PFD - Alaska Permanent Fund grows in value

Dividends appear to be bottoming out and should get bigger next year

Posted: Sunday, October 09, 2005

The 2005 Alaska Permanent Fund dividend checks will be $845.76 when they're released later this week, which is the lowest they've been since 1988.

But Alaskans shouldn't be worried about the strength of the Alaska Permanent Fund, the state's rainy-day account that invests a portion of the state's income from its oil and mineral wealth.

The fund grew a healthy $1.75 billion over the 2004-05 fiscal year, and the value of the fund is $31.515 billion (as of Sept. 29).

Bob Bartholomew, the chief operating officer of the Alaska Permanent Fund Corp., said the fund is becoming more complex as it matures to meet changing markets.

"The permanent fund has been evolving for the past 25 years," Bartholomew said at his office in Juneau's Goldbelt Plaza, one of the many properties owned by the fund. "The permanent fund will continue to play an important role in Alaska's future."

The fund was created as an investment account to save some of the state's oil and mineral wealth for the future, and the main purpose of the Alaska Permanent Fund Corp., or APFC, is to invest the money deposited into the fund. The corporation, a quasi-state agency that serves as its own entity, also manages the state's Mental Health Trust account.

Another organization, the Permanent Fund Dividend Division, is part of the state's Department of Revenue and its job is to handle the dividend distribution.

Bartholomew said the fund's accounts have become more diversified over time, and the fund now is more sophisticated.

"When we started it was just 100 percent U.S. government bonds," Bartholomew said of the only way the fund was allowed to invest the first money it received in 1977. "If (the fund) wouldn't have evolved, it would have earned less than half what's it's earned over the years."

In 1983, the APFC was allowed to invest in U.S. stock markets and real estate. In 1990, the fund was allowed to invest in international stock markets. And in 1999, the fund was able to start making investments in what Bartholomew called "alternative assets." He said the two main alternative assets are private equity investments - in which the APFC funds venture capitalists who seek out start-up businesses and technologies - and absolute return investments, such as hedge funds. Another type of alternative asset is to play the commodity markets.

"The two things that have driven the Permanent Fund are our asset allocation and diversification, and our patience and our ability to stay the course and invest for the long term," Bartholomew said. "It's our selection and discipline."

The corporation invests 55 percent of its principal in the stock market, 32 percent in bonds, 10 percent in real estate and 3 percent in alternative investments, Bartholomew said.

When it comes to stocks, he said the APFC can't own more than 5 percent of the stock in any publicly traded company for diversification. He also said when markets fluctuate, the fund isn't quick to sell off its investments. The stock market has gone through several declines over the years. By holding onto most of its main stocks and buying more as people sold out, the fund actually grew because the stocks later rebounded to higher values.

"I think it's called 'behavioral finance,' where the average person buys high and sells low, and we don't want that," Bartholomew said. "The average investor buys and sells stocks that have been in the news, and that's too late. We want to be ahead of the cycle."

Bartholomew said the fund has earned an average of 10.66 percent per year over the past 28 years. If the fund had only been able to invest in government bonds, then it could only expect to earn about 4.75 percent (using the formula for the next five years).

"The challenge for us is to continue to research as markets become more global, and investing becomes more global," Bartholomew said.

So if the fund is so strong then why are dividend checks down this year, the fifth straight year they've declined?

A big reason goes back to 2002 and 2003, years where the fund made money but not nearly as much as it had in previous years when there had been a robust stock market and real estate was selling for a premium. High tech stocks especially plummeted starting in 2001, and that carried over into the fund's 2002 and 2003 fiscal years.

In 2000 the fund earned a record $2.222 billion, while 2001 came in with $1.199 billion in earnings. But the market bottomed out in 2002 and the fund only made $257 million, followed by $355 million in 2003. The 2004 fiscal year saw a rise to $1.502 billion in earnings as the fund's built-in diversification helped it rebound.

The formula used for determining dividend checks involves a five-year average, so it took a while to get the low-earning years out of the formula. The five-year average was designed to "smooth out the peaks and valleys and make it (the dividend) more stable from year to year," according to a handout from the APFC. The handout also points out that the 2002 dividend would have been less than $200 instead of $1,540.76 if just the earnings from that year had been used.

Another reason the dividend checks didn't rise as much as oil prices is because oil's impact on the dividend is indirect. Incoming oil revenue is deposited into the fund's principal, and according to state law the fund's principal can only be invested and not spent. That takes most of the oil revenues out of the dividend equation.

But higher oil prices can have an indirect effect on dividends because when the fund's principal is bigger, then the earnings on the fund's investments are higher. The earnings from the fund's investments is what funds the dividend checks.

Another effect on dividends is a recent change made by the state Legislature that means only realized earnings can be used in the calculation of dividends and not unrealized gains.

For example, the fund owns a building that's valued at $10 million and rising property values boost the building's worth to $12 million. If the fund keeps the building, the $2 million increase in value is considered an unrealized gain and can't be used in the dividend formula until the building is sold. But the $1 million the fund received in rent payments for the building are considered realized earnings and they can be used in the dividend calculation.

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