The Alaska Permanent Fund beat its performance benchmarks last year and compares favorably to its peers, according to the investment consulting firm Callan, which has advised the state on the Permanent Fund’s performance for decades.
In testimony to the House and Senate Finance Committees on Tuesday and Wednesday, Callan CEO Greg Allen had high praise for the Permanent Fund’s managers.
“I'd say it's, in my view, one of the best run portfolios amongst our clients,” Allen told senators Wednesday.
The fund earned 12.5% last year, far in excess of the long-term target of 5% plus inflation. It beat its own performance benchmark, meant to compare it to a similarly allocated fund, by 0.24% after accounting for management fees, Callan told the Permanent Fund's board. As of Wednesday, the fund stood at more than $89 billion.
Over the past 10 years, Callan told lawmakers the Permanent Fund has performed about on par with peers like large foundations and college endowments and better than most large state retirement funds.
The fund has also kept pace with the long-term 5% plus inflation target over the past 35 years, Callan said.
In the past three years, however, the Permanent Fund’s return has lagged behind its peers, the consultants said. That’s due in part to the fact that the fund has more bonds and less stock than some other funds, making it more stable and less risky, they said.
After adjusting for that risk with a metric known as the Sharpe ratio, Callan Vice President Steve Center said the Permanent Fund looks like it’s doing a better job extracting returns than most similar funds. It outranks 86% of billion-dollar public funds and 62% of large endowments on that metric, according to Callan.
That shows that “the investment team is taking measured risks that are paying off well compared to the other peers in this peer group,” Center said.
The fund has a very diverse portfolio. In addition to traditional publicly traded stocks and bonds, Alaskans also collectively hold billions in real estate, hedge funds, shares in private companies and non-bank lending known as private credit. Those last two categories — private equity and private credit — give the fund a chance to capitalize on opportunities that, as a whole, perform better than the equivalents on the public market, the consultants said.
However, facing fierce competition for spots in some private equity offerings, the Alaska Permanent Fund Corp.’s chief investment officer recently suggested a 1%-per-year reduction in the fund’s private equity, private credit and real estate portfolios over the next three years.
In some other categories — especially in the public markets — the fund’s size gives it immense negotiating power to drive down fees, Allen said. But the best private equity managers are “completely oversubscribed,” Allen said.
“If the Permanent Fund walks away and says, ‘I don't want to pay 2% management fees and 20% carried interest,’ which is the going rate, they'll simply say, ‘Fine, because we've got 20 other investors behind you,’” Allen said.
Chief Investment Officer Marcus Frampton also recommended reducing the Permanent Fund’s publicly traded bond holdings and adding more stock in public companies to make up for the reductions. The Alaska Permanent Fund Corporation’s board could act on the recommendation in May, according to meeting documents.
Speaking to lawmakers, Callan also addressed a common question from lawmakers and the public: instead of paying in-house and external fund managers, why not invest the fund in a low-cost index fund like the S&P 500?
Lawmakers across the political spectrum have floated the idea in recent years as a way to cut management costs as the stock market has soared to record highs.
But that would be “irresponsible” for an institution like the Permanent Fund, Allen said. For one thing, he said, about a third of the S&P 500’s value comes from seven closely related tech stocks, the so-called Magnificent Seven.
That means investing the nearly $90 billion fund in the S&P 500 would put about $30 billion in those seven stocks, Allen said.
“There's no planet on which that's considered diversified in the institutional investment world," Allen said. "You'd be subject to massive criticism when the piper has to be paid and the entire portfolio goes down 40%, which is what happened to equities in the (2008) global financial crisis."
The fund’s diversified portfolio necessarily means that it’ll never do as well as the best-performing asset classes, he said.
“But if you're in them all, you're going to have a smoother ride, and if you do it right, you're going to be able to earn competitive returns,” Allen said. “It's what the Permanent Fund has done.”
