Permafund announces banner year in earnings

Five-year averaging means dividends will be smaller this year

Posted: Wednesday, July 28, 2004

ANCHORAGE - High oil revenue and sound investments gave the Alaska Permanent Fund a 14.1 percent rate of return and a total value of $27.4 billion for the fiscal year that ended June 30, managers announced Tuesday.

"We're pleased that the fund had such a strong year, especially after coming through several years of down markets and low returns," said Bob Bartholomew, acting executive director.

He gave credit to policies backed by the permanent fund corporation's trustees.

"The trustees' commitment to making long-term investment decisions and adequately diversifying the fund's portfolio put us in a good position to take advantage of the upswing in the markets earlier this year," he said.

The figures are preliminary. Audited year-end financial results will be included in the corporation's annual financial report on Sept. 20.

The Alaska Permanent Fund was established through a constitutional amendment approved by Alaska voters in 1976. The constitutional amendment and its supporting statutes set aside at least 25 percent of certain mineral revenues - especially oil wealth - paid to the state for deposit into a public savings account. The account was to be invested for the benefit of current and future generations of Alaskans.

Since 1982, the fund has paid an annual dividend to eligible Alaskans ranging from $331.29 in 1984 to $1,963.86 in 2000. Checks last year were $1,107.56.

The 14.1 percent return last fiscal year compares to an average of 10.5 percent over the last 26 years, Bartholomew said.

"It's certainly above average, but we've probably had five or six years that had a higher return," he said, noting that the fund has existed over a time generally favorable to stock market investors.

All of the fund's asset classes - stocks, bonds and real estate - produced positive returns last year. International stocks returned 28 percent and domestic stocks 21 percent. Growth was primarily in the first nine months of the fiscal year.

"Stocks during the last quarter were actually down almost 2 percent," he said.

Real estate also gave a strong performance, returning more than 14 percent. Much was due to real estate investment trusts, which trade like stocks. The permanent fund corporation keeps 30 percent of its real estate investment in REITs, mainly because of their liquidity. Managers' preference is to invest in direct real estate - buildings managed for annual income - which returned 11 percent.

"We want the majority of return to come from the cash flow and not the appreciation in value," he said.

The fund received oil revenues of $353 million.

The fund also saw a $3.4 billion increase in the value of investments.

After accounting for the scheduled $581 million payment for dividends, the fund had a net growth of $3.2 billion over the fiscal 2003 year-end balance.

Dividends this year are projected to be smaller. They are calculated on a five-year average, and fiscal year 2004 replaces fiscal year 1999.

Overall return on investment that year was 9.5 percent. However, dividends are calculated only on realized gains, such as interest, rentals and sales of investments, not unrealized gains and losses such increases in property values.

"We in essence keep two sets of accounting records," Bartholomew said.

Realized income last year was $1.5 billion, compared to $2.5 billion for 1999.

The strong earnings the last 12 months will help balance previous years when almost everybody lost money in the stock market, Bartholomew said.

"This was a banner year, but the fund experienced losses in 2001 and 2002 and now has an annualized return of 5 percent over the last five years," he said.

He urged Alaskans to focus on fund performance in the long term.

"It's important to focus on how the fund performs over time and not just look at individual years."

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