Angela Rodell, chief executive of the $60 billion Alaska Permanent Fund Corporation, the biggest sovereign endowment in the US, can’t hide her frustration. Her freedom to scout the globe for long-term investments and build up a growth-boosting allocation to private markets could well be crimped by cash calls from the Juneau-based state government.
“This is, potentially, a very big chunk to manage,” she says.
APFC was created in 1976 to save and invest a portion of Alaska’s mineral royalties for the benefit of present and future generations of Alaskans. The fund pays an annual dividend to residents of the state that has risen along with the success of the fund. But now, with Alaska facing an annual deficit of nearly $3 billion, the sovereign fund may well have to help the government, which could cost more than the dividend ever has.
This would affect how Rodell manages liquidity, with a knock-on effect on an investment strategy that has always played to its long-term strengths. And because she still doesn’t know what the cash call will be – if it comes at all – it is difficult to plan.
“When the government comes to an agreement, we will decide what change this requires on our side,” Rodell says. “Paying the dividend so far has never required a change of strategy.”
But if the fund has to plug a gap as big as the deficit, she won’t have any choice.
APFC is not alone in its travails; the strain of low oil prices is forcing petroleum-rich governments from Azerbaijan to Saudi Arabia to pull money from SWFs to prop up their economies. Between March 2015 and March 2017, the collective assets overseen by SWFs decreased 0.5 per cent, compared with a 14 per cent increase in the two years to March 2015, the Sovereign Wealth Fund Institute states. Between 2014 and 2016, SWFs withdrew at least $85 billion from asset managers, figures from data provider eVestment show.
If the call comes at the APFC, Rodell will increase the current 22 per cent fixed income allocation. She is also re-evaluating the private-market portfolio, mulling which commitments to reduce so she has less money tied up in illiquid investments.
“We will leave public equity alone, but this strategy will still drive down our performance,” she says. “People want the fund to return 12 per cent a year, but you can’t have it both ways.”
APFC returned 12.37 per cent in the year ending June 2017; about 60 per cent of the portfolio is now apportioned to growth assets. The public equity allocation accounts for 40 per cent of assets. About 32 per cent of the portfolio is invested outside the US.
A high point of the year was the steady increase in the alternatives allocation, with new commitments to infrastructure and private equity, Rodell says. And if she had a free hand, this is where she would focus growth in the year ahead. She wants to expand the investment team from today’s 45 to perform the due diligence required for more co- and direct investments to cut fees and have more control. But securing a budget for the salaries and benefits needed to employ private-market expertise has proved tricky.
“We continue to look at ways we can streamline this process to make it easier to recruit. Not getting budget authority to spend on hiring has slowed us down the most,” says Rodell, whose reputation for transparency and openness has drawn global investors to Juneau to gather insight. Executives from Japan’s Government Pension Investment Fund (GPIF) recently made the trip to Alaska for advice on building a private-equity portfolio.
“They liked our mixed, three-pronged strategy and we don’t hide behind confidentiality walls,” Rodell says.
APFC’s $4.2 billion private-equity portfolio is equally split between direct, co-investments and fund investment. It has just set new mandates with ONCAP, Incline and Catterton Latin America. Internal private equity has returned 20 per cent since its inception in 2013. The bulk of the $25.9 billion public equity portfolio is externally managed, with a small, but increasing allocation run internally through exchange-traded funds.
Strategy in real estate, which accounts for 11 per cent of assets, is focused on tilting to non-core, in a break from the conservative core focus to date. Rodell likes value-added and opportunistic investments, such as seniors housing and medical properties. The portfolio includes a ‘build-to-core’ program and a focus on development opportunities. APFC is underweight industrials and overweight family and retail property, to capture urbanisation and Millennial themes. Investments include a joint stake with State of Michigan Retirement System in Simpson Housing, an owner and operator of multi-family properties across the US. Overseas property now accounts for 7 per cent of the real-estate portfolio.
The fixed income allocation is designed around an internally managed $7 billion investment-grade bond portfolio; an allocation to Treasury inflation-protected securities is also managed in-house. The allocations to global high yield, emerging-market debt, real-estate investment trusts and listed infrastructure are managed externally by a cohort that includes Oaktree, Capital Guardian and Cohen & Steers.
“We see a lot of value overseas, primarily in emerging markets,” Rodell says. “For the last five years, we have been tilting away from the US. Our emerging markets got hit in 2014-15 but we stayed the course and emerging markets have recouped their value.”
The private-income portfolio includes allocations to infrastructure – the bulk of which lies in energy assets but also in the mix are transport, waste management, timber – and private credit, which includes direct lending and distressed credit. For the last year, APFC has been running the private-credit allocation internally; it’s off to a good start, with one-year returns of 9.5 per cent.
The $2.2 billion absolute return portfolio includes recently added allocations to global macro, CTA, fundamental equity market-neutral, fixed income relative value and event-driven. Also, just this October, Rodell introduced a $2 billion currency-hedging program with London-based manager Adrian Lee & Partners.
“We have a $17 billion currency exposure,” she says. “This strategy is a recognition that currency does influence the value of the portfolio and can have negative repercussions.”
If Rodell doesn’t have to change tack to plug the state deficit, she has no plans to change the allocation.
“We have a heightened awareness of what is going on, and we are looking at opportunities to take value and realise value where we can,” she concludes. “But we are not altering our overall asset allocation at this time.”