Legislators are questioning the Alaska Permanent Fund's bold new asset allocation strategy and asking why Alaska has the only such fund managed that way.
The Legislature's Budget and Audit Committee, meeting in Anchorage and by teleconference, questioned Mike Burns, the fund's executive director, and Jeff Scott, its chief investment officer,
Two of the Legislature's most influential members, Rep. Mike Hawker, R-Anchorage, and Sen. Bert Stedman, R-Sitka, led the questioning. They co-chair the House and Senate Finance Committees, respectively, and work in the accounting and finance industries.
The permanent fund took legislators by surprise when it changed how it was allocating its $32 billion portfolio from the traditional allocations to stocks, bonds, real estate and other investments to categorizing its investments by exposure to economic conditions.
That change came without consulting legislators and "shook us to our roots," Hawker said.
Burns and Scott tried to reassure legislators by saying 95 percent of the investments would remain the same. When the fund was at its recent $40 billion level, 5 percent equated to $2 billion.
"Two billion dollars is a lot of money to me and my constituents," said Rep. Mike Doogan, D-Anchorage. "We want to know in some detail what that change in investment strategy was."
The new investment strategy was approved by the corporation's board of trustees in May, and took effect July 1.
The permanent fund had not been consistent with its old asset allocation model for much of the last year. The fund executives held more bonds and fewer stocks than the model called for, hoping that bonds would increase in value more than stocks.
If they had followed its asset allocation strategy, the portfolio would have been rebalanced to maintain the investment ratios defined.
Hawker said they were concerned that the permanent fund had not been adequately rebalanced.
"You've got to keep the balancing up if you are going to meet the objective of those plans," he said.
Burns and Scott told their board of trustees in December they would rebalance the fund to precisely hit target investment ratios. Friday, they told legislators they had rebalanced, but used a new definition of rebalancing that used some fudge room around the target.
The failure to rebalance by investing more in stocks likely cost the fund some profits when stocks made their big rebound in the last few months, Burns has said.
The permanent fund's innovative new asset allocation model has been noted by the financial industry trade press, which has said few other investment funds are using similar strategies.
"I am interested in who has implemented it, who's just talking about it," Stedman said. "I'm also interested in who has looked at it and rejected it."
The change to an asset allocation strategy that is used by few other funds makes it difficult to compare Alaska's strategy to others, Hawker said.
"How do we benchmark when others don't do it this way?" he said.
Committee members Friday asked Burns and Scott to return in September and present more information about the new strategy.
Legislators said they were surprised that the permanent fund would implement such a change without involving the committees that oversee the fund.
Last year, before the permanent fund had its big drop in value in 2009, legislators had declined to hear from the permanent fund as they were dealing with the new, voter-imposed 90-day legislative session.
Contact reporter Pat Forgey at 523-2250 or firstname.lastname@example.org.