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My Turn: Permanent Fund takes new approach to asset allocation

Posted: Wednesday, June 24, 2009

The Board of Trustees of the Alaska Permanent Fund Corp. recently changed how we describe and categorize investments. They now use an allocation that groups assets based on risk characteristics, rather than by the type of investment. The underlying investments and their proportions haven't changed significantly, and are very similar to allocations from recent years, with a similar risk profile.

At times, corporate bonds act more like stocks than they act like U.S. Treasuries. This makes sense when you consider that the companies that issue these corporate bonds are the same companies traded on the stock market. Grouping corporate bonds alongside stocks allows the trustees and staff to better evaluate the Fund's exposure to public companies.

This new way to group our investments fits the board's long-standing approach to asset allocation. The board doesn't try to time the markets or focus on short-term market conditions. Instead, we build a portfolio that will provide a more stable return under a variety of market conditions.

To that end, each of the new categories addresses one of several economic conditions that the Fund could face in the coming years. This helps the Fund stay on course regardless of what the next few years bring.

The new categories and their related conditions are:

• Cash, to fund the annual dividend to Alaskans.

• Interest rates perform well in times of deflation and crisis markets.

• Company exposure performs well when the economy is strong.

• Real assets perform well in times of inflation.

• Special opportunities, which will arise in different market conditions.

The traditional asset classes have not been abandoned - they are included under the new groups and listed in the allocation resolution passed by the trustees. This resolution can be found on the Fund's Web site at www.apfc.org.

We have added an allocation called "real return mandates." Under this strategy, external managers will invest in the same things as the Fund (stocks, bonds, real estate) and hold to the same risk profile as the Fund overall. This will create three to four $500 million "mini-funds" within the Permanent Fund.

It is important to note that while the strategy is new to the Fund, the underlying investments will be of the same types as what the Fund currently owns.

These "mini-funds" will allow us to see the approach that external managers take to asset allocation, and how it differs from our standard approach. We will compare the results of these portfolios with each other and against the Fund as a whole, which may lead to adjustments and improvements in how we allocate all our assets. The real return mandates fall under the special opportunities group.

A second addition is an allocation to cash. The fund will gradually accumulate liquid securities with a duration of less than a year, so there is enough cash to pay the estimated dividend to Alaskans.

The other addition to the Fund's asset allocation is to TIPS - U.S. Treasury Inflation Protected Securities. These securities carry the low-risk advantages of bonds with the inflation protection that is usually provided by real assets, such as real estate and infrastructure.

You can find information about the Fund's past and present asset allocations at apfc.org.

• Steve Frank is chairman of the Board of Trustees of the Alaska Permanent Fund Corp.



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