Permanent fund looks to operate smaller accounts

New managers will run small portions of Alaska's savings fund

Posted: Thursday, December 03, 2009

Management of a portion of the $34 billion Alaska Permanent Fund will be contracted out to outside investment managers, but fund staff say the goal is more to learn how expert investors operate than a hope for explosive new returns.

The fund's Chief Investment Officer Jeff Scott is calling the money managers who will be hired "external CIOs," and expects each of the four managers will be given $500 million to invest as mini-permanent funds, for a total of $2 billion.

The new mangers will chose their own mixture of stocks, bonds and other investments that they think will be profitable.

Scott told the permanent fund's Board of Trustees Wednesday in Anchorage that part of the goal in bringing in top investment professionals for the new external manager mandate was to have people from whom Alaska can learn from.

"Part of this program is education; it's the biggest part of the program," Scott told the board, which gave staff the go-ahead for the manager selection.

The permanent fund's staff has been unable to persuade the governor and Legislature to expand its investment staff in recent years, but can offer management fees on substantial amounts of money without legislative approval.

The newly hired external CIOs will be required to allow permanent fund staff to visit them to watch how they operate. Scott said that might involve week-long visits, rather than the hour-long visits typical of the business.

Scott said the new managers will be dealing with lower-level permanent fund staff for longer periods of time, not just short visits with CEO Mike Burns or himself.

At the same time, the external CIOs' firms will also have to come to Alaska regularly to brief staff and the board.

Scott said the companies would have to send portfolio managers, not marketing staff, to Alaska for those presentations.

The final five candidates, which include Goldman Sachs and PIMCO, all said that requirement was acceptable.

One candidate told Scott they will "be in Juneau more often than we want."

"That remains to be seen," Scott said.

Callan Associates, the permanent fund's outside advisor, helped to come up with a list of possible candidates for Alaska.

"This was a very unusual search, there aren't many searches done for this type of mandate," said Michael O'Leary, Callan's Alaska representative.

The final list of possible candidates was provided by Callan and then narrowed down by permanent fund staff. O'Leary said those remaining are "fantastic managers."

Scott said the fees paid to the external CIOs would be based on performance, but were structured to see that the permanent fund didn't pay hedge fund-type of fees if the managers weren't able to beat the market. The top amount they might be paid was also capped, he said.

"I don't want to write an unlimited check to anybody," Scott said.

The final four will be selected, placed under contract and funded by the end of next year's first quarter, permanent fund staff said.

The external CIOs will have some limitations that the permanent fund itself does not have, such as how long invested money can be locked up and how liquid it must be. They won't be able to invest in private equity, real estate, timber or other types of assets, Scott said.

That should make the external CIO investments less risky than average for the full permanent fund, Scott said.

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

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