Permanent fund looks back on profitable year

Fund begins rebound from 2008; managers start new investments

Posted: Thursday, February 25, 2010

The Alaska Permanent Fund had a stellar 2009, earning 18.76 percent for the year, its managers were told Wednesday.

The Alaska Permanent Fund Corp.'s Board of Trustees heard a report on the fund's yearly performance Wednesday while meeting in the corporation's Juneau headquarters.

The board also approved a new investment type known as "mezzanine debt," which fund managers said might prove lucrative despite the risks.

The permanent fund in 2009 far exceeded its expected return, said Michael O'Leary, an advisor to the fund working for Callan Associates, a San Francisco-based investment advisory firm.

That strong 2009 return failed to make up for 2008's disastrous returns, O'Leary said, when the Fund lost nearly 25 percent.

The Fund in 2009 still fell slightly behind similar funds, he said.

"It was just a tad below your target benchmark, and just a tad below median," O'Leary said.

While the financial industry closely watches annual investment performance, Permanent Fund Dividend payments are based on a fiscal year measurement. So far this fiscal year the Fund has earned $385 million in statutory net income, the calculation of Fund earnings on which annual dividend checks are based.

Individual parts of the fund had varying returns, some of which O'Leary called "spectacular," such as some international and emerging market stocks.

One particularly bright spot was in the Permanent Fund's bond portfolio, which is mostly managed in-house instead of contracted out to managers elsewhere.

"In-house performance was really pretty spectacular," said Bill Moran, a fund trustee who is also president of Ketchikan's First Bank.

Returns from the Permanent Fund's bond portfolio exceeded both its benchmark and that of similar funds, O'Leary said.

Permanent Fund Chief Investment Officer Jeff Scott praised how the portfolio had been managed over the years.

"Over time, I think we're providing superior risk-adjusted returns," he said.

The board Wednesday also approved the new mezzanine debt investment, with an allocation of $500 million to two companies to implement the strategy.

Mezzanine debt is where companies borrow money, but the debt is less secure than senior debt. If the companies cannot pay back the money they've borrowed, holders of mezzanine debt get paid only after the senior debt holders are paid.

Mezzanine debt is "inherently risky," O'Leary told the board, but also has the potential for higher returns for the Permanent Fund.

The two companies each receiving $250 million from the permanent fund are Oaktree Capital Management and Audax Management Company.

Those companies will be paid relatively high management fees, and if profits are high enough they'll share in those as well.

"If they do well, we all benefit," Scott said. "That's how they justify it."

• Contact reporter Pat Forgey at 523-2250 or

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