Lawmakers question Permanent Fund investment strategy

Legislators skeptical of 'leading edge' model for asset allocation

Posted: Tuesday, September 29, 2009

Alaska legislators are continuing to question the Alaska Permanent Fund's new "leading edge" asset allocation strategy, with leading legislators saying they should have been consulted on such a change.

At a meeting of the Legislative Budget & Audit Committee in Anchorage Monday, top officials with the Alaska Permanent Fund Corporation defended the strategy.

"The facts are we haven't changed the asset allocation except to make it more conservative," said Steve Frank, chairman of the corporation's board of trustees.

The corporation manages the $33 billion fund, profits that provide a dividend check to most Alaska residents. This year's checks of $1,305 will go out next month.

The dramatic change to the asset allocation model came as the fund moved away from a traditional allocation of portions of the fund to stocks, bonds, real estate, and other investments. Now, they'll instead group investments by exposure to how well companies do or how they'll be affected by rising interest rates.

The change takes effect July 1, the start of the state's fiscal year.

Frank and other corporation staff told the committee that underneath that change in how they looked at investments were only small changes in the fund's actual holdings, however.

"We are not really changing our asset allocation," Frank said, other than adding small holdings of cash and Treasury Inflation-Protected Securities, elements that would tend to make the fund less volatile.

"The facts are we haven't changed the asset allocation except to make it more conservative," he said.

Corporation Chief Investment Officer Jeff Scott presented examples of how the old and new asset allocations would perform under different scenarios the market has faced or might face. That analysis showed only slight changes in how the fund would perform, he said.

Legislators continued to question the need and justification for the change, but House Finance Committee Co-chair Mike Hawker, R-Anchorage, said it was "not a blame game."

But he said the corporation should have consulted with the Legislature before making such a change, which legislators learned of through the newspaper.

Hawker said legislators were told the changes were minor, but then they began reading in the national financial press about Alaska's "leading edge" investment strategy.

That concerned Rep. Mike Doogan, D-Anchorage, who said it may be "too state-of-the art" and not consistent with the permanent fund founders' conservative investment philosophy.

"We don't want to be the leading edge of a plane going down," he said.

Scott said they were leading edge in how they were looking at risk, but the underlying assets remain conservative.

"We've been mischaracterized by the press, and that's unfortunate," Frank said.

Legislators said the fund staff should have better explained what they were doing to the Legislature, however.

Hawker said the public and their legislators value the fund highly, and want to watch its management closely.

"I wasn't so sure your new staff understood the Legislature's role in this," Hawker said.

Frank agreed they should have done better at keeping them informed.

"We failed to appreciate that we should have talked to the Legislature ahead of time," Frank said, himself a former legislator.

The controversial new asset allocation policy has gotten most of the attention, but the corporation has not been adhering to its previous policy before the change.

Monday, the corporation's investment advisor Michael O'Leary of Callan Associates, said the failure to more closely follow the asset allocation model hurt returns in the last several months.

"With the benefit of hindsight it would have been beneficial if it had rebalanced more rapidly," he said.

The fund wound up with too little money in stocks and too much in bonds, but remained that way betting that bonds would gain value more quickly than stocks. Instead, stocks made big gains.

Holding to an asset allocation model is intended to prevent bets on which way the market will move, and is thought to provide better returns in the long term.

• Contact Pat Forgey at 523-2250.

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