Alaska Permanent Fund Corp., Juneau, unveiled a five-year investment management plan on Sept. 28 that aims to nearly double the assets it internally manages and also introduces a new target allocation.
The $54.8 billion sovereign wealth fund routinely reviews its investment philosophy every five years, and one conclusion as part of the review was to further its capabilities in internal management, said CEO Angela Rodell in a telephone interview.
“We have been focused like many funds on building up internal management expertise,” Ms. Rodell said. “It allows us to customize our portfolio in a way we can't with external managers.”
Ms. Rodell said fees are also a reason for the fund's focus on increasing internally managed assets, which she said currently accounts for 24% of the fund's assets. She said she is looking to increase that number to between 40% and 50% over the next five to 10 years.
“We will always have a need for external managers. We don't expect to go to an excessive or 100% internally managed,” she said. “(If) an external manager is excelling in the mandate we've given them, we have no incentive” to switch to internal management.
Also as part of the five-year review, the sovereign wealth fund changed its target allocation to account for liquidity and market changes, Ms. Rodell said.
Since the previous five-year plan for 2011 to 2016 was instituted, the permanent fund has experienced “slight underperformance vs. peers,” according to the presentation to the board regarding the new investment plan.
Ms. Rodell noted the board did not change the real-return target of the consumer price index plus 5%.
“We have a good handle on risk, but we need to get more efficient with risk,” Ms. Rodell said. “We designed a portfolio that will better manage the continued volatility in the markets going forward.”
The new structure increases targets to private equity, real estate and infrastructure, and reduces targets to global equities.
It splits assets by investment objectives — 60% growth and 40% income — and also splits assets into categories based on liquidity — 55% tradable/liquid and 45% illiquid.
Falling within the growth and illiquid categories, the target to “private equity and special growth” increases to 17% from 10%, while the target to absolute-return funds falls to 6% from 10%.
As part of the presentation's suggestions for increasing the fund's exposure to private equity, the plan will “expand APFC's capability for making direct investments internationally, particularly by leveraging APFC's sovereign wealth status” and the fund may also explore hiring investment staff outside Alaska “in order to access and secure compelling international deal flow.”
The leverage of APFC's sovereign-wealth-fund status includes its founding membership in the International Forum of Sovereign Wealth Funds and its perceived status as existing separately from the mechanisms of state government.
Within both the income and illiquid categories, the real estate target increases to 13% from 11% and “infrastructure and special income” rises to 9% from 3%.
The sole asset class that falls within both the growth and tradable categories is global equity, whose target falls to 37% from 39%.
The target to asset classes falling within both the income and tradable categories falls to 18% from 24%. Those asset classes are investment-grade fixed income, high-yield fixed income, emerging markets fixed income, real estate investment trusts, infrastructure securities and cash.
Additionally, the sovereign wealth fund is looking into adopting incentive compensation “commensurate with investment peers,” the presentation said. Ms. Rodell said the fund is aggressively pursuing more investment staff, both by promoting from within, as well as hiring new entry-level and mid-level investment professionals.
“There are five positions currently listed on our website that we're recruiting for our investment staff,” Ms. Rodell said. Those include positions for analysts in public equities and tradable income and senior associates in private equity and special opportunities, and private markets.
When looking at the future of the permanent fund long term, the volatility in oil prices is making it very difficult to accurately predict where the fund will be in the future.
APFC receives its funds per a constitutional amendment that mandates at least 25% of “all mineral lease rentals, royalties, royalty sales proceeds, federal mineral revenue-sharing payments and bonuses received by the state” is placed in the permanent fund.
“The state's really in a state of flux because state revenues are 90% from oil and gas production taxes so our whole mission could change drastically over the next year or two,” Ms. Rodell said, “so it's hard to say but the core of the fund is protected by the constitution and can't be spent.” n