State money managers stay the course

Alaska Permanent Fund loses billions in market decline

Posted: Sunday, October 19, 2008

The Alaska Permanent Fund, which recently topped out at more than $40 billion, is now less than $30 billion.

Much of that decline came from this year's precipitous stock market decline, though some has been from losses in bonds and paying out a record $1.3 billion in dividends this year.

Other state investment funds, such as for public employee retirement, also have seen declines.

So how are the state's top money managers reacting to the stock market declines? It looks like they'll be buying more stock.

That's not as strange as it sounds, even at a time when TV stock picker Jim Cramer is screaming "sell" and most other commentators are saying to hunker down and hold what you've got.

But some savvy investors think there are good values to be had out there, even if those values won't be recognized right away.

"If you are thinking long term, like we like to think, everything is a pretty good value," said Mike Burns, executive director of the Alaska Permanent Fund Corp.

At the permanent fund and at the Department of Revenue's Treasury Division, a system called "asset allocation" is set up by their governing bodies in calmer times. That system has the effect of forcing them to buy low and sell high. Such a strategy prevents investors from trading based on emotion instead of following a steady plan, Burns said.

"That's the discipline that we have over a long period of time," he said.

Each body sets their asset allocations, including how much to invest in U.S. stocks, foreign stocks, U.S. bonds, etc. The permanent fund, for example, has set a target of 26 percent of its holdings in U.S. stocks, but currently has less than 23 percent there. The difference is hundreds of millions of dollars.

The Alaska Retirement Management Board is looking at similar issues. It met in a special meeting last week because of the "extraordinary financial times we are experiencing," said Gail Schubert, the board's chairwoman.

The news in the markets was bad, said chief investment officer Gary Bader, resulting in the board's stock investments dropping by 28 percent since the beginning of the year.

That means they'll have to rebalance to get back to their targets, he said.

How each agency goes about rebalancing may be different, and trickier at the ARM Board than at the permanent fund, managers said.

New money flows into Burns' fund regularly, almost all of which comes from the state's share of its North Slope royalty oil. Last year that amounted to $844 million, and $674 million is projected to come in this year.

Burns said his goal is to use the new cash inflows to rebalance, rather than selling things they already hold.

"In a market like this everything looks pretty attractive to buy, and nothing looks attractive to sell," he said.

If they do have to sell, real estate holdings are likely to be among the last sold, Burns said, even though it now makes up 13.6 percent of the portfolio, despite a target allocation of 10 percent.

That's because real estate is considered an "illiquid" asset, meaning it often takes time to convert to cash. Also, this may not be a good time to sell, either.

If the fund can avoid an active rebalancing and just do it with putting new revenue into the areas it wants to boost, it can avoid selling any investments at depressed prices, Burns said.

Bader said that's not a luxury he's able to afford.

The amount of money state employees contribute for retirement doesn't cover the costs of paying for current retirees, meaning money has to be taken out of investments every month for that, he said.

Bader said they'll probably have to sell bonds that have fallen in value "even though we may have to take a loss on some of them," to do the rebalancing.

One of the ARM Board's investment advisers, George Wilson, said the endowment funds he advises are doing the same thing: Holding steady with their long-term plans and rebalancing their portfolios to make sure they're complying with their investment management targets.

"Staying the course is the message in my world," he said.

After reviewing not only investment returns, but the soundness of its financial management companies, the board adjourned Wednesday without making any changes.

• Contact reporter Pat Forgeyat 523-2250 or e-mail

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