Permanent fund warned of lower earnings

Trustees ponder changes, but get warning about increasing risk

This year’s permanent fund dividend will be smaller than last year’s, and market projections for the next several years aren’t looking good for a big rebound, the Alaska Permanent Fund Board of Trustees heard Thursday.


Future earnings may be so low, investment adviser Michael O’Leary said, the board will have to guard against the temptation to get into too-risky investments to boost earnings.

The biggest earnings obstacle to overcome, according to O’Leary and Greg Allen, both with the advisory firm Callan Associates, is low interest rates and the resulting low bond yields.

The permanent fund has about 30 percent of its holdings in fixed-income assets, or bonds, and Callan and others are projecting extremely low profits from fixed income for up to 10 years.

Those returns might be about 3.25 percent, Allen said, and will bring down total fund earnings for large pension funds, endowments and the Alaska Permanent Fund.

“That’s a tough message to go out and tell people,” Allen said.

That means pension funds, endowments and other big investors will find it difficult to meet their expected returns, unless stocks produce stellar returns, he said.

And U.S. stocks are considered to be relatively fairly priced, with little room for standout gains, he said.

“They want to hear that they’re going to get 8 percent or 8.5 percent,” he said.

The only markets that are predicted to make that level of return are the more risky private equity and emerging markets.

“And nobody is going tohave 100 percent of a portfolio made up of emerging markets and private equity,” he said.

The permanent fund expects to earn a return of 5 percent above inflation, said Executive Director Michael Burns.

It will use the information from the Callan presentation when it makes its investment allocation decision for the next fiscal year in May, he said.

Alaska’s other big fund, the Alaska Retirement Management Board’s trust fund, assumes it will earn 8 percent on its savings when it calculates how much must be contributed each year to meet pension obligations.

Its assumptions include inflation, meaning the real return expectation is closer to the 5 percent the permanent fund is expecting.

Some think that amount is too much to expect. Allen said Ohio recently dropped its earnings expectations from 8 percent to 7.25 percent.

That resulted in “painful” contribution increases, Allen said.

One way to avoid that is to make higher yielding investments, but that comes at a cost, Allen said.

“Getting a 5 percent (real) return is going to require people to take more risk thatnthey’re used to,” he said.

That’s something that some individuals are already doing, said Bill Moran, chairman of the board of trustees and president of Ketchikan-based First Bank.

“That’s something that we’re already seeing at the bank level,” Moran said.

“After three years of getting zero on their savings accounts, people are getting impatient,” he said.

Callan representatives suggested that the permanent fund could lower its earnings expectations, as it doesn’t have the same kind of payment obligations as the retirement funds.

PFDs are based on a formula that looks at an average of the previous five years’ profits.

“I’m not sure there’s a real strong reason why your hurdle rate needs to be that high,” Allen said.

O’Leary called 5 percent a reasonable return expectation over the very long term.

“Historically that has been achieved, but there have been periods of a decade or more when it hasn’t been achieved,” he said.

Idaho’s retirement fund manager Robert Maynard serves as an adviser to Alaska’s funds, and told the trustees Thursday his state had reduced its earnings expectation to 7.25 percent.

O’Leary called that “clearly at the low end of the public fund arena,” though he noted there were a few below even that.

In other business, the trustees reviewed Burns’ job performance and gave him a 5 percent raise, retroactive to last July 1.

• Contact reporter Pat Forgey at 523-2250 or at


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