Alaska Permanent Fund Corp. board all but rejects plan for riskier investment target

The board of trustees for the Alaska Permanent Fund Corp. meets Monday, Oct. 30, 2023, in Juneau. (Photo by James Brooks/Alaska Beacon)

(James Brooks/Alaska Beacon) – The Alaska Permanent Fund Corp. almost certainly will not seek riskier investments as it tries to increase the value of the fund to $100 billion, its board of trustees decided Monday as the board prepared to finalize a new four-year strategic plan.

Final approval of the plan will take place in December, but board members had considered raising the fund’s investment target in order to reach $100 billion within five years. The current target is 5%, plus the rate of inflation, as measured by the consumer price index.

During a work session meeting on Monday, trustees did everything but explicitly reject the idea after advisers said it was particularly risky.

“I think it’s likely it will stay at the CPI-plus-5, based on the robust discussion today,” said board chair Ethan Schutt.

The board hadn’t formally proposed raising the fund’s investment target, but doing so is implicit in any plan to raise the fund’s value to $100 billion in five or seven years.

“If we chose to target a $100 billion value by a certain date, that might involve the board adopting a different (target),” said Marcus Frampton, the fund’s chief investment officer.

Mathematically, hitting $100 billion in five years would require an average annual return of 9.3% — roughly 7% atop expected inflation.

Doing so would require the fund to be “aggressive,” Frampton said.

“Would I set that goal personally? I don’t know,” he said. “I’m not sure I’d be there with that 9.3 number.”

Trying to reach that target would likely involve more money in risky private equity accounts and investments using borrowed money, staff said.

Under one scenario, the fund would have borrowed as much as $18 billion — a quarter of the fund’s present value.

Britt Harris, the interim CEO of the Texas Permanent School Fund and a member of the Permanent Fund Corp.’s investment advisory group, said it’s “probably imprudent” to target a 7% return plus inflation. 

Both Harris and fellow investment advisory group member George Zinn, treasurer of Microsoft, advised the board to target 4% returns instead — a figure that’s below, not above, the fund’s current 5% target.

A 4% target would also be less than the annual transfer from the Permanent Fund to the state treasury each year.

Despite the drawbacks, a lower target comes with less risk and is in line with what other funds are doing, the board’s advisers said. Harris said the general expectation is for lower financial returns, which is why the board is hearing a 4% recommendation.

“Anything above 5% is starting to look like an outlier when you’re considering public money,” said Greg Allen of Callan, the Permanent Fund Corp.’s third-party advisory firm.

While the board turned down a change to its investment target, it did ask staff to prepare a strategic plan that calls for some changes to state law.

Board members said they are interested in exempting high-level hiring processes — for the corporation’s executive director and chief investment officer — from the state’s open meetings act.

Doing so would allow candidates to apply for those jobs without their current employer knowing. Schutt said he’s been discouraged from applying for public jobs, himself.

“If you have to give your employer notice that you are looking to leave, if you don’t get the new job, there can be real consequences,” he said.

The board also expressed interest in legislation that could exempt the Permanent Fund Corp. from state procurement rules, and a separate change to shield the personnel records of high-level staff from the state’s open records law.