AK permanent fund quietly shifts strategy

CEO, commissioner Galvin say fund not trying to time market

Posted: Friday, December 05, 2008

Managers of the Alaska Permanent Fund are backing away from their long-term investment plans in the face of the ongoing Wall Street crisis.

Those plans, the fund's asset allocation strategy, are set by the fund's board of trustees and determine how much money goes into various types of assets, such as stocks, also called equities, or bonds, also called fixed-income investments.

Formally setting a strategy is done to ensure investment managers don't make rash decisions in the heat of the moment, fund staff say. The $28 billion permanent fund is facing unprecedented losses, and is down more than $10 billion this year.

The shift in strategy is a reversal for Mike Burns, executive director of the Alaska Permanent Fund Corporation, who as recently as October told the Empire the fund would be sticking with its long-term plans.

In November, however, the Alaska Budget Report disclosed that that wasn't happening, and fund managers were deviating from their strategy.

As the Permanent Fund Board of Trustees met in Anchorage this week, Burns and other fund managers told the board that holdings were not always invested as the board's asset allocation policies called for.

Minor deviations are always expected, but in some cases the actual numbers are outside expected deviation ranges as well.

In the area of fixed income, the permanent fund is significantly overweight, fund managers said. Bond holdings have fared far better that stocks, especially foreign stocks, in recent months.

Under the board's asset allocation policy, that should mean the fund would re-balance its assets into areas that have declined, bringing each sector closer to its allotted amount. That would have likely meant buying stocks, possibly by selling bonds to do so.

The fact that the permanent fund hadn't been doing that seemed to take some trustees by surprise, including Chairman Steve Frank of Fairbanks, who said he was "uncomfortable in not re-balancing."

Holding to asset allocation models promotes an investment philosophy in which overvalued assets are sold and undervalued assets are purchased, which can mean selling hot investments and purchasing those that are out of favor at the time.

"What we've been taught is buy low and sell high," Frank said. "Maintain that discipline and you'll be served well over time."

The corporation's fixed-income manager, Jim Parise, said he's convinced that the credit instruments such as bonds are going to do better than stocks in the next year, in part because the federal government is backing lending in the hopes it will boost the economy.

"Credit is going to outperform equities, that's our internal thinking," Parise said.

He urged the board to keep its over-investment there.

Burns told the Empire that did not amount to an attempt to time the market, however.

"We are not trying to outguess the market, that's never what we've been about," he said.

In the past, when the staff has held to the asset allocation policy, they've used regular changes, such as deposits and withdrawals, to re-balance to get closer to the allocation policy.

This year, the entire amount of the dividend, about $1.4 billion, came from the overweight fixed-income portfolio, Burns said.

In October, Burns told the Empire they would likely be placing the fund's monthly royalty deposits in sectors where they were underweight. Instead, that amount was placed in the already overweight fixed-income sector, he acknowledged.

Department of Revenue Commissioner Pat Galvin, also a member of the board of trustees, recently publicly challenged the contention by the Alaska Budget Report's Editor-at-Large Gregg Erickson that the permanent fund's asset allocation decisions amounted to trying to time the market.

"We do not attempt to guess on the overall market, individual stocks and bonds, or on which class of assets looks the strongest for the coming year," Galvin wrote in a newspaper column.

The board of trustees this week asked permanent fund managers for monthly reports on whether they were in compliance with their asset allocation policy, but didn't demand immediate changes.

• Contact reporter Pat Forgey at 523-2250 or patrick.forgey@juneauempire.com.



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