Permanent Fund grows 1.35 percent in FY 2016

The Permanent Fund unofficially grew a modest 1.35 percent on a $52.8 billion portfolio in fiscal year 2016, the result of a volatile 12 months for public financial markets, according to Fund leadership.

Alaska Permanent Fund Corp. Executive Director Angela Rodell said during an Aug. 18 meeting of the policy study group Commonwealth North in Anchorage that market fluctuations followed oil’s wintertime foray to less than $30 per barrel, the first time the dominant commodity had been that cheap for that long since the early 2000s.

If there is change to the unaudited 1.35 percent return for the 2016 state fiscal year, which ended June 30, it would likely be an increase, Rodell said.

The Fund’s Earnings Reserve Account, which holds realized and unrealized gains, finished fiscal year 2016 with $8.1 billion, according to Rodell.

The fund held $54.2 billion in total assets as of Aug. 22.

Private market assets, which comprise 44 percent of the Fund’s current investment portfolio, are where the best returns have been recently.

“Real estate continues to be a very good area for us,” she said.

About 12 percent of the Fund’s assets are in real estate holdings, which yielded nearly a 17 percent return in 2016, followed closely by infrastructure investments, which produced 14.9 percent returns for the year.

Public equity holdings, about 40 percent of the Fund, lost 5.1 percent.

Since 2011, the Alaska Permanent Fund Corp. has achieved an average return of 6.41 percent, which is 1.56 percent above the benchmark set by the APFC Board of Trustees for a similar portfolio managed passively, Rodell, a former Revenue commissioner under Gov. Sean Parnell, noted.

“We think this is strong performance, but we can do better. We strive to be an excellent performer, not just a solid performer,” she said.

The performance of the Permanent Fund has become a focal point of political circles, beyond simply what it means for fall dividend checks, as Gov. Bill Walker and some in the Legislature push to use the Fund’s earnings to fill half or more of the state’s $3 billion-plus annual deficits.

The final “Permanent Fund bill” that passed the Senate by a wide margin but failed to reach a floor vote in the House this past spring would have established an annual 5.25 percent of market value, or POMV, draw from the Earnings Reserve Account.

The trustees have in the past supported a POMV draw from the Fund of up to 5 percent.

Revenue Commissioner Randy Hoffbeck, a current Fund trustee, said repeatedly during testimony to legislative committees that the 5.25 POMV draw is at the far upper limit of what could sustainably be pulled each year.

Earlier versions of legislation to use Fund earnings had smaller percentage draws; the 5.25 percent figure was a political compromise that would really mean achieving 7.25 percent annual returns to maintain the Fund’s value after adjusting for inflation.

Rodell said managers try to hold 6 percent of the overall value of the Fund in cash and liquid investments to make needed cash calls and that prospective liquidity challenges if draws are made to fund government “are a topic of discussion” but no decision to change investment strategy has been made because policy hasn’t yet changed.

How the corporation handles future draws will depend on the size of the draws and whether Fund management needs to be adjusted to meet the new demand, she said.

Rodell emphasized that the Permanent Fund Corp. is “not in a position to anticipate” what might happen politically.

She also noted that POMV draws from other large endowment funds, such as those held by Harvard and Yale have historically been in the 5 percent range but some draws have been cut to 4.5 percent or 4 percent because anticipated returns weren’t materializing.

“All we are tasked with is to manage the money and that’s it. I think it’s just really important to recognize that. This is a big debate (using Fund earnings for government services) and when I get asked about what is a sustainable draw I don’t address that question,” Rodell said. “It’s not important what I think is sustainable. If I know what the bogey is we’ll hit the bogey.”

Unique about Alaska’s Permanent Fund, she added, is that the draw can only come from the realized gains in the Earnings Reserve, which based on statute that allows lawmakers to draw from the account with a simple majority vote, is nothing more than another savings account from the corporation’s perspective.

“Just like we don’t talk about what’s sustainable for the Constitutional Budget Reserve and we don’t talk about what was sustainable for the Statutory Budget Reserve, the Earnings Reserve Account is an account that belongs to the State of Alaska that can be spent,” Rodell said.