'A uniquely bad time'

Some on the Alaska Permanent Fund's Board of Trustees want to bet big, but analysts say it's a really bad time to do so.

Happy Friday, Alaska.

In this edition: There are strange things done o’er at the Permanent Fund. This week, the Alaska Permanent Fund’s Board of Trustees met to review what, by most accounts, is a risky plan to rocket the fund from about $74 billion to $100 billion in a matter of years. While the key architect—a close ally of the governor—was jazzed about the plan, going as far as to call it “my baby” at an investor conference last week, things were much cooler under the scrutiny of the fund’s risk-averse staff and analysts. Let’s dive into the plan, where it’s coming from and what it says about the board's direction. Oh, also, it sounds like they’re gunning for even more satellite offices. Then we’ll close it out with the reading list and weekend watching.

Current mood: 🤑

‘A uniquely bad time’

Photo by Jp Valery on Unsplash

The Alaska Permanent Fund’s Board of Trustees met on Monday to get their first look as a group at an ambitious plan to boost the fund’s value from about $75 billion to $100 billion in a matter of years. For Trustee Ellie Rubenstein, it was supposed to be a victory lap. Just days before, she was on the stage of an investor conference in Saudi Arabia, hyping the plan as a victory for higher-risk private equity.

“My baby has been our $100 billion strategic plan that we will hit over the next three to five years. We’re unveiling that next week,” she said, adding, “We will finally be in the $100 billion club when we unveil this, and the only way to pull that off will be to increase private equity. I won my battle with [Chief Investment Officer Marcus Frampton].”

Rubenstein’s “baby,” however, would require a sea change in the Alaska Permanent Fund’s investment strategy, leaning into higher-risk private equity investments to a level that would require the fund to borrow heavily. Fund managers said there was simply no other feasible way to hit $100 billion in that time frame because it requires higher returns than the fund’s current target of 5% annual growth on top of inflation.

The proposal championed by Rubeinstein—with input from fellow trustees that included former DEC Commissioner Jason Brune, Craig Richards, and, at least for some of the sessions, Department of Revenue Commissioner Adam Crum during a series of private, closed-door meetings—would require increasing the growth goal to about 7% on top of inflation, or total annual growth of about 9.3%. Fund managers said that would require the Alaska Permanent Fund to leverage itself, borrowing money it doesn’t have for the additional investments.

The proposal landed with a thud at Monday’s hearing.

Everyone from the Alaska Permanent Fund’s investment staff, Frampton included, to several analysts said it was too risky for their liking, especially with cooling markets and the ever-looming fear of a crash.

In a particularly telling exchange at Monday’s hearing, Jason Brune responded to the naysayers by demanding the analysts weigh in with their preferred growth targets if they didn’t support the 7% target. Would it be 5.5%, 5.25% or something else?

“4%” was the first response from one analyst who said things were already too risky given the outlook for the world markets.

John Skjervem, the Chief Investment Officer of the Utah Retirement System, doubled down on the point, arguing that the state of the economy doesn’t support getting more aggressive at this time.

“I’d be uncomfortable with a return target any greater than what we currently have. I think CPI plus 5 is the upper limit of what we should be pursuing,” he said. “Most of the investment history of the Permanent Fund has played out in a four-decade, secular bull market and bonds. You’ve had 40 years of the wind at your back. That changed last year. … It’s hard to say it’s over, but it’s not going to be a tailwind. It’s probably going to be a headwind.”

He went over various economic indicators that warned against taking on additional risk, noting that there’s plenty of uncertainty at this time. Others noted that it would take considerable investment from the Alaska Permanent Fund to manage the loans and the relationships with the all-important credit rating agencies and that those costs would eat into profits and likely undercut the spendable portion of the fund.

“This is a uniquely bad time to consider raising the return target,” Skjervem said.

It’s not what Rubenstein, who has been pushing for the Alaska Permanent Fund to take on more risk and increase its private equity investments, wanted to hear.

“If you’re a board member wanting to see more risk than has been taken, what area or what boundary would you be pushing?” she responded to Skjervem.

“I don’t support additional risk,” Skjervem said flatly. “I don’t have a satisfactory answer to that question because I wouldn’t support additional risk.”

The board ultimately took no action on the long-term strategic plan. Further discussion is expected at the board’s December meeting, but most indications from Monday’s meeting are that there’s not enough support for the change.

Follow the incomplete thread: Board of Trustee’s Monday meeting

Why it matters

With the volatility in oil tax revenue, the Alaska Permanent Fund has become the foundation of the state’s financial health. Its investment income covers a large chunk of state government spending as well as the annual dividend payment, which makes the fund’s certainly and reliability of particular importance. In recent years, the Alaska Legislature has taken steps to continue to shore up the fund by transferring huge chunks of money into the constitutionally protected corpus of the fund.