Legislature(2021 - 2022)ADAMS 519
01/25/2022 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Alaska Permanent Fund by the Alaska Permanent Fund Corporation | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 281 | TELECONFERENCED | |
| *+ | HB 282 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
HOUSE FINANCE COMMITTEE
January 25, 2022
1:34 p.m.
1:34:19 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:34 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Kelly Merrick, Co-Chair
Representative Dan Ortiz, Vice-Chair
Representative Ben Carpenter
Representative Bryce Edgmon
Representative DeLena Johnson
Representative Andy Josephson
Representative Bart LeBon
Representative Sara Rasmussen
Representative Steve Thompson
Representative Adam Wool
MEMBERS ABSENT
None
ALSO PRESENT
Valerie Mertz, Acting Executive Director and Chief
Financial Officer, Alaska Permanent Fund Corporation; Chris
Poag, Legal Counsel, Alaska Permanent Fund Corporation.
PRESENT VIA TELECONFERENCE
Marcus Frampton, Chief Investment Officer, Alaska Permanent
Fund Corporation.
SUMMARY
PRESENTATION: ALASKA PERMANENT FUND by the ALASKA PERMANENT
FUND CORPORATION
^PRESENTATION: ALASKA PERMANENT FUND by the ALASKA
PERMANENT FUND CORPORATION
1:35:11 PM
VALERIE MERTZ, ACTING EXECUTIVE DIRECTOR AND CHIEF
FINANCIAL OFFICER, ALASKA PERMANENT FUND CORPORATION,
provided a PowerPoint presentation titled "Alaska Permanent
Fund Corporation: House Finance Committee," dated January
25, 2022 (copy on file). She briefly introduced herself and
shared that she had lived in Juneau most of her life. She
was a certified public accountant (CPA) and had been with
the Alaska Permanent Fund Corporation (APFC) for 18 years.
She had been the acting director during the transition
between the former Director Mike Burns to Director Angela
Rodell in 2015. She offered assurance to the committee that
employees at APFC had not let recent controversies impact
the work that they were doing.
Ms. Mertz advanced to slide 2 and relayed that the fund was
created in 1980 as a separate state entity. The fund was
overseen by a board of trustees who served as its
fiduciaries. The mission of the corporation was to manage
and invest the assets of the Permanent Fund and other funds
designated by law in accordance with AS 37.13.010 through
AS 37.13.190. She pointed to the right side of the slide
which showed the items managed by the corporation.
Representative Edgmon asked for more information about the
maximum returns and the vision of the corporation as
indicated on the slide.
Ms. Mertz answered that APFC was required to follow the
prudent investor rule and that the mission and vision of
the corporation were driven by the rule.
Representative Edgmon stated that "maximum" was an
important word in the prudent investor rule.
1:39:15 PM
Ms. Mertz turned to slide 3 and detailed that the fund had
a balance of just under $81 billion at the end of November
2021, with $65 billion in the fund principal. The Earnings
Reserve Account (ERA) balance was $15.7 billion. She
relayed that $3.4 billion of the $15.7 billion had been set
aside for the FY 23 percent of market value (POMV) transfer
to the general fund, and another $3.4 billion for the
unrealized gains of ERA. In total, there were uncommitted
earnings of just under $9 billion.
Ms. Mertz addressed slide 4 which included a list of the
sources of change in value for the fund from the end of FY
21 to FY 22 as of November 30, 2021. The bottom of the
slide showed how APFC calculated statutory net income,
which did not include the unrealized gains and losses. She
reported that the FY 22 year-to-date to ERA was just under
$3 billion.
1:42:34 PM
Ms. Mertz advanced to slide 5 which compared APFC's return
on investment between FY 21 and FY 20 using a variety of
metrics. She relayed that FY 21 was an extraordinary year
for the fund in terms of performance, earning an average of
$77 million per trading day. In FY 20, the fund earned
about $7 million per trading day. She noted that APFC's
operating budget and management fee budget in FY 21 totaled
about $168 million, which meant that all operating expenses
for the year had been recovered by about the sixth trading
day.
Representative Johnson pointed to the last box on slide 5
regarding APFC investment management. She asked for more
details about what investment management entailed for the
corporation.
Ms. Mertz answered that it represented the amount that was
paid out to investment managers, which included the
publicly traded securities, systems and analytics, and due
diligence and legal fees needed to manage the fund.
Representative Johnson asked if the category included all
contractors working outside the APFC building.
Ms. Mertz replied that it did not include all contractors.
She explained that employees who did administrative work
would not be included, but employees who did investment
management work were included.
Representative Wool asked which category the performance
bonuses fell under.
Ms. Mertz responded that the bonuses were in the operations
budget.
Representative Wool asked why there was a decrease in the
operations budget from FY 20 to FY 21.
Ms. Mertz clarified that the figures on the slide were
actual expenses, not the budget authorization. She would
have to follow up on exactly what constituted the
reduction.
1:46:13 PM
Ms. Mertz moved to slide 6 which included a graphical
representation of the structure of the fund. She pointed
out the mineral royalties flowing into the principal on the
left side of the slide, which were distributed into income
producing investments, and the earnings then flowed into
the ERA account. She noted that the ERA account was also
invested alongside the principal and available for
appropriation. She explained that appropriated amounts
would flow out of the ERA and back to the principal in the
form of inflation proofing. The ERA was also used to fund
corporate operating expenses and the POMV transfer to the
general fund.
Ms. Mertz discussed the principal of the fund on slide 8.
She detailed that the principal was established in the
constitution as a permanent savings account and was used
only for income-producing investments and was protected
from appropriation. Historically, the principal grew in
three ways: royalty deposits, inflation proofing, and
special appropriation. The slide showed that the expected
royalty amount in FY 22 was $429 million.
Representative Edgmon did not see reference to the special
appropriations the legislature had made over the years. He
asked if special appropriations would be more than royalty
deposits over the year.
Ms. Mertz responded she would answer the question on the
next slide.
Representative Josephson asked whether the special
appropriations were known as inflation transfers.
Ms. Mertz answered that APFC considered inflation proofing
appropriations to be separate from everything else.
Representative LeBon noted that the royalty deposits shown
on the chart on side 8 consisted of the 25 percent of
royalty proceeds and the statutorily mandated deposits of
50 percent for leases after 1979. He asked if there was a
comment about the relationship between the two pools of
money flowing into the fund. He asked if the state was up
to date with the 50 percent deposit for leases.
Ms. Mertz responded that APFC did not make a distinction
between the constitutionally required amounts and the
statutorily required amounts. She noted that the Department
of Natural Resources (DNR) oversaw the matter.
Representative LeBon pointed out that royalty deposits
included mining in addition to oil and gas. He acknowledged
the important role mining had played in building up the
fund.
Representative Wool asked if royalties from federal lands
such as the Natural Petroleum Reserve-Alaska (NPRA)
followed the same deposit structure.
Ms. Mertz replied that federal deposits were included as
received from DNR.
Ms. Mertz continued to address slide 8 and relayed that the
second way the principal grew was inflation. She explained
that the inflation proofing calculation was based on
deposits into the principal and on the inflation rate that
was calculated as per statute. An appropriation was needed
to fulfill the statutory obligation. She noted that there
were a handful of years that did not include an inflation
transfer because the inflation rate was negative.
Ms. Mertz addressed the third way the principal could grow,
which was through special appropriation. The growth came
about when there were legislative deposits from both the
general fund and ERA.
1:53:15 PM
Ms. Mertz moved to slide 9 which included a graph outlining
the principal contributions since FY 78. She believed it
applied to Representative Edgmon's previous question. The
gold bars represented the mineral royalty deposits, which
totaled about $18.4 billion since the inception of the
fund. The bright blue bar reflected inflation proofing,
which was tied to the inflation rate and varied from year
to year in magnitude. Since the inception of the fund, $18
billion had been transferred from the ERA to the principal.
Co-Chair Merrick asked for an explanation of the settlement
category represented by the red bars.
Ms. Mertz answered that there was a lawsuit in which the
state was involved and the settlement money from the
lawsuit was deposited into the principal. She was not
appraised of the particulars of the lawsuit.
Representative Edgmon noted that there were some years
where the state was not able to fund inflation proofing. He
thought the fact that the legislature had been intent upon
growing the fund needed underscoring.
Ms. Mertz reviewed the ERA beginning on slide 11. She
explained that it was established in AS 37.13.145(a) as a
separate account to hold the realized earnings from the
fund's investment portfolio and it grew through the receipt
of statutory net income. She advanced to slide 12 and added
that statutory net income included two components: the
regularized monthly cash flows that the portfolio
investments were generating and the capital gains and
losses. She thought that FY 22 was shaping up to be fairly
profitable. The bars on the chart on slide 12 represented
the total returns as compared to the statutory net income
since FY 01. There was not an immediate correlation between
the statutory net income and total return. She thought that
the statutory net income was more dependent upon the
activity in the portfolio.
1:58:56 PM
Ms. Mertz discussed the cumulative fund earnings and how
the earnings had been used on slide 13. Since inception,
the fund had generated almost $80 billion in realized
earnings. Of the $80 billion, about $37 million had been
paid out in the form of dividend appropriations, POMV
distributions to the general fund, and Alaska capital
income. There had been $30 billion in savings from ERA to
the principal. The current realized earnings were about $12
billion and there was $9 billion left over for uncommitted
earnings.
Representative Edgmon remarked that when the first dividend
had been distributed in 1982, it consisted of money that
had been appropriated by the legislature rather than money
in the fund. He asked if there had been occasions when more
than five percent POMV was paid out as the fund was
growing.
Ms. Mertz thought the question was interesting and that it
would be valuable to find out the answer.
Representative Edgmon would appreciate a follow up with the
information.
Representative Carpenter thought there were two statutes
that directed the corporation on how to determine earnings.
He asked how the corporation decided which of the two
statutes to follow.
Ms. Mertz answered that the APFC's accounting followed
generally accepted accounting principles. The principles
required that earnings be committed when the amount was
known. The only way a payout would not happen was if the
legislature decided against it. The corporation was able to
accurately predict the POMV transfer amount well in advance
and had decided the likelihood of that payment not
occurring was remote.
Representative Carpenter understood that SB 26 [adopted in
2018] relating to the POMV draw was in conflict with
another statute. He thought that APFC assumed that in the
next budget cycle, the legislature would choose the POMV
model and not the 21 percent model as outlined in SB 26.
However, if the legislature chose to not continue with the
POMV model for whatever reason, other statutes would apply
equally to APFC's obligations.
Ms. Mertz agreed that APFC followed the appropriations as
acted upon. She stated that the calculation under the
statutory dividend would result in less of a commitment
from the ERA than the POMV calculation would. She thought
the approach was conservative because it required that the
maximum amount possible be set aside.
2:06:39 PM
Representative Wool stated that the SB 26 statute was not
just a calculation statute but was a funding source
statute. He was not certain that there was a funding source
included in the original statute [AS 37.13.010 through
37.13.190]. He recalled that the legislature was told in
2008 that the ERA might not be substantial enough to pay
out a dividend. He guessed that the ERA might have exceeded
five percent POMV in 2008.
Ms. Mertz replied it was possible. She could not provide a
definitive answer without running the numbers.
2:08:19 PM
MARCUS FRAMPTON, CHIEF INVESTMENT OFFICER, ALASKA PERMANENT
FUND CORPORATION (via teleconference), apologized for not
being present in person. He was currently traveling
visiting external investment managers. He continued the
presentation on slide 15 to discuss the investment
oversight. He relayed that the investment team had 52
employees with five investment directors that reported
directly to him. He stated that the team made his job
fairly easy in terms of managing the fund and there was a
significant amount of experience within the team. He
reported to the executive director, who was currently Ms.
Mertz.
Representative Thompson asked about the amount of turnover
of investment officers and portfolio managers. He asked how
the corporation compared to other funds in term of staff
retention.
Mr. Frampton answered that there had been some turnover
within the team. He thought there were good retention rates
for senior level investment officers, but he had a more
difficult time retaining junior and mid-level employees due
to the competitiveness of the industry. He noted that he
had some trouble recruiting and retaining employees.
Although there had been turnover, he believed the
corporation had a stable team and that key positions had a
long tenure.
2:13:29 PM
Representative Edgmon thought that the fund had recently
won a fairly prestigious award as a good place to work. He
remarked that turnover was part of the investment industry
and there would always be higher turnover rates.
Ms. Mertz replied that the corporation had won an award in
2021 for being one of the best places to work from a
publication called Pensions and Investments. The award was
based on a survey by the human resources director and
completed by employees. She agreed that turnover was part
of the game. She remarked that recruiting in Juneau was
particularly difficult because not many people wanted to
live in Juneau.
Representative Edgmon understood that the award was
international and only sovereign wealth funds were
eligible.
Representative LeBon referred to the chart on slide 15 and
asked how involved the board of trustees was in the
decision to consider private investments offered to the
fund by venture capital investment companies. He asked for
more details about the role the board played in investment
decisions.
Mr. Frampton responded that there was less board
involvement in investment decisions in Alaska than there
was in other states with similar plans. Every year during
the month of May, APFC presented the board with a pacing
analysis that outlined the recommended amount of capital
that should be deployed in venture capital private equity
and other private equity to achieve the exposure target.
For example, the target for venture capital private equity
in 2021 was $1.6 billon. He relayed that all of the
investment discretion was at the staff level. He understood
that based on ten-year returns, Alaska had the top
performing private investment program in the country.
2:18:28 PM
Mr. Frampton advanced to the discuss some current topics in
the investment department on slide 16. The corporation was
currently working off of a November 2021 performance report
that showed the fund was up by 2.8 percent. He noted that
public equities accounted for about 38 percent of the fund,
but the equity benchmark had appreciated by about 4 percent
in December of 2021. There were strong marks coming in for
December 2021 on private equity as well. He believed the
fund was increasing in value despite the stock markets
appearing to be in a decline. He thought that the fund was
up by perhaps a bit more than the reported 2.8 percent but
it was difficult to say. He stated there were three open
positions in the investment department, which seemed like
it had been the average number of open positions during the
ten years he had worked for the corporation. There was a
new credit analyst position that had been recently approved
and for which APFC was recruiting, however it had been
difficult to fill. There was also a portfolio manager of
real estate position that was open as a result of someone
leaving the corporation. He reiterated that the turnover
was normal. The corporation was always focusing on the
assessment of internal versus external management but was
especially focused on public equities in the current year.
He added that the corporation was always very cautious as
internally managed equities grew. Every year, Callan
Associates presented an asset allocation analysis to the
board which fed into the return of the fund. For the last
couple of years, the Callan capital market forecasted that
every asset apart from private equity would be under the
consumer price index (CPI) plus five percent.
Mr. Frampton skipped slide 17 and moved to slide 18 showing
pie charts of the fund's asset allocation over time. He
relayed that in 1980, an investor could earn a double digit
return just in fixed income. Over time, asset classes had
been added and the equity mix had grown. After 2006, the
fund began adding numerous private asset classes and
alternatives. He pointed to the pie chart on the right side
of the slide which showed the corporation's current target.
The dark blue and light green sections combined reflected
58 percent of the fund in the 2022 target. He stated that
some of the asset classes had high market exposure and
others had low market exposure. He added that the
corporation would only support hedge funds that were market
neutral and the returns portfolio was uncorrelated to the
stock market due to the cautious investing. He tried to
keep a thoughtful amount of assets in low exposure classes
to ensure that there would still be returns when the market
was behaving differently.
2:27:42 PM
Vice-Chair Ortiz stated the committee had heard from Callan
Associates the previous day. The president of Callan, Mr.
Greg Allen, had relayed that the ERA was a distraction and
suggested constitutionalizing the POMV to end the
distraction. He asked how much the distribution chart on
slide 18 was impacted by the potential that the legislature
could overdraw the ERA at any time. He asked if the charts
would change in any way if the ERA were eliminated.
Mr. Frampton replied that he did not believe the chart
would be at all impacted if the ERA was eliminated. He and
the investment team did not pay attention to the difference
between the ERA and principal from a daily management
perspective. He thought the corporation's chief risk
officer as well as Callan would not want more than 45
percent of the fund invested in illiquid assets because it
would not be possible to rebalance the fund. He relayed
that his goal was to compile a liquid asset portfolio that
could deliver a real return of five percent. More private
equity had been allocated because the goal was difficult to
accomplish given the current market.
Representative Wool asked for a definition of private
income and risk parity.
Mr. Frampton answered that private income involved
investing in private infrastructure and private credit. He
explained the corporation was a limited partner in funds
that extended private loans to private companies. He noted
that private infrastructure was the same, and the
corporation was generally a limited partner in funds that
were managed by purchasers of infrastructure assets such as
airports and toll roads. The corporation was aggressive in
coinvesting without incurring fees. He noted that currently
the high yield market was at about four percent and risk
parity was a small one percent allocation. It was a
complicated concept, but generally it consisted of managers
who were weighing global balance portfolios, commodities,
bonds, stocks, and treasury inflation-protected securities
(TIPS) and applying leverage to the non-equity investments
to achieve the same volatility contribution. For example,
the managers aimed to ensure that the volatility
contribution within the bonds was the same as the stocks.
He explained that generally, 90 percent of volatility in a
portfolio was from equity because bonds did not change. In
simple terms, risk parity managers applied leverage to the
bonds.
2:33:29 PM
Representative Edgmon pointed to the pie chart on side 18
detailing the 2022 target. He understood that the 38
percent section representing stocks was most sensitive to
inflationary activity.
Mr. Frampton answered that the fixed income portfolio was
most sensitive to inflation. If there was eight percent
inflation in the next seven years it would negatively
impact the value of the bond portfolio. He thought that
stocks had some ability to pass through price increases. If
inflation continued at its current rate, businesses would
experience a significant amount of pressure on wages. He
was concerned about inflation and thought it was the
biggest investment risk and that most portfolios were not
well positioned for it. The corporation had added some gold
investments and a portion of the corporation's cash was
held in gold exchange traded funds (ETFs).
Representative Edgmon asked how it would play out if there
was a draw that exceeded the five percent POMV.
Mr. Frampton answered that an ad hoc draw would come out of
the liquid assets. Depending on the magnitude of the draw,
the other exposures might need to be adjusted.
2:36:41 PM
Representative Edgmon asked who would be involved in the
decision making process if an overdraw occurred.
Mr. Frampton asked for clarification on whether
Representative Edgmon was referring to the decision to
overdraw or the decision on what would be done after an
overdraw occurred.
Representative Edgmon responded that he was curious about
what the process would be if an overdraw were to occur. He
presumed that the payout would not occur all at one time.
He suggested that the investment decisions would be
significant enough to involve the board of trustees.
Mr. Frampton answered that there were specified ranges
around each asset class in the investment policy statement.
He relayed that the permitted ranges were referred to as
the green zone. If there was an overdraw, APFC would work
to stay in the green zone when withdrawing the funds. He
was confident he would be able to stay in the green zone
and would communicate his plans with the board of trustees.
Representative Edgmon stated that the process was outlined
in program benchmarks. He was trying to get a better sense
of the decision making process and thought it was important
to understand what would happen in the case of an overdraw.
Mr. Frampton advanced to slide 19 and discussed the total
fund positioning and performance. There were a few notable
deviations from the fund's benchmarks. As of June 3, 2021,
the asset allocation was up from the target by three
percent in the private equity category. He had looked at
other funds such as the California Public Employees'
Retirement System (CALPERS) and noticed that most other
funds also differed from the target in private equity.
Generally speaking, the private equity asset class had been
successful. He also highlighted that the state was
defensively positioned in public equity as well.
2:42:49 PM
Representative Johnson asked for clarification on the 0.1
percent risk parity. She asked if the asset allocation was
intended to balance risk because bonds were low-risk
investments.
Mr. Frampton answered that Representative Johnson seemed to
understand it well. He added that it was a balanced
portfolio holding a wider range of assets than were held by
most traditional portfolios. The whole portfolio had the
volatility of an equity portfolio but behaved slightly
differently because there were risk contributions from
other areas. The fund had no exposure to leverage and it
was unlikely to be affected by outside sources. The asset
allocation was small, but there were two large and separate
accounts of $400 million. He thought the managers of the
accounts interacted well with staff from APFC and that the
relationship was sound.
Representative Johnson thought it would make sense for
there to be a research component within the strategy.
Mr. Frampton turned to a chart on diversification on slide
20. He relayed that Alaska had a much more global portfolio
than its peers. The United States' stock market had been
the stand-out performer in the the past ten years and had
consistently outperformed its targets. The graph on the
slide compared the U.S. market's returns since 1900 to
other markets.
2:48:28 PM
Mr. Frampton briefly highlighted the global portfolio on
slide 21. He addressed the current market environment on
slide 22 which provided data from Bridgewater Associates.
One of the duties of APFC was to work with Callan to
project what the future would look like, which was
challenging. It was possible to go back and look at the
market valuation in the past and make projections based on
the data. He noted that the stock market had only been as
expensive as it currently was in 1929 and 2000, and both of
the periods had weak equity markets. The chart on the right
of the slide was produced by Bridgewater Associates using a
valuation-based expected return approach. The 10-year
outlook for nominal returns on U.S. equities was about five
percent using the approach. He believed the investing
market would become more difficult than it had been in the
past ten years.
Mr. Frampton skipped slide 23 and moved to slide 24 where
he discussed risk management. He explained that APFC was in
the business of taking risks in order to achieve its return
objectives. The corporation could choose to take no
investment risks and still achieve its goals; however if
the corporation abstained from taking risks over a 10 to 15
year period of time, it was likely that the goals would not
be reached. He thought APFC had a sophisticated approach to
risk management.
Representative Wool remarked that investment decisions
sometimes hinged upon political considerations. He thought
the board had likely been lobbied to take a particular
political approach, but he guessed that the board and the
corporation were not persuaded. He mentioned that New
Mexico had a sovereign wealth fund with a three percent
yearly draw, and a portion of the draw was allotted to in-
state investments. He acknowledged that Mr. Frampton might
have planned to address the topic later in the
presentation.
2:54:51 PM
Mr. Frampton responded that environmental, social, and
governance (ESG) investing was a current buzzword in the
investment industry. The corporation allowed for public
comments at board meetings and the comments currently
tended to be around divesting from fossil fuels. The
corporation had not incorporated ESGs into the portfolio.
Much of the success of the fund was related to the oil and
gas industry and the corporation made investment decisions
purely on financial merits. The corporation was holding its
private equity investments and its other investments to the
same benchmarks.
Representative Wool shared his understanding that
investments were held to the same benchmarks. He indicated
that New Mexico had $30 billion in its fund with a three
percent annual draw. He asked if APFC had a similar
percentage benchmark. He was glad that investments were
held to the same performance levels.
Mr. Frampton answered that private equity performance was
complicated. Generally, returns were categorized as either
realized or unrealized. He thought it was too early to
properly evaluate the performance, but the early private
equity returns had been promising. He added that APFC had
made $200 million in commitments in 2019. He was pleased
with the results, but again it was still early on in the
process.
Representative LeBon noted that some national banks had
announced a reluctance to invest in the oil and gas
industry in Alaska. He asked whether APFC was willing to
invest in any of the national banks through stock holdings.
Mr. Frampton answered that every major bank had stated that
it was against investing in arctic oil and gas. He thought
that fixed income trading would be difficult if the
corporation was not able to trade through market makers and
brokers. He added that the big banks were major components
in state industries and the corporation did not avoid
investing in the banks. He was skeptical about the basis of
the decision to refrain from investing in artic oil and gas
and thought it was based more in public relations than in
environmentalism.
Representative Josephson asked if there was anything in
statute that was prohibiting APFC from adopting an ESG
perspective.
3:01:28 PM
Mr. Frampton responded that he did not know. He thought
that there were elements of ESG that were important and
valid, and he did not intend to be dismissive of the idea.
It was vital to the corporation for companies to have an
independent board and strong governance in order for the
corporation to invest. It would be a mistake to ignore ESG
risks, but it would also be a mistake to ignore technology
changes. He did not mean to give the impression that the
corporation did not factor in ESG risks, but he simply
wanted to relay that the corporation was laser-focused on
performance and not distracted by ESG risks.
Representative Josephson indicated that the Exxon board was
doing substantive things to move in an intentional
direction in terms of how it wanted to grow. He thought one
of the first things that came before the board in the late
1980s or early 1990s concerned Apartheid and investment in
South Africa. remarked that "these are things" the state
should historically be tuned into.
3:03:50 PM
Representative Rasmussen asked if the Permanent Fund would
be impacted if royalty deposits ceased.
Mr. Frampton replied that there would be an impact on the
growth of the fund if it no longer received royalties.
Representative Carpenter asked if APFC could meet its
mission without investing in private equity in Alaska. He
understood the importance of transparency in the private
equity field.
Mr. Frampton responded that the private equity portfolio
was $16 billion, and $200 million was allocated to the in-
state program. He relayed that if the program had not been
realized, the corporation's ability to achieve its goals
would not have been inhibited. He did not want there to be
a law that impeded a private equity firm from performing
transactions of its own volition in the state. The in-state
program was relatively small compared to the private equity
portfolio and if the program did not exist, the corporation
would not be inhibited.
Representative Carpenter commented that $200 million might
seem like a a small sum to APFC but it seemed like a large
sum in Alaska politics as a whole. He was not aware of how
the money was being spent and he was trying to understand
the implications of the lack of transparency.
Mr. Frampton responded that he did not intend to diminish
the importance of the private equity program and agreed
that it was significant.
Representative Wool added that $200 million was a
substantial amount of money for local businesses. He asked
if there was a similar program in place prior to 2019. He
understood that due to the nature of private equity, Mr.
Frampton could not reveal which entity or entities were
receiving the $200 million sum. He asked if a recipient or
recipients could be revealed if a private equity firm
cashed out and it resulted in a gain.
3:08:55 PM
Mr. Frampton answered there had been investments prior to
2019. When he first began working at APFC, there was an
Alaska certificate of deposit (CD) program where the
corporation deposited some of its cash with banks around
the state. The program had been discontinued, but he did
not remember the detailed history. The corporation owned
its building in Juneau which was valued at about $9
million. There had been some past real estate investments
as well, such as retail properties. He reported that the
first time the corporation had employed a private equity
directive was in 2019. There were specific confidentiality
provisions in all of APFC's private equity partnership
agreements, and other investors that did not have similar
confidentiality agreements were not able to access top
funds. There had been some investments where public
announcements were made and there were other investments
for which details would be kept private.
CHRIS POAG, LEGAL COUNSEL, ALASKA PERMANENT FUND
CORPORATION, noted that there had been requests for more
transparency and the corporation was working with its
managers to come up with solutions. He added that the
corporation was following state law, and the ability to be
protected by state law gave the corporation access to
higher performing funds. The particulars of a company in
which APFC invested would not change once the corporation
exited the company. He thought there was a multitude of
reasons why a company might want investment particulars to
remain private. However, there also may be cases when
companies would volunteer to disclose information. For
example, some companies had regional distributions and
could benefit from global distributions with the assistance
of a private equity partnership, and it was not uncommon
for companies to publicly announce such partnerships. He
thought that everyone was trying to protect the Permanent
Fund and that the returns from private equity were an
important factor in the fund's success. He was working on a
solution to increase transparency while closely following
statute, and he would get back to the committee with a more
detailed response.
Mr. Poag suggested that if the committee was more concerned
about the implications of in-state investment, members
should revisit AS 37.13.120(c). He emphasized that in
regard to ESG investments, the corporation made its
investment decisions based on risks and returns and did not
examine social considerations simply for the sake of social
considerations. He reported that a prior legislature had
placed a stipulation in statute that the corporation would
prioritize in-state investments if the investments were as
profitable as investments from other states. The
corporation's preference was to make in-state investments
but only if it benefited the state. It was a difficult
policy decision and that it had been a struggle for the
entire life of the fund. He relayed that the corporation
was doing its best to honor statutes and state preference,
but it was difficult to please everyone as it was a
contentious topic.
Representative Wool responded that he understood Mr. Poag's
perspective. He would look at New Mexico's fund to
determine how it handled similar situations. He noted that
Alaska also had the Alaska Industrial Development and
Export Authority (AIDEA) which invested in the state.
Representative Edgmon thought transparency was not
contemplated when the governing statute was crafted. He
asked if Mr. Poag would like to comment on the
interpretation of the statute.
3:19:03 PM
Mr. Poag answered that AS 37.13.200 was enacted in 1980 and
he had not been able to access the transcripts of the
historical discussion around the statute. He was uncertain
if the statute was intended to allow the board to invest in
private equity. He credited the legislature for creating
the statute because he had learned that the state's access
to private equity was contingent on the state being a
Freedom of Information Act (FOIA) investor. The state was
required to be subject to public records requests in order
to qualify. He often used AS 40.25.120(a)(4) to illustrate
that if the corporation was given proprietary information,
the corporation was obligated to maintain the
confidentiality of the information. Through the statute, he
could reassure entities that confidentially would be
maintained. However, APFC was taking the request for more
transparent information very seriously. He thought that if
the corporation had foreseen the issue, it might have been
built into the program during its inception. He reiterated
that external private equity investments were held to the
same standards as in-state investments. It was difficult to
discern whether the corporation would receive incentive
compensation through the program because the program was
still in its infancy. He concluded that investment
decisions were complicated, but he hoped to provide some
solutions that would appease the rightful concerns about
transparency.
Representative Edgmon appreciated the historical
perspective. He asked how public beneficiaries of a public
corporation could be reassured that the $200 million would
not increase to something more like $200 billion. He asked
if there was any public participation or public disclosure
in the process. He thought that AS 37.13.120 was vague and
that there was no inherent obligation for disclosure.
Mr. Poag asked for clarification.
Representative Edgmon responded that he appreciated Mr.
Poag's characterization of the risk threshold. However, he
wondered if there was any fiduciary responsibility for
disclosure. He referred to slide 18 and asked how the $200
million was incorporated in the 2022 asset allocation
target pie chart. He thought the need for public
transparency would be even more significant if $200 million
became $200 billion.
Mr. Poag responded that the $200 million came about through
a board resolution. He envisioned that if the program was
successful, the board would consider continuing the
program, and the discussion on the matter would be open to
the public. The committee could expect the corporation to
report on the funds as the funds became realized. He did
not think it would be difficult to provide statistical
reports about the investments, but he emphasized that it
was simply too early to know and there was not enough data
to report upon. He added that language from the legislature
was what led to the genesis of the program. He thought the
ideas that the corporation would be presenting to the
legislature at a later date would appease most of the
concerns.
3:26:40 PM
Co-Chair Foster noted the meeting was almost over. He asked
if the presenters were available to stay beyond the
allotted meeting time.
Ms. Mertz was available to stay.
Mr. Frampton did not have any other obligations and was
available.
Representative Wool referred to AS 37.13.120. He asked if
there was a reason why it took as long as it did for the
board to determine whether the $200 million private equity
investment would produce returns. He asked at what point
would there be a decision on whether it was successful, and
would the public have access to the results.
Mr. Frampton replied that there had been a resolution
during a board meeting in either September of 2018 or
December of 2018 that dictated the process. He elaborated
that APFC had spent several months researching the ways in
which other states approached similar mandates and then met
with managers from various firms to discuss the best way to
structure the arrangement. He explained that it was typical
for private equity firms to invest a fund over the course
of three to four years. It had been about two and a half
years since the contract was released and the two managers
had participated well. He shared that McKinley Capital
Management was fully invested and Bering Capital was around
two thirds invested. There was a separate line in the
performance report for in-state private equity which
currently showed a one-year return on the program of 60
percent. The return was great but it was still very early.
Both managers had one investment that had gone public, and
that performance was good, but funds had not been realized
yet. The success of the program was somewhat subjective,
and it was difficult to determine at what point success
could be claimed. It was not uncommon to re-up managers if
they had realized around 25 percent of their investments if
the managers had crafted a productive model.
3:33:16 PM
Mr. Frampton quickly addressed fund performance on slide
26. He noted that private equity had done well as according
to the data from November 30, 2021.
Mr. Frampton skipped slide 27 and ended his portion of the
presentation on slide 29 with benchmarks. He thought APFC
was positioned to outperform its benchmarks and that the
last ten years had been strong. However, any investor must
recognize that the last ten years had been a historic bull
market. He noted that real estate had been a difficult
market for the corporation and would be an area of
improvement going forward. Real estate was an expensive
market and it had taken the corporation a few years to
adjust to it. He reported that 2021 was the first year in
four or five years that the corporation had beat its
benchmark in real estate. When strategies were not
eliciting a strong performance, the corporation worked
diligently to make improvements.
Representative Johnson noted that was a prior presentation
that indicated there was a heavy focus on real estate in
the fund, and there was some desire to change the
allocation. She asked if real estate sales had decreased
the heavy focus on real estate and made the portfolio more
cohesive with the corporation's goals.
Mr. Frampton responded that he did not recall the instance
Representative Johnson was referencing. In the past, the
corporation allocated closer to 12 percent of the fund to
real estate. The combination of selling the real estate
portfolio in 2018 and the depreciation of other assets
drove the real estate percentage down to around six
percent. The corporation reset the target allocation to
eight percent and in the last few years had focused heavily
on building up the apartment and industrial portion of the
fund. He would like there to be more real estate
representation within the fund. He indicated that APFC was
working towards increasing the allocation amount from eight
percent to 12 percent.
3:39:14 PM
Ms. Mertz continued the presentation on slide 31 and
discussed distribution calculations. She explained that the
slide showed the two statutes that dictated the ways in
which the fund was distributed: the statutory dividend fund
transfer calculation in AS 37.13.145(b) and the POMV
calculation in AS 37.13.140(b). Both distribution statutes
required an appropriation in order to make a draw from the
ERA. The statutory dividend fund transfer calculation was
based on realized income and the POMV calculation was based
on value. There had not been an appropriation under the
statutory dividend fund transfer calculation since 2019,
but it was still an active statute and the amount generated
from the statute were still being monitored and tracked.
There was a lag built in to the POMV calculation which
allowed for calculation of the appropriation amount well in
advance.
Representative Wool understood that the sums from the two
calculations were not in conflict because as long as the
sum of the five percent draw based on the POMV calculation
was higher than the statutory dividend fund transfer
calculation, the draw would cover the Permanent Fund
Dividend (PFD).
Ms. Mertz agreed it was the case under the given scenario.
However, there were scenarios where the sums could be in
conflict depending on the values involved.
Ms. Mertz moved to slide 32 to discuss the return and POMV
draw. She noted that only three and a half years had passed
since the POMV draw began and that it would continue to be
monitored as time went on. Due to the timing lag built in
to the calculation, the effective rate was less than the
actual rate. The timing lag also created stability in the
draw amount. She highlighted that although the actual
performance of fund over the last few years had been
volatile, the draw amounts had been stable.
3:43:47 PM
Ms. Mertz advanced to slide 33 to explain the resolutions
the board had supported over the years. The board had a
long history of supporting a rules-based draw scenario
dating back to 2000. Additionally, two resolutions were
passed in 2018 supporting a rules-based legal framework to
govern fund inflows, outflow, and internal transfers. In
2020, the board passed a resolution restructuring the fund
from its current two account system into a single fund.
However, the board acknowledged that such restructuring
might not be achievable. If it was not achievable, there
were additional recommendations in the resolution.
Ms. Mertz turned to slide 34 and reported that the
Trustees' Paper Volume 9 was published in 2020. The paper
proposed a number of reforms that would strengthen the
stability and sustainability of the fund. It also compared
the Permanent Fund to other sovereign wealth funds around
the country and the world and examined the successes and
failures. The paper concluded that successful sovereign
wealth funds operated within a rules-based system that
allowed the funds to perform a combination of saving,
stabilization, and income-generation functions.
Ms. Mertz continued to slide 35 to address accountability
on slide 35. She relayed that APFC worked diligently to be
accountable to its stakeholders and to the people of
Alaska. The corporation published accurate and timely
information on its investment work in an effort to be
accountable. She concluded the presentation on slide 36,
which included links to APFC's website.
3:47:25 PM
Representative Edgmon thanked the presenters for the
information and thought the presentation helped break down
some walls of misunderstanding. There were topics the
committee would not talk about and should not talk about
during the current meeting, but the information offered by
the presenters was a great place to start. He recalled
attending an APFC meeting in 2019 and having a positive
exchange with the trustees. He stressed the importance of
continuing the communication between the corporation and
the legislature.
Representative Thompson thanked the presenters. He thought
that there were some missed investment opportunities in the
past due to heavy procedural requirements and was unsure if
the issue was resolved.
Ms. Mertz responded that the corporation had specific
exemptions from the procurement process around its
investing. She thought the corporation had been able to be
nimbler due to exemptions.
Representative Thompson asked if there were exemptions that
allowed the corporation to act quickly on timely
opportunities.
Ms. Mertz responded in the affirmative.
Vice-Chair Ortiz echoed Representative Edgmon's comments
and thanked the presenters.
ADJOURNMENT
3:52:05 PM
The meeting was adjourned at 3:52 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| APFC-HFIN 012522 Presentation.pdf |
HFIN 1/25/2022 1:30:00 PM |
|
| 202220131_APFC Follow Up to HFIN on Jan 25.pdf |
HFIN 1/25/2022 1:30:00 PM |