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Permanent Fund to continue securities lending

Alaska protected from risks, advisers tell fund trustees

Posted: February 23, 2012 - 1:18am

The Alaska Permanent Fund Corp. will continue lending out stocks in its $40 billion-plus portfolio, despite the losses some other funds have had with the practice.

It’s called securities lending, but it may be more aptly called securities “renting” due to the income the permanent fund receives.

Last year the fund made about $9.2 million from making a portion of its portfolio, worth about $3.4 billion on average, available for custodian Bank of New York Mellon to lend. The bank then rented those securities to others who need to hold title to them, but don’t necessarily want to purchase them outright.

That may be for those who want to use them in short sales, said Mike Burns, the fund’s executive director. While various securities may be lent, most of the fund’s revenue from lending comes from lending stocks, especially small-cap stocks.

Alaska’s securities lending program has protections for the permanent fund that few others get, said Bill Kelly, BNY Mellon’s deputy department head for securities lending.

That means that even in 2008, when some who lent securities had difficulty getting them back, recovering the securities wasn’t a problem for the permanent fund, he said.

“The Alaska Permanent Fund has a highly customized securities lending program,” Kelly said.

The managers of Alaska’s fund have been able to negotiate extra protections and guarantees into its program that few other investors get.

“That customization has served to help navigate the financial crisis more successfully than perhaps other securities lending participants that you’ve either read about, heard about or spoken to,” Kelly said.

That includes both the bank holding equivalent collateral for any securities lent, as well as the bank itself guaranteeing the deal, he said.

The protections Alaska has negotiated for its securities lending program have been offered to few others, Kelly said.

Michael O’Leary, an investment advisor to the trustees, said the protections Alaska has are an “almost unique feature.”

A number of other pension funds and others who once participated in securities have abandoned the practice when they discovered it wasn’t as risk-free as they once thought.

Idaho no longer does securities lending because it couldn’t get the same deal Alaska has.

“That’s the reason why you do securities lending and we don’t,” said Robert Maynard, chief investment officer of the Public Employees Retirement System of Idaho.

Maynard is an outside adviser to the Alaska Permanent Fund as well.

One of those entities that suspended securities lending several years ago was the Alaska Retirement Management Board. Department of Revenue Chief Investment Officer Gary Bader told the board then getting paid for securities lending might look like “free money,” but that there was a chance it might carry significant hidden risks.

Maynard said he, too, was opposed to securities lending, unless the same protections Alaska received were offered.

The arrangement with BNY Mellon leaves Alaska completely indemnified, Burns said.

The deal that the permanent fund has negotiated for securities lending is “extraordinary,” and even that may understate how unique it is, Maynard said.

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

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