinn Devitt, CIO of the $2.6 billion Chicago Policemen's Annuity & Benefit Fund, kicked off a panel she moderated Wednesday about currency hedging by chastising managers that aren't honest about sources of returns, including currency.

The Chicago Policemen's pension fund earned a 17% net return for the year ended Dec. 31, which was pushed up by global equities and that performance was boosted by the outperformance of currencies including the euro, Ms. Devitt said. She said the pension fund rebalanced the portfolio to realize some of that currency gain.

As of Dec. 31, equities accounted for 57% of plan assets, but plan officials are cutting it down to the pension fund's 42% target.