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Permanent Fund gives State Street the boot

Posted: Sunday, March 09, 2008

Attorneys for the state in December won a remarkable settlement with State Street Global Advisors after the huge investment company lost some state retirement money last summer, but the company's involvement with Alaska wasn't over.

In exchange for reimbursing several million dollars in bond funds managed by State Street, the Alaska Retirement Management Board agreed to continue to do business with State Street. The board manages $14 billion in pension assets, and about $3.5 billion of that is with State Street, state officials said.

Now, the Alaska Permanent Fund Corp. has decided on its own to pull half a billion dollars out of a State Street foreign stock fund that it has only been in since September.

That's likely to cost State Street at least $2.25 million in annual management fees, based on Empire calculations.

State Street spokeswoman Arlene Roberts said she was unfamiliar with the issue and declined further comment.

The growing size of the Alaska Permanent Fund, along with the state's pension assets, means Alaska is being forced to become a player in the high-stakes world of finance. The ongoing State Street issue shows how the state's money managers are working to keep Alaska's investments safe.

Alaska Permanent Fund Corp. Executive Director Michael Burns said the decision to pull out of the State Street EAFE fund, was only indirectly linked to ongoing turmoil elsewhere in State Street. EAFE funds are invested in Europe, Australia and the Far East.

The decision to pull $504 million out of State Street EAFE was mostly because permanent fund staff and advisers had lost confidence in how the fund was managed, Burns said.

"It was primarily because of changes in personnel," he said.

Those personnel changes were likely tied to the losses in the controversial bond funds, he said.

State Street recently set aside $618 million to deal with claims from aggrieved investors, and Reuters recently reported that half a dozen top managers had left or been fired recently because of the bond fund problems.

Department of Revenue Deputy Commissioner Brian Andrews said no withdrawals similar to that of the permanent fund are planned by the Alaska Retirement Management Board.

Alaska was only one of many retirement funds which lost money in State Street's Daily Corporate/Government Bond Fund. The fund, which was billed as a conservative investment option, instead made risky bets involving sub-prime mortgages.

When those bets went wrong, multiple lawsuits were filed, but Alaska settled out of court.

The ARM Board got nearly all of its money back without a suit, but also agreed to help State Street keep the size of the settlement quiet.

In another part of the settlement agreement, the ARM Board and State Street agreed there would be "no change in the relationship" between the two parties.

That agreement did not bind the permanent fund, however.

Burns said permanent fund staff had been watching their new investment in State Street's EAFE fund closely, given the turmoil elsewhere in State Street. In January, they sent one of their outside advisers to visit State Street.

That adviser, Michael O'Leary of Callan Associates, provided a report that eventually led the permanent fund to make the decision to pull all $504 million out of the State Street's EAFE fund.

Burns said O'Leary was concerned about a loss of personnel. In the midst of the bond fund turmoil, another investment company swooped in and hired away the entire team of EAFE managers, Burns said.

In the investment world, that's called a "lift out," and it left Burns, O'Leary and the Permanent Fund concerned enough that they decided to not gamble that the replacements would be equally competent.

The Permanent Fund Corp.'s decision to pull out of State Street was also kept quiet. Burns, who acknowledged it recently, said that was so other companies wouldn't know the corporation was selling stocks and drive the prices down.

Andrews said the ARM Board staff, which also uses O'Leary as an adviser, came to a different decision based on different facts.

That's because the ARM Board's investments with State Street are not actively managed. Instead, they mirror an index such as the S&P 500, buying the exact same stocks as in the index, and in the exact same proportions.

That strategy does not take a skilled investment team to manage, he said.

O'Leary "was an integral part of the permanent fund's decision to get out from under there (State Street) but he's comfortable with us staying," Andrews said.

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



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