For at least six months, the Alaska Permanent Fund has been holding more bonds and fewer stocks than its policies call for in the hopes that bonds would out perform stocks - a gamble that may have been costly for the $30 billion fund that finances annual dividend checks to state residents.
Parts of the battered portfolio, stocks especially, have recently jumped in value. That follows the permanent fund Board of Trustees' decision last fall, made on the advice of investment staff, to delay rebalancing the portfolio.
In December, some trustees said they were surprised to find out the permanent fund wasn't rebalancing regularly. Still, for months the staff continued to deposit new oil revenue into the over-allocated bond account. Friday, Alaska Permanent Fund Corporation Executive Director Mike Burns said it was to keep liquid assets available.
It wasn't until March that a major transfer was made into stocks, but not enough to make the fund consistent with its standing investment policy.
"We made the major move almost at the right moment," Burns said, though he denied it was an attempt to time the market.
Burns acknowledged that the gains could have been greater if they'd stuck closer to the standing policy, but couldn't readily calculate the difference.
The market shift is bringing the permanent fund closer to meeting the standing policy's targets, though a completely new strategy is taking effect July 1, Burns said. At a meeting in Anchorage last week, the Board of Trustees decided to abandon the plan they'd been ignoring and adopted a completely new investment allocation strategy.
Historically, the allocation strategy has been defined as a series of percentages stating relative target values of the permanent fund by investment type - essentially a pie chart with slices for stocks, bonds, real estate, infrastructure, etc.
The new strategy defines the pie slices in a qualitatively different way. It's based on how exposed different types of investments are to interest rate changes and to companies' success.
Burns said the new strategy will involve little or no immediate changes to what the fund holds.
"It's not a lot different, most of the pieces are the same," Burns said.
Holding to an asset allocation model forces buying low and selling high. As the value of the actual investments fluctuate in the market, so do the sizes of pie slices relative to each other. To rebalance the portfolio, fund managers would sell inflated assets and buy deflated assets until the size of the pie slices are aligned with the targets set out in the Board of Trustees' strategy, which it revisits annually.
Among the decisions the trustees were faced with as they adopted the new strategy was how risky the permanent fund's investments should be. Over time, riskier investments are expected to bring greater profits, but can also bring sharper losses.
Under the old allocation model, the permanent fund fell from more than $40 billion in value to less than $30 billion in about one year; most of the losses accrued in higher risk investments.
"This allocation has produced recently a loss of 25 percent, and mathematically it could produce a loss even greater than that," said Jeff Scott, the corporation's chief investment officer. "It appears at this time a maximum annual loss of 25 percent is tolerable."
Scott, who joined the corporation last year, pushed for the new allocation model.
Trustee Pat Galvin, commissioner of the Department of Revenue, said that while the fund was down dramatically, the state's residents understood that all markets were down.
The permanent fund's investment advisors say the asset allocation decision is the key to how big investment profits or losses will be, and eventually how big annual dividend checks to Alaska's residents will be.
It is not clear whether the new policy will require rebalancing, or set timelines for rebalancing to be done. Burns said that decision would be part of a new investment policy manual that is still under discussion.
• Contact reporter Pat Forgey at 523-2250 or firstname.lastname@example.org.
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