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CIO suggests new permanent fund options

Investment chief Jay Willoughby says state should capitalize on fund's strengths

Posted: February 23, 2012 - 12:21am
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New Alaska Permanent Fund Corporation Chief Investment Officer Jay Willoughby speaks to the Board of Trustees at the start of their two-day quarterly meeting in Juneau on Wednesday.  Michael Penn/Juneau Empire
Michael Penn/Juneau Empire
New Alaska Permanent Fund Corporation Chief Investment Officer Jay Willoughby speaks to the Board of Trustees at the start of their two-day quarterly meeting in Juneau on Wednesday.

The Alaska Permanent Fund’s new chief investment officer has been on the job for more than three months now, and has told the fund’s board of trustees it‘s time to look at making some changes to the $41 billion fund.

The fund, the earnings from which provide Alaskans’ cherished dividend checks every year, is at risk of not meeting expectations for future growth, said Jay Willoughby, the fund’s new CIO.

The fund currently has about 60 percent in stocks, 30 percent in bonds and 10 percent in real estate, he said.

Willoughby told the trustees he and the fund’s advisers doubted the current investments in stocks, bonds and real estate could meet the trustees’ goal of a 5 percent real return after inflation.

At the same time, he said, the Alaska Permanent Fund has competitive advantages other investors don’t.

One is its unlimited timeline, along with it sheer size, liquidity and ability to manage risk.

“We can purchase something with a much longer time horizon than somebody who is going to have to sell,” Willoughby said.

In comparison to pension funds or endowments that have to regularly sell investments to meet expenses, the permanent fund gets regular deposits of oil royalty money and only pays out when it makes profits.

“If you agree with me that these are our biggest competitive advantages, the trick, the important thing, is how do we leverage them?” Willoughby asked the trustees.

The board is meeting in Juneau this week, its only meeting this year in the capital. Its other four meetings are scheduled for Anchorage.

Willoughby presented the board with what he called “some very viable ideas” to consider for future investments it could make to take advantage of those strengths.

“We could purchase a portfolio of homes from a bank that is trying to get rid of its (repossessed real estate) at attractive prices,” he said. “We could then hire a property manager to manage this property for us” as rentals, he said.

“I think we could earn returns that would meaningfully exceed anything we could get in fixed income,” he said.

After some period, possibly 5-7 years, they could be sold to individual homeowners after a housing rebound.

The Dodd-Frank financial reform legislation is forcing banks to get out of their own investment management businesses, meaning some talented money managers will be available, he said.

The permanent fund could provide seed capital to get one or more investment management firms going.

“There’s a lot of forced exodus from banks of people who have been really successful investment managers internally,” he said.

Alaska also might be able to profit from buying distressed sovereign debt, he said.

Willoughby said the board would need to be ready to make investments at some time in the future, and should consider having ready cash available.

“If we can tactically redeploy 5-7 percent in opportunities as they arise,” the permanent fund could benefit, he said.

Alaska Permanent Fund Corp. Executive Director Mike Burns, Willoughby’s boss, said the ideas sounded good.

He said they’d recently looked into making investments in agricultural land. The returns looked attractive, but the amount of money that could be invested in that sector was too small to provide meaningful returns for the fund.

“It’s going to be a great investment, but it’s not going to move the needle,” Burns said. “There are some things we may just be too big to do.

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

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