Legislature(2013 - 2014)HOUSE FINANCE 519
02/05/2013 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Overview: Alaska Permanent Fund Corporation | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
February 5, 2013
1:32 p.m.
1:32:57 PM
CALL TO ORDER
Co-Chair Austerman called the House Finance Committee
meeting to order at 1:32 p.m.
MEMBERS PRESENT
Representative Alan Austerman, Co-Chair
Representative Bill Stoltze, Co-Chair
Representative Mark Neuman, Vice-Chair
Representative Bryce Edgmon
Representative Les Gara
Representative Lindsey Holmes
Representative Scott Kawasaki, Alternate
Representative Cathy Munoz
Representative Steve Thompson
Representative Tammie Wilson
MEMBERS ABSENT
Representative David Guttenberg
Representative Mia Costello
ALSO PRESENT
Mike Burns, Executive Director, Alaska Permanent Fund
Corporation, Department of Revenue; Laura Achee, Director
of Communications and Administration, Alaska Permanent Fund
Corporation, Department of Revenue.
SUMMARY
^OVERVIEW: ALASKA PERMANENT FUND CORPORATION
1:33:38 PM
MIKE BURNS, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION (APFC), DEPARTMENT OF REVENUE, provided a
PowerPoint presentation titled "Alaska Permanent Fund
Corporation Designed for Sustainability" (copy on file). He
pointed to slide 2 titled "Renewable Resource." He
discussed that the corporation's accounting was confusing,
which was exacerbated by new government accounting
standards. He referred to the information on slide 2 as
"checkbook" accounting. He communicated that $16.5 billion
had been deposited to the Alaska Permanent Fund (APF) to
date, $19.8 billion in dividends had been paid, and the
fund's current value was $45 billion. He believed the fund
had been incredibly successful and felt that Alaskans
should be proud of the accomplishment. He moved to slide 3
that showed fiscal year to date (FYTD) returns for FY 13;
the total FYTD return was 7.3 percent, the benchmark return
was 7.4 percent, the ending balance was $43.7 billion and
the change from FY 12 was $3.4 billion. He shared that the
return through the end of January 2013 was 10.4 percent and
the fund balance was $44.9 billion. He stressed that the
fund investment strategy focused on the long-term, but some
individual months were very successful (e.g. January 2013).
Mr. Burns moved to slide 4 related to FY 12 performance.
The total return had been -0.01 percent with a benchmark of
-0.2 percent. The fund's FY 12 ending balance had been
$40.3 billion. He addressed the fund's performance over the
past 28.5 years on slide 5. He noted that the fund had
existed beyond 28.5 years, but the records from the
performance consultant only went back that far. The fund's
performance during the 28.5 year period was 8.8 percent. He
highlighted that 2008 and 2009 had been devastating on
returns as seen in the 5-year performance of 1.2 percent
compared to the 3-year return of 10.4 percent. He shared
that the 2008 calendar year was one of the 3 worst years in
the 200-year history of available stock market records. He
relayed that the other worst returns had occurred prior to
the war of 1812 when the U.S. had cut off trade with France
and England.
1:39:20 PM
Mr. Burns directed attention to the fund's asset allocation
on slide 6. Categories included real assets, company
exposure, opportunity pool, cash, and interest rates. He
noted that assets within each of the categories were
grouped by risk. Real assets accounted for 19 percent of
the fund and worked to protect against inflation; the
category included real estate, Treasury Inflation Protected
Securities (TIPS), infrastructure, and other. The company
exposure category included all public, private, domestic,
international equity and corporate debt. The grouping
allowed fund investors to move in the capital structure of
companies and industries (e.g. money could be moved from
credit to equity) and enabled the fund to take advantage of
growth and prosperity cycles. The interest rates category
included U.S. treasuries and sovereign debt of developed
countries, which worked to protect the fund against
deflation. The other opportunity pool accounted for 18
percent of the fund's allocation and included market
anomalies and special opportunities discovered over time.
He explained that while the other asset allocations
represented targets, the opportunity pool was limited to 18
percent given that special opportunities did not exist all
of the time. He noted that any money that did not have a
"special opportunity home" went into the company exposure
allocation. He communicated his intent to further explain
the slide later in the presentation.
1:42:38 PM
Mr. Burns pointed to a handout titled "Total Fund Value" as
of February 1, 2013 (copy on file). The chart included rows
for each asset allocation and columns showed traditional
asset classes [e.g. equities, fixed income, and other].
Slide 7 included a pie chart of the fund's target asset
allocation: stocks 36 percent, real estate 12 percent,
absolute return 6 percent, private equity 6 percent,
infrastructure 4 percent, cash 2 percent, bonds 20 percent,
and other 12 percent (a small blue unlabeled segment
represented public/private credit including mezzanine debt,
high yield, and other).
Mr. Burns turned to slide 8 titled "The Effect of
Diversification." The yellow line on the chart showed the
total fund's performance from 2007 to 2012; individual
asset classes were represented in blue. The slide's purpose
was to demonstrate the importance of diversification and
how the success of each asset class fluctuated with time.
He relayed that APFC looked forward and not back; it did
not operate as a market timer. He detailed that targets for
each asset class also included bands; there was "risk
dashboard" on 20 items that was looked at each day. The
dashboard included red, green, and yellow zones. He
elaborated that the chief investment officer and staff had
the authority to trade within the green zone; approval by
the executive director was required to operate in the
yellow zone; and the board was notified when investments
moved into the red zone. The board could request a special
meeting, members could request individual explanations, or
the board could accept the staffs' written explanation. He
elaborated that moving into the yellow and red zones
triggered a discussion about investments. He noted that
there could be a reason for moving into the areas and that
the goal may be to be light in specific investments. He
furthered that the board was apprised of the yellow zones
at its regular meetings. He relayed that sometimes markets
were unfavorable and it was not possible to adjust asset
classes such as real estate and infrastructure; however,
liquid asset classes could be adjusted.
1:47:42 PM
Mr. Burns stated that one of the fund's biggest strengths
was that it was multi-generational; it had the ability to
take a very long-term view and could handle illiquidity
better than most funds. He detailed that historically
illiquid assets provided a better return because they did
not require a liquidity premium. The long-term view was
taken as much as possible (sometimes in illiquid assets and
private markets). He relayed more money was being invested
in illiquid assets over time. He pointed to slide 27 titled
"Risk Dashboard: Dollar Allocation Limits." He reiterated
his earlier testimony that the dashboard was generated on a
daily basis; risk measures included country, liquidity, and
other. The corporation was proud of the dashboard that had
been developed internally. He added that the overall zone
parameters were reviewed on an annual basis.
Mr. Burns addressed slide 9 titled "2012 Performance by
Asset Class." He relayed that the fund had performed close
to and slightly better than benchmark in most asset
classes, with the exception of real estate and absolute
return. He communicated that it was difficult to match the
NCREIF index [National Council of Real Estate Investment
Fiduciaries]. He explained that the index used higher
leverage than APFC; in difficult markets the APF would
outperform the index. He shared that leverage was generally
used in partnerships in the real estate portfolio. For
example, the fund owned 50 percent of two large shopping
centers with a public retail REIT [Real Estate Investment
Trust]. The fund returns had also fallen well below the
absolute return benchmark. He detailed that APFC had
created the absolute return benchmark in 2004; it had never
met the benchmark and it was clearly not the correct
target. He believed APFC had held out for managers to earn
LIBOR [London Interbank Offering Rate] plus 400 basis
points; however, the asset class did not generate income at
that level. The corporation was in the process of looking
at the HFR Index [Hedge Fund Research]; APFC managers had
consistently beaten the HFR Index.
LAURA ACHEE, DIRECTOR OF COMMUNICATIONS AND ADMINISTRATION,
ALASKA PERMANENT FUND CORPORATION, DEPARTMENT OF REVENUE,
used the poor absolute return performance on slide 9 to
point out the importance of portfolio diversification
spread across a multitude of asset classes.
1:53:36 PM
Mr. Burns turned to slide 10 titled "Stock Portfolio." The
inner ring of a circular chart included the active,
passive, and quasi-passive methods of management for
accessing equity; active management represented slightly
over 50 percent of the management options. He detailed that
passive management followed indices, which was momentum
driven. As a stock became increasingly successful it made
up a larger portion of the index; he used Apple as an
example. He added that under passive management the
purchase price was typically high because it followed the
success of a stock. Quasi-passive compared and ranked the
fundamentals (sales growth, earnings growth, and other) of
various companies. Active management was the most expensive
and passive was the cheapest. Quasi-passive was more value
driven. The next ring represented APFC's three portfolios:
U.S., non-U.S., and global. He explained that global
managers could invest in U.S. and non-U.S. investments. He
listed major global exposure including Japan, U.S., U.K.,
Asia, Europe, and other.
1:56:19 PM
Mr. Burns directed attention to slide 11, which included
the fund's top 5 holdings as of 12/31/2012. Top stocks
included Apple, Samsung, Google, Microsoft, and Exxon
Mobil.
Ms. Achee added that the chart showed the top 5 holdings
out of the 6,000 individual securities owned by the fund.
Mr. Burns remarked that some of the 6,000 securities were
owned by multiple APFC investment managers on behalf of the
fund. He added that Exxon Mobil may be the fund's top stock
currently. Slide 12 illustrated the fund's bond portfolio,
which included corporate, treasuries, non-U.S. government,
mortgage-backed, commercial mortgage backed securities,
non-U.S. corporate. He noted that non-U.S. bonds accounted
for 7 percent of the portfolio. He continued to discuss the
bond portfolio on slide 13. The slide included two circular
charts, which showed that the portfolio's percentage of
non-U.S. bonds had decreased in the last six months of
2012. He explained that the legislature had approved funds
for two additional fixed income staff the prior year in
order to allow APFC to begin managing international fixed
income internally; he noted that the savings were dramatic.
During the time APFC was preparing to make the transition
from external managers to in-house management Europe began
to have substantial financial problems; therefore, APFC had
elected to hold off on making the change. He relayed that
initially the fund had approximately $950 million to $1
billion in non-U.S. bonds (primarily in developed nations);
however, it had reduced its exposure to approximately $300
million. He noted that APFC was getting close to reversing
the decision and filling the positions.
Ms. Achee added that the APFC managed portion shown in red
(slide 13) would be larger in the following year.
Mr. Burns agreed. He remarked that internal management in
any area was dramatically less expensive compared to
external management. He continued to discuss internal
management and noted that there were some items that could
not be managed in-house. He added that APFC did not spend
GF money; it was funded by receipt authority.
2:02:00 PM
Mr. Burns directed attention to real estate on slide 14. He
believed the allocation was managed economically;
management was conducted both internally and externally.
The fund used five direct equity managers and one REIT
manager. He discussed real estate's illiquid nature. He
stated that the closest proxy to owning real estate was to
own REITs. The portfolio consisted of 33 percent office, 30
percent retail, 25 percent multifamily, 7 percent REITs,
and 5 percent industrial. He communicated that the barriers
to entry in industrial real estate were not high, which
made it difficult for long-term investors to find
attractive properties. He observed that it was possible to
have the best warehouse one year only to see other
identical warehouses built in the area the following year.
Mr. Burns looked at the portfolio's Tysons Corner Center
real estate investment on slide 15. He shared that the fund
had owned the property for many years, which was beginning
an expansion phase. He detailed that the property had 2
million square feet of developed space; he equated it to a
small city. He elaborated that the Washington, D.C. train
system was planned to extend to Dulles and currently went
two stops past the center. He elaborated on the train
system. The building shown on the right had 440 apartments,
the middle building was a 500,050 square foot office
building, and the third building would be a Hyatt hotel;
the buildings were all currently under construction.
2:07:14 PM
Mr. Burns continued to discuss Tyson's Corner Center on
slide 15. The office building was 65 percent pre-leased;
the lead tenant was Intelsat. He believed leasing the
remaining 35 percent would not be difficult. He opined that
the apartments would be attractive and would fill a need in
the area; 20 of the units would be marketed at a lower
price. He discussed the expense of new parking, which would
be below ground; the spaces would be shared by the hotel
and retail customers. He believed that sharing the spaces
had saved $50,000 per parking space. He added that the
project used approximately 40 percent leverage.
2:09:52 PM
Mr. Burns looked at the real estate investment 299 Park
Avenue on slide 16. The office building was 42 stories and
was located next to the Waldorf Astoria hotel. The fund's
investment partner was Fisher Brothers, who owned five
major skyscrapers in New York. He shared that the Fisher
family had built approximately 60 Fisher Houses across the
country that were aimed at accommodating family of injured
soldiers. He pointed to the building value [$1.2 billion]
and added that the building was approximately 50 percent
leveraged. He remarked that investments in Manhattan were
typically liquid assets.
Mr. Burns directed attention to the CityCenter II, III, and
IV properties on slide 17 (CityCenter III was shown on the
slide). The properties were office and retail, which were
located next to hotels and two interstates in Houston,
Texas. He detailed that CityCenter II was fully leased,
CityCenter III was close to or completely leased, and
CityCenter IV was under construction. He remarked that the
property did not carry a Manhattan price tag [$50 million
property value]. He moved to the residential Parc Huron
property located in Chicago (slide 18). The property had
been marketed as condominiums, which had not sold. He
believed converting the units from apartments to
condominiums could bring a high payout; however, APFC
currently had no plans to make the conversion. Slide 19
pertained to the Simpson Housing LLLP based in Denver,
Colorado. The corporation and the State of Michigan each
owned 47 percent; the balance was owned by management. The
real estate operating company had 16,000 units nationwide.
He explained that the partnership was in the third year of
a five-year plan to expand and update the properties; older
product would be sold and replaced. He relayed that
apartments were the "hottest asset class," which made it
difficult to purchase properties that penciled out.
2:14:26 PM
Mr. Burns discussed private assets on slide 20, which
included private equity, infrastructure, American Homes 4
Rent, and private credit. He detailed that private credit
included mezzanine debt, bank loans, syndicated bank loans,
and other. He moved to slide 23 related to American homes 4
rent; APFC owned 80 percent and the operator owned the
remaining 20 percent. The head of operations had started
Public Storage, which was larger than all other public
storage companies combined. The homes were single family
and had been purchased at foreclosure sales. He shared that
in the past there had been no asset class for institutional
ownership of single family homes; however, that had
changed. He discussed that the partner had done a great job
operating the venture, which included approximately 4,700
houses in various states. The corporation had committed
$600 million to date; the partner had invested $150
million. He shared that two of the states APFC had liked
the most were Texas and Georgia; every foreclosure sale
occurred on the first Tuesday of each month, which made
logistics challenging. He noted that Atlanta was the focus
in Georgia, but the market was large and challenging. He
listed Texas property locations including Dallas, Houston,
San Antonio, and Austin.
2:18:29 PM
Mr. Burns continued to speak to slide 23 and relayed that
competition for the homes was tight. He stated that
individuals were walking around with stacks of cashier's
checks. He continued to discuss the home purchase process.
He communicated that American Homes 4 Rent had expanded to
over 300 contract employees in the past year. He talked
about the condition of the homes. The partnership may
choose to sell the houses when they appreciated or may sell
them to a REIT or to another aggregator. He relayed that
the investment was expected to bring in a 6 percent to 7
percent yield; there was no leverage used.
2:20:36 PM
Mr. Burns explained that private equity consisted of
purchasing companies that were not publicly traded. Private
equity could include the sale of a family company for
estate planning purposes, the sale of a subsidiary of a
major corporation that no longer fit with the company's
long-term goals, or other. The asset class used a
significant amount of leverage; however, APFC believed
returns were better than those on public equity. The asset
class was limited to 6 percent in the APFC portfolio;
however, it had not reached that amount. Money from earlier
investments was paying out, while the corporation continued
to make new investments. He shared that APFC consultant
Callan Associates had to put a limitation on private equity
when making investment recommendations.
Mr. Burns addressed infrastructure investments on slides 21
and 22. He relayed that infrastructure assets were
traditionally government owned or regulated. Examples
included toll roads, pipelines, electrical transmission
lines, ports, airports, and other. The corporation was
invested in three partnerships with properties in the U.S.
the United Kingdom, India, Argentina, and Canada. He
elaborated that holdings included a propane distribution
system in India, the airport in Vancouver, British
Columbia, and the Gatwick and City airports in London. The
legislature had approved a new co-investment infrastructure
position in FY 13. He detailed that when APFC negotiated
contracts with partnerships it was specified that the
corporation would never invest more than a set amount into
a project; if a project was over the set amount, another
investor was required. He expounded that APFC bargained for
co-investment rights and the co-investment staff and
outside consultant could make an independent decision on
projects. He relayed that private investment had expensive
fees; whereas co-investment had no fees. He stated that the
staff could save the corporation millions or nothing, given
that staff may decide not to invest in many projects. The
corporation believed the position was a good investment.
2:25:26 PM
Mr. Burns looked at slide 24 titled "Multi-asset
strategies." He discussed the corporation's affinity for
emerging markets. Significant emerging markets included the
BRIC countries (Brazil, Russia, India, and China), which
were sometimes altered and referred to as BRIM (Brazil,
Russia, India, and Mexico). The corporation believed the
markets would grow more significantly than developed
markets. He referred to emerging market debt and equity
managers (two had been found in the same company). Cap
Guardian and PIMCO managed APFC's emerging markets
investments across three asset classes (equity, bonds, and
currency). The investment managers had the ability to move
money back and forth between the three asset classes. He
relayed that APFC was happy with the results thus far.
Mr. Burns explained that absolute return was hedge fund
investing and was the least risky asset class. He shared
that it was necessary to take more risk than APFC managers
currently took. He elaborated that the three managers had
consistently outperformed the hedge fund indices; the index
had not surpassed LIBOR plus 400 basis points. The
corporation planned to examine its current policies related
to absolute return. There were 157 underlying investments,
6 were owned by more than one manager. The risk had been
spread, which was expensive, but diversification protection
was necessary in order to limit potential financial impact
if one of the investments failed.
Ms. Achee noted that the corporation's risk exposure was
approximately $10 million to $15 million; if an investment
did fail the company would not lose more than this amount.
She noted the figures were significant, but not disastrous.
2:29:26 PM
Mr. Burns addressed the APFC external CIO program on slide
26. The program was in its second year and five managers
had been hired out of a larger pool. The corporation was
interested to know how the managers would invest if they
were "unshackled"; he noted APFC had not completely
unshackled them. The managers had been instructed to invest
money in any way they believed would be the most successful
with the exception of real estate and provided that the
money would be available in two years. Slide 26 showed pie
charts for two of the managers including PIMCO and GMO. The
investment strategies were very different; GMO invested
more heavily in equities (shown in green). He added that
other managers had very little invested in equities. The
goal was broad style diversification; the corporation was
pleased with the outcomes. He continued that one of the
managers had outperformed expectations; GMO had
underperformed; however, the company's style was to wait it
out until valuations came its way. He remarked that the
company had lost half of its business when it had refused
to invest in the dot-com era because it did not believe the
valuations made sense. The company's strategy was to invest
at the bottom. He relayed that one of the external CIO
managers was invited to speak at each of the APFC board
meetings.
2:32:06 PM
Mr. Burns detailed slide 28: "Financial Networks." The
slide illustrated all APFC systems and how they
interrelated. He remarked on the system's complexity. The
system required substantial security to protect it from
hackers in various nations. He relayed that the systems
shown on slide 28 were needed to run the $45 billion in
funds.
Ms. Achee discussed the APFC systems that were created by
independent software companies specializing in the
particular area. She explained that the information
technology staff was tasked with working to ensure that the
various systems were compatible and could communicate
effectively. She mentioned the difficulty of incorporating
the different technologies. She stressed that the
technologies were instrumental in enabling the corporation
to compete with global investors. She relayed that the
corporation would be requesting funds in years to come for
new systems and consulting on existing systems.
2:35:08 PM
Mr. Burns addressed dividend calculation on slide 29. He
explained that statutory net income was the corporation's
cash flow; it included dividends, interest, and rent
received and realized capital gains. The Alaska Permanent
Fund Dividend (PFD) calculation used five fiscal years.
Each year the income from the earliest of the five fiscal
years dropped off as the most current fiscal year was
added. He pointed to the $2.9 billion figure in FY 08 and
commented that it was unlikely a number that large would
replace it. The corporation anticipated that the PFD would
decrease again in the current year. He detailed that when
the negative $2.5 billion figure from FY 09 dropped off the
formula would change dramatically. He believed that in the
next five years statutory net income would continue to be a
small number despite fund growth. He elaborated that the
largest component had historically been from fixed income,
but with the 10-year treasury at 2 percent to 2.4 percent,
it would not bring significant earnings; low interest rates
would hold the statutory net income down for some time.
Ms. Achee noted that there was no direct correlation
between mineral royalties (oil included) and the dividend
calculation (slide 31). She explained that incoming
royalties boosted the PFD's total principal value over
time, which did increase statutory net income. She
elaborated that the royalties did add to the dividend in a
subtle way over time.
Mr. Burns discussed peer recognition on slide 32. He
relayed that APFC had won an aiCIO industry innovation
award two years earlier. He shared that APFC met with the
Singapore Government Investment Corporation on several
occasions; Singapore had two of the largest sovereign
wealth funds in the world. Other public and private fund
managers APFC had met with included the Norway Government
Pension Fund, Mitsubishi UFJ Trust and Banking,
Massachusetts PRIM, California State Teachers Retirement
System, and the University of California. He added that the
representatives with the major Japanese government
investment fund would be visiting APFC in the near future.
He stated the APFC was essentially a sovereign wealth fund.
He pointed to an international group that included all
sovereign wealth funds; the two U.S. representatives were
the U.S. treasury and APFC. He believed the corporation had
a good reputation.
2:39:32 PM
Representative Wilson wondered why APFC was not investing
in infrastructure in Alaska. She believed the message
implied that Alaska projects were not worth investing in.
She asked if a project or two could fit into the portfolio
in the future.
Mr. Burns replied that APFC was required to obtain a
specific return. There had not been many projects available
in Alaska. He detailed that the corporation invested in
infrastructure projects via [pooled] funds with other
investors. He remarked that he would inform other investors
if an appropriate project emerged in Alaska. He discussed
that APFC was potentially interested in more Alaska real
estate; however, it would be possible for APFC to overheat
the market very quickly. He elaborated that the
institutional size the corporation would need to invest in
was substantial; there were not institutional-sized deals.
He continued that the real estate market in Alaska was
pretty well balanced. He reiterated that APFC could upset
that market fairly quickly. He added that one of its real
estate managers was tasked with looking for deals in
Alaska.
Representative Wilson clarified her interest in an
infrastructure project such as the pipeline or a Liquid to
Natural Gas (LNG) plant on the North Slope. She understood
that Alaska did not have very large real estate investment
opportunities, but she believed there were mega
infrastructure projects that APFC could invest in.
Mr. Burns responded that APFC had been directed by the
legislature in statute to not act as a lender or investor
of last resort. He explained that APFC would prefer to
invest in Alaska if the numbers worked. The corporation did
not want to go into deals that required it to locate $200
million (or other) in low-cost capital.
Vice-Chair Neuman asked whether APFC had any investments in
Alaska. Mr. Burns replied it had two investments in Alaska
including the Goldbelt Building in Juneau and an old
mortgage of approximately $60,000. He elaborated that the
mortgage was the remainder of an old program.
2:43:59 PM
Ms. Achee added that APFC was not averse to investing in
Alaska; statutes outlined that if it was presented with two
equal investments (one in Alaska and another outside of
Alaska) it was directed to choose the Alaska investment.
Ultimately the corporation's direction was to make money.
She elaborated that if a mega project presented itself in
Alaska and the numbers worked out, there would be no reason
why APFC would not be interested in being in a pool of
investors. She added that diversification was important and
the corporation would not invest as a sole financial
supporter in a project.
Representative Gara asked APFC to keep its eye on the
development of shale oil on the North Slope. He surmised
that the development may present a potential partnership
investment opportunity. He asked what kind of cost savings
could be achieved if some of the more expensive private
contracts could be replaced with in-house staff.
Mr. Burns answered that the next step would be a co-
investment position for private equity that would include
the same type of follow-on rights used in infrastructure
investments, which saved on fees. There were two positions
for international fixed income that had not been filled
because APFC had veered away from the asset class; the
corporation was looking to increasing investments in the
area and planned to fill the positions. He communicated
that approximately half of the savings from the
international fixed income manager had been realized due to
APFC's divestment in the asset class. The corporation had
contemplated a mathematically driven internal stock fund
that would require a specific market cap, dividend yield,
and price/earnings ratio. The fund would be quasi-passive.
He could not quantify the number. The corporation's
operating budget request was approximately $12 million, but
its manager budget was at least 10 times larger. He
communicated that there were currently some investments
that the corporation would not consider. Things that seemed
out of reach currently may be reachable if interim steps
were taken over time. He remarked on the number of APFC
positions.
Ms. Achee clarified that there were currently 38 positions.
Mr. Burns added that two of the positions were currently
vacant.
2:48:45 PM
Representative Gara asked whether APFC would be coming
forward with a plan regarding bringing positions in-house
for cost savings. Mr. Burns replied that APFC was planning
a board meeting that would focus on refreshing the
corporation's strategic plan later in the spring. The
entity only provided one service, which was to manage money
for returns. He believed it may be possible to provide the
legislature with a multi-year plan the following
legislative session.
Ms. Achee elaborated that the board had been thinking about
the ideas; the three positions received for FY 13 were
phase 1 of a plan devised by the board in the past two
years. She stated that growth had been taken in a managed
approach. She relayed that the corporation would present
additional phases in future years until it reached the
point where management could not be internalized any
further. She communicated that it was challenging to
attract talented staff from out of state that would enable
the corporation to internalize some of the management.
Mr. Burns noted that it may be advantageous for the
corporation to have an office out of state if it planned to
invest heavily in private equity and co-investments. He
detailed that it was necessary to be with the other
investors on a daily basis. He was uncertain where the
employees would be located (e.g. New York, San Francisco,
or other). He discussed the importance of interaction with
gatekeepers and those running underlying funds. He
clarified that the corporation was not moving out of
Alaska.
Ms. Achee agreed that the corporation did not intend to
leave Alaska.
Co-Chair Stoltze suggested looking to the Alaska Railroad
for advice on how not to develop the urban transfer center
property at Tyson's Corner. He observed a shale oil
investment seemed like a good deal; however, it would be
moving money from one state pocket into the PFD given the
way tax credits worked. He surmised the public would be
unhappy if tax credits were taken from the General Fund for
deposit into the PFD.
2:52:54 PM
Mr. Burns answered that he was uncertain about how the
shale credits would work. He reminded the committee that
APFC had no use for tax credits. He surmised that the
investment may be good for a tax paying entity.
Co-Chair Stoltze made a remark about tax credits and
politics. Mr. Burns noted that APFC was not a tax payer.
Co-Chair Stoltze understood and noted that his comment may
have been editorial.
Representative Kawasaki asked about external managers and
brokers and wondered how frequently contracts were reviewed
and turned over. He discussed the history of APFC. The
permanent fund of other states such as Wyoming, Montana,
New Mexico, and others did not come close to the Alaska
fund. He understood that making money was the corporation's
primary goal; however, he lamented that the goal could not
include Alaskan investments.
Mr. Burns answered that it varied slightly by asset class.
He informed the committee that its equity staff had been
hired to oversee the managers on a daily basis to ensure
that APFC's directives were followed. He communicated that
real estate worked more with external managers; fixed
income staff monitored the few external fixed income
managers. He discussed that monitoring managers performance
across the asset classes was a primary duty of the APFC
staff. He addressed manager turnover and relayed that APFC
had let managers go due to poor performance; however,
managers were terminated due to other reasons as well. He
stated that if a manager had bad year it was the worst time
to get rid of them. He compared the job to that of a
fireman running towards the fire. He relayed that
additional causes for termination included a change in
ownership, the replacement of a managerial team, a change
in finances, an ethical lapse occurred, or other.
2:57:53 PM
Representative Kawasaki was curious about the management of
APFC. He mentioned the number of employees and contractors
worldwide. Ms. Achee answered that APFC had 38 full-time
employees; the two fixed income positions were vacant,
which APFC hoped to fill by the end of the current fiscal
year. There were roughly 60 external contractors across all
of the corporation's asset classes (listed on the APFC
website). The internal operating budget was approximately
$11.5 million for FY 14 and slightly over $100 million for
external managers. She pointed to expertise and specialty
provided by external managers and noted that some of the
firms were small (APFC sized) whereas others were much
larger global firms.
Mr. Burns added that APFC was large enough to access the
best talent in the world. He pointed to the external
management cost of approximately $114 million for FY 14
only represented external manager fees that were billed to
APFC. Certain asset classes (e.g. real estate) retained
fees; they were taken as a reduction in income.
Ms. Achee invited legislators to visit the APFC office
anytime.
Representative Kawasaki asked if APFC was subject to state
procurement codes when it hired for contracts. He asked
whether fees were reviewed frequently. Mr. Burns replied
that generally the state did follow procurement codes;
however, there was an exception for any fiduciary services.
Ms. Achee elaborated that for non-fiduciary contracts APFC
followed the state procurement code. A similar process was
used for fiduciary contracts; proposals were scored and
compared. The corporation was not required to make a change
to its general consultant Callan Associates, but it did
choose to do a contract renewal on occasion; Callan
Associates had twice beaten other companies in a request
for proposal process. She noted that the state pension fund
used the same process. She highlighted that the corporation
did not fall under the state salary structure; statutes
directed the APFC board to set the fund's salary management
program.
3:02:11 PM
Co-Chair Austerman discussed that the committee would not
meet the following day.
ADJOURNMENT
3:02:39 PM
The meeting was adjourned at 3:02 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 201302_APFCforHFIN2.pdf |
HFIN 2/5/2013 1:30:00 PM |
Perm Fund Corp Overview |