Alaska Permanent Fund Corporation
2015 Annual Report
Growing for Alaska
Principal
Earnings
Mineral Royalties
Fund wins aiCIO Industry Innovator Award
The Alaska Permanent Fund Corporation (APFC) has won the aiCIO Industry Innovation Award in the sovereign wealth fund category for
the second time in four years. aiCIO is an industry publication for Chief Investment Officers produced by Asset International, a company that
provides data and investment analytics to the investment industry.
aiCIO recognized efforts the Board and staff have made over the last few years to add depth and
diversification to the Permanent Fund’s investments, including bringing more investments in-house. These
changes were made not to seek outside recognition, but because the APFC believes in-house management
provides a number of benefits to the Fund’s long-term health. In addition, the Fund began taking direct
stakes in companies such as Juno Therapeutics, in order to take advantage of lower fees while allowing for
greater control through in-house management.
As one of the early sovereign wealth funds, and the largest state-level fund of its kind in the United States, the Permanent Fund attracts attention
from all over the world as a model for how to turn a non-renewable natural resource into a renewable financial resource. Even with a staff that is
smaller in size than many other funds of similar size, the APFC has significantly advanced its mission to better ensure the health of the Fund for
present and future generations of Alaskans.
Asset Allocation
Each year, the Board sets the target allocation for the Permanent Fund’s
investments. This provides a broad investment strategy, within which individual
investment decisions can be made. In setting this strategy, the Board doesn’t
try to time the markets or focus on short-term market conditions. Instead,
it builds a portfolio that will provide more stable returns under a variety of
market conditions.
The image below shows the risk-based allocation adopted by the Board in
2009 on the outside of the graph. The traditional asset classes are shown on
the inside of the graph, in the corresponding areas where they fall.
Real Assets, 19%
The value of real assets hedges
inflation risk, helping protect
the Fund’s real value over time.
Cash and Interest Rates, 6%
The cash allocation is designed to let
the Fund build up reserves over the
course of the year to meet its expected
liabilities, primarily the annual dividend
payment each July.
Company Exposure, 55%
When the economy is
performing well, most public
and private companies are
performing well. Investing in
these corporations allows the
PermanentFund to benefit in
times of growth and prosperity.
Special Opportunities, 20%
This allocation allows the Permanent
Fund to invest in special opportunities
and to take advantage of dislocations
in the markets.
Asset Classes
Stocks represent a share of ownership in public
companies. The Permanent Fund owns shares in
more than 3,000 corporations around the world.
Bonds are a form of loan. A bond “issuer” – a
corporation or government – borrows money at a
preset interest rate for a preset period of time.
Real estate includes both direct investments in
properties across the U.S., including malls, office
buildings and apartment complexes, and real
estate investment trusts (REITs). These are publicly
traded financial instruments that invest in incomeproducing real estate and are traded like stocks.
Private equity investments are made directly in
private corporations — corporations that are not
publicly traded in stock markets. The APFC uses
gatekeepers to evaluate the firms that make these
investments on the Fund’s behalf.
Cash investments are liquid investments with
durations of less than 12 months.
Other
Absolute return investments (also called hedge
funds) are private investment partnerships that use
multiple stock and bond investment strategies to
achieve a target return on investments.
Infrastructure investments are facilities or
services that are typically owned and managed by
governments, such as toll roads or electric utilities.
Infrastructure investments provide a steady return
over a long period of time.
New Investments in Real Estate
The Permanent Fund has seen progress in two initiatives implemented over the last two years: European real estate, where the Permanent Fund was able to
make a favorable entry in a new market, and U.S. industrial properties, acquiring properties in a growth segment underweight in the portfolio. The Fund
purchased a 50 percent interest in Zenia Boulevard Shopping Centre in Alicante, Spain and Alegro Alfragide Shopping Centre in Lisbon, Portugal. Through
these acquisitions, APFC was able to form a promising strategic partnership with Immochan, a large European owner and operator of retail properties
throughout the continent. In the industrial sector, Valwood & CentrePort Industrial Park, a multi-building property located in Dallas, was purchased in the
summer of 2014, and Faraday, a warehouse located in Carlsbad, California was added shortly thereafter. In the fall of 2015, four industrial properties located in
Illinois and Ohio were added to the portfolio.
Golden Square Shopping Centre (Warrington, UK), 2014
Corporate Grove (Buffalo Grove, IL), 2015
Lewis Centre Way (Grove City, OH), 2015
Global Way (West Chester, OH), 2015
Zenia Boulevard Shopping Centre (Alicante, Spain), 2014
Saving Investment Costs Through In-House Management
Over the years, most of the day-to-day management of the Permanent Fund’s
investments has fallen to outside firms that are closer to the financial markets
and have the resources to provide the best results. Internal staff focused
on overseeing the performance of these firms, and advising the Board on
higher level decisions. As the Corporation’s capabilities have grown, and as
telecommunications have made the world smaller, the Board has focused on
bringing more of the work to the APFC.
In-house management provides comparable or better returns at a lower cost
than using outside managers, and the investment and support positions
created at the Corporation to do this work bring good paying, professional
jobs to Alaska. The Permanent Fund is currently managed by 18 investment
staff, supported by 24 accounting, IT, legal and administrative staff. When
more of the work is conducted in-house, it deepens the internal knowledge of
the Fund’s investments and allows for better alignment of the Fund’s interests
across portfolios.
returns during the 2008-2009 recession than institutional funds that rely more
heavily on outside managers. The real estate portfolio has more than doubled
in value, bringing $3.2 billion to the Fund over the last five years while inhouse management and joint venture arrangements have generated savings on
fees in excess of $3 million annually.
From the Permanent Fund’s earliest days in 1977, the bond portfolio was
managed in-house. Over the years, the majority of the U.S. bond portfolio
has stayed in-house, saving the Corporation more than $15 million in
fees with returns that are often better than the Fund’s peers. In 2013,
management of part of the international bond portfolio moved to Juneau as
well, adding another $500,000 in annual fee savings. These fee savings are on
a portfolio that has grown $5.6 billion in the last five years, ending fiscal year
2015 with $12.1 billion in bond investments.
One area of in-house management that has been particularly successful is
with the Fund’s infrastructure and private equity investments. Historically the
Corporation has relied on outside gatekeepers to make and manage these
investments, but in recent years the Board has directed APFC staff to make
the investments directly or through co-investments. These internally managed
investments save more than $9 million in fees each year, a number that is
expected to grow over time, and generated more than $3.2 billion in value to
the Fund over the last five years.
The Permanent Fund made its first real estate investment in 1983. Over the
years, the Corporation has taken over greater control of these investments.
Eighty percent of the Fund’s $6.5 billion real estate portfolio is in majority or
wholly owned assets controlled by the APFC, a dramatically different picture
than 20 years ago, when the Fund had more properties in the portfolio but
was the controlling partner in only 30 percent of them. Hands-on ownership
is more time consuming, but it can produce better results. As a controlling
owner of most properties in the portfolio, the Fund saw better real estate
One asset class that has traditionally been managed outside of the APFC is
the $23 billion stock portfolio. The Board believes that the time has come
that the Corporation can successfully bring a portion of the passive stock
portfolio in-house. This will require additional investment officers as well as
risk management and information technology staff, but it will eliminate more
than $3 million in external management fees paid to outside firms each year.
Saved fees will stay in the Permanent Fund, adding value that will be available
to invest for the benefit of present and future generations of Alaskans.
Goldbelt Place (Juneau, AK)
A Two-Part Fund
While the entire Fund is invested in assets
such as stocks, bonds and real estate, for
accounting purposes it is divided into two parts:
principal and the realized earnings account.
The Alaska Constitution says that the principal
may not be spent. The realized earnings in
the realized earnings account may be spent
by the Legislature for any public purpose,
which includes the Permanent Fund Dividend
distribution.
What are realized earnings? Realized earnings
are the income from bond interest, real estate
rent payments and stock dividends as well as the
profits from selling assets that have increased
in value. Any losses from selling assets that
have decreased in value are deducted from
the realized earnings. Realized earnings are
accounted for in the realized earnings account
and, once received, are reinvested in the same
assets as the principal to increase the Fund’s
earning potential.
What about unrealized gains? Unrealized gains
(and losses) are the increases (or decreases) in
the value of assets that the Permanent Fund
currently holds. These gains (and losses) are
considered part of the principal until the asset is
sold, and then any net realized gains (or losses)
are recorded in the realized earnings account.
Principal and Realized Earnings Account
As of June 30, 2015, ending balance (in billions)
$50
$25
0
Realized Earnings Account
$ 7.2
Principal
45.6
Total: $52.8
The Effects of Diversification
Five Year Cumulative Return
150%
U.S. Equities
125%
100%
Global Equities
Real Estate
75%
Total Fund Return
50%
Alternative Investments
Non-U.S. Equities
25%
U.S. Bonds
Non-U.S. Bonds
0
-10%
6/10
9/10
12/10
3/11
6/11
9/11
12/11
3/12
6/12
9/12
12/12
3/13
6/13
9/13
12/13
3/14
6/14
9/14
12/14
3/15
6/15
The Permanent Fund’s portfolio is designed to take advantage of different types of investments that generally work in
disharmony with one another and bring different risk and return profiles to the mix. By investing in a range of diverse
assets, the Fund is better positioned to achieve a positive return in various market conditions.
Letter from the CEO
After serving on the Alaska Permanent
Fund Corporation Board of Trustees during
my recent tenure as Commissioner of the
Department of Revenue, I am pleased to have
the opportunity to continue to serve Alaska
as the Chief Executive Officer of the APFC.
For fiscal year 2015, the Fund gained 4.9
percent, well ahead of the composite
benchmark return of -1.4 percent, and ended
June 30 with a value of $52.8 billion, up
$1.6 billion from the prior fiscal year-end.
Although the Fund’s performance ended the
Angela Rodell, CEO
fiscal year in positive territory, it was at times a volatile year, and some asset
classes produced losses. After two years of rising markets, the correction we
saw at the start of the year wasn’t wholly unexpected. Later rallies helped
make up lost ground, but the earlier losses certainly weighed on overall
returns. The risk aware approach we take to managing assets helped us to
successfully navigate this more difficult market environment.
The U.S. stock portfolio gained 7.2 percent for the fiscal year, while the
non-U.S. portfolio returned -5.2 percent. The Fund’s global portfolio, which
contains both U.S. and non-U.S. stocks returned 1.2 percent. Bonds had
periods of difficulty over the fiscal year as well, and while the Fund’s U.S.
portfolio was up 1.2 percent, the non-U.S. portfolio lost 2.4 percent.
Real estate was an area of growth for the Permanent Fund in more ways
than one. Not only did the Fund’s investments gain 9.8 percent for the
fiscal year, but the portfolio expanded in notable ways as well. The Fund’s
long-time investment, Tysons Corner Center outside Washington D.C.,
celebrated the successful grand opening of a sizeable three-building addition,
including an office tower, hotel and apartment complex. Finally, the purchase
of 50-percent ownership interests in retail properties in Portugal and Spain
added to the year-old European portfolio.
Private equity was a strong contributor, with the portfolio gaining 16.5
percent over the fiscal year. The Fund’s infrastructure investments were also
up, returning 4.7 percent for the period. The absolute return and real return
portfolios are comprised of multiple asset types, and returned 1.7 percent
and 3.4 percent respectively.
I was not the only new arrival at the APFC. In addition to my hire, the
Corporation welcomed three other new staff members over the last year.
Jane Sherbrooke, our finance intern in 2014, returned after graduation to
become an Operations Analyst in the Finance Department. Chris Poag
transferred from the Alaska Department of Law to serve as the APFC’s
General Counsel, and Tim Andreyka recently came on board as an
Investment Officer for our real estate portfolio. We are pleased to welcome
these new members to the Corporation’s team!
Sincerely,
Angela Rodell, CEO
Fund Fiscal Year 2015 Performance
15%
12%
9%
6%
3%
0
-3%
-6%
4.9 1.4 3.2
7.2 7.3 7.3
-5.2 -5.3 -3.2
1.2 1.1 2.6
1.2 1.9 1.6
-2.4 4.0 -2.6
9.8 11.9 13.6
1.7 3.4 2.3
Total Fund
U.S. Stocks
Non-U.S. Stocks
Global Stocks
U.S. Bonds
Non-U.S. Bonds
Real Estate
Absolute Return
& Distressed Debt
Fund
Benchmark
Median Public Fund
Due to differences in hedging strategies, there is no meaningful peer group against which to measure returns.
4.9%
$600 million
$52.8 billion
$1.6 billion
$1,373 million
$624 million
Total Fund return
Constitutional deposit
from mineral resources
for the fiscal year
Fund balance on
June 30, 2015
(after dividends)
Increase from ending
balance on June 30,
2015 (after dividends)
Total paid for fall
2015 dividends
Inflation proofing of
principal, based on the
statutory calculation
APFC.ORG
Find the most up-to-date
information on the Fund
at apfc.org.
Information on past
values and performance
Important Fund news
Most current
financial statements
and investment
performance
Current Fund value
Upcoming board
meetings