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Permanent Fund finishes rebound

Fiscal Year 2011's $2.1 billion income will be used to calculate PFD

Posted: August 2, 2011 - 9:46pm

The last year’s powerful stock market returns of 30 percent or more meant a big year for the Alaska Permanent Fund, its staff announced Tuesday.

The fund ended the fiscal year up 20.6 percent, its third highest annual return ever, and topped $40 billion as it rebounded from the steep decline of two to three years ago, said Mike Burns, executive director of the Alaska Permanent Fund Corporation.

The big returns for the year were driven by the half of the fund that’s in the stock markets, also known as equity markets, in the U.S. and abroad, Burns said.

“There was a lot of strong wind at our backs in the equities markets,” he said.

The return for the fiscal year in which the 2011 dividend will be calculated is about average among funds similar to the Alaska Permanent Fund, Burns said.

“It’s right in the ballpark with what I’ve seen from some other large funds,” he said.

While stock market returns were high, other permanent fund investments didn’t do so well, including investments in the trendy hedge fund area, which produced a return of only 8 percent for the year.

Also lagging was the fund’s innovative “external CIO” program where a handful of top investment managers are hired to run miniature versions of the permanent fund with their own chief investment officers. Those mini-funds are then able to allocate resources where they think the best returns are. That strategy on average brought in 17 percent during the year. That’s good for a typical year but a laggard compared to this year’s stellar stock market returns.

Burns said that in a diversified fund like Alaska’s, that’s going to happen.

“There’s always some place you wish you weren’t” Burns said.

This year stocks did so well that any investments other than stocks looked poor by comparison, he said.

“If we’d had any asset that was not in equities it would have done better in equities, but that’s not how you build a diversified portfolio,” he said.

During the last year, the permanent fund’s U.S. bond holdings of $8.6 billion returned 5.3 percent, well below stocks. But over the last three years U.S. bonds brought in 6.6 percent, leading the fund and helping insulate the fund from the full impact of the drastic decline stocks took.

While stocks brought in the best returns this year, they also have the benefit of being cheap to own. U.S. stocks, especially those in large capitalization companies, can be held in index funds that simply copy the holdings of indexes such as the S&P 500 for about a tenth of a percent of their value, Burns said.

Some other investments can cost much more, with hedge funds costing 1 or 2 percent, depending on incentives, which comes out of returns.

Some stock holdings, such as funds that specialize in smaller companies, can also have high fees, but Burns said the fund managers can sometimes earn outsize returns for Alaska in exchange.

While the Permanent Fund during the last year saw its assets rise by $6.8 billion, including oil royalties deposited in to the fund, its statutory net income was only $2.1 billion.

The statutory net income amount is crucial, because a five-year average of the fund’s income is what is used to calculate each year’s PFD. The amount this year’s dividend is expected to be announced next month.

• Contact reporter Pat Forgey at 523-2250 or at patrick.forgey@juenauempire.com.

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