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Permanent fund takes hit in plunge

Corporation's managers mull making riskier investments following bad day on Wall Street

Posted: Thursday, March 01, 2007

The day after the Alaska Permanent Fund lost $630 million - in what may have been the largest one-day loss in the fund's history - members of its board met in Juneau to discuss taking even more risk with fund investments.

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Done right, the alternative investments to the usual bonds and company stocks could actually reduce losses like Tuesday's, fund managers say.

"This area is in great contrast to conventional stocks and bonds," said Allan Bufferd, advisor to the board.

The Alaska Permanent Fund, created by voters in 1976 to save oil profits for the state's future, has grown steadily. It was at nearly $38 billion Monday, before U.S. and global stock markets fell precipitously.

"We're long-term investors, but yesterday was a very long day," said Michael Burns, the fund corporation's executive director, reported Wednesday morning.

The corporation's board of trustees already had scheduled a presentation on risky alternative investments, and went ahead with it Wednesday.

The trustees decided in 2004 to begin investing in alternative portfolios, such as private equity investments in companies not traded on stock markets, venture capital investments in growing companies or backing buyouts of publicly traded companies looking to go private.

"Right now, buyout is very hot," said Rick Shafer, chief investment officer for the corporation.

The trustees in 2006 increased the allocation in the alternative investments they call "absolute return" to 4 percent of the total fund. That recently meant about $1.2 billion, but will likely soon mean $1.4 billion as the total permanent fund continues to grow, Shafer said.

To do that, Shafer needs to find skilled money managers for the trustees to entrust with Alaska's money. First, they'll allocate various amounts of money to several managers. Those managers will then have to find deals in which they want to invest.

That's been a slow process, he said.

"We're trying to creep up to 4 percent," Shafer said.

The permanent fund trustees initiated the process in 2004, and only now are seeing returns. While profitable so far, Shafer said, it's too early for the results to be meaningful, he said.

While the state is looking for investments, that money stays in regular fund investments and continues to make money, he said.

Alternative investments such as absolute return investments bring diversification to the state, which reduces total volatility.

For example, on Tuesday, while almost every investment category the fund tracks was down, the U.S. and non-U.S. bond investments made $36 million and $6 million, respectively.

Typically bond investments provide lower returns than stocks. On Tuesday, however, they kept the Permanent Fund from losing even more money.

The trustees also are considering expanding into new alternative investment styles. On Wednesday, they began considering investment in a private money manager called the Distressed Opportunities Fund.

That fund invests in the debt of troubled companies. It buys into the companies at a discount and then tries to turn a profit. In a turbulent economy, that kind of investment strategy could pay big dividends.

"We don't see it today, but we see it coming," said Doug Bratton, a fund manager seeking to manage state money.

Later, the trustees heard a presentation on investments in infrastructure, another type of alternative investment. That might include investments in toll roads or bridges, pipelines or other public or private infrastructure.

Both investment styles also often move differently than stock markets, and could provide good returns at times when the market is down. All together, however, those investments are only likely to be a very small percentage of the permanent fund.

• Pat Forgey can be reached at patrick.forgey@juneauempire.com.



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