Legislature(2015 - 2016)SENATE FINANCE 532
02/06/2015 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Presentation: Alaska Permanent Fund Corporation | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
SENATE FINANCE COMMITTEE
February 6, 2015
9:02 a.m.
9:02:13 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 9:02 a.m.
MEMBERS PRESENT
Senator Anna MacKinnon, Co-Chair
Senator Pete Kelly, Co-Chair
Senator Peter Micciche, Vice-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Lyman Hoffman
Senator Donny Olson
MEMBERS ABSENT
None
ALSO PRESENT
Michael Burns, Executive Director, Alaska Permanent Fund
Corporation (PFC), Department of Revenue; Laura Achee,
Director of Communications and Administration, Alaska
Permanent Fund Corporation, Department of Revenue.
SUMMARY
^PRESENTATION: ALASKA PERMANENT FUND CORPORATION
9:03:03 AM
MICHAEL BURNS, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION (PFC), DEPARTMENT OF REVENUE, began his
presentation(copy on file). He turned to Slide 2, "Renewable
resource":
· $18.1 billion - deposited in Fund to date
· $21.6 billion - dividends paid to date
· $52.5 billion - current value
He relayed that of the $18.1 billion in deposits, $15.3
billion was in royalties. He presented slide 3, "FY2014
Performance":
· Total return - 15.5 percent
· Benchmark return - 15.7 percent
· Ending Balance - $51.2 billion
· Change from FY13 - $6.3 billion
· Dividend - $1.2 billion
He explained that the corporation was structured
conservatively, with less exposure to equities than some of
its peers. He opined that the approach had slightly hurt the
corporation, but was appropriate for the Fund. He noted (not
on slide) that the actual income of the Fund was $6.8
billion.
9:05:56 AM
Mr. Burns clarified that the change in the value of the Fund
was $6.3 billion, and took into consideration the in-flows
from oil royalties and the dividend being dispersed; the
actual gap earning of the Fund was $6.8 billion.
9:06:21 AM
Vice-Chair Micciche requested an explanation the membership
of the Alaska Permanent Fund Board, and a synopsis of the
board's responsibilities. He understood that the board was
appointed by the governor.
Mr. Burns responded that by statute the requirements to be
on the board were pretty open ended, among them a background
in business, accounting or finance investments. He noted
there were four public members; one seat per year was
appointed by the Governor; two Commissioners were members,
one of which must be the Commissioner of Revenue.
9:08:20 AM
Vice-Chair Micciche referred to Slide 3. He wondered why the
return was lower in 2014 than that of the retirement system.
Mr. Burns responded that returns varied from year-to-year
and that the corporation had a longer profile horizon than
the retirement system. He said that the Fund took advantage
of private assets and had less exposure to equity markets
than the retirement system.
9:10:17 AM
Mr. Burns turned to Slide 4, "Fund Performance," which was
for periods ending June 30, 2014. The bar graph on the slide
charted the Permanent Fund, the Benchmark, and the Median
Public Fund. He noted that it was challenging to define the
"benchmark" as evidenced in the slide. He added that the
corporation was unique and had few peer groups; there were
seven other corporations in the country with similarly
structured permanent funds.
9:12:12 AM
Vice-Chair Micciche asked what types of funds were invested
into the Median Public Fund.
Mr. Burns responded primarily be private pension funds; APFC
was not a pension, but The Median Public Fund generally was
comprised of state, large county, and city pension funds.
Vice-Chair Micciche asked whether the Public Median Fund was
heavy on equities.
Mr. Burns reiterated that APFC maintained lower equity
exposure. He said that there was a significant difference
between the Alaska Retirement System and APFC over that last
year in equities. He stated that he could not offer numbers
over the past 5-10 years. He added that the APFC was
historically on the more aggressive side investment-wise,
but had not been the past 18 months. He relayed that the
fiscal climate on the national level over the past few years
had made the corporation more conservative in its
investments. He asserted that the APFC investments and
portfolio was performing well, and there was a strong belief
in the corporation in reversion to the mean. He shared that
APFC's real estate portfolio was performing successfully and
that for the first time the APFC had purchased real estate
internationally.
9:16:04 AM
Mr. Burns recalled that on March 9th, 2009; when the market
was so incredibly cheap that the corporation was compelled
to invest APFC put $8oo million into an S&P Index account,
which was worth approximately $3 billion in 2015. He offered
that value could sometimes be found in "running toward the
fire."
9:17:07 AM
Senator Bishop asked whether the corporation was "running
toward the fire" when choosing current energy investments.
Mr. Burns responded in the affirmative. He said that APFC
had made substantial commitments over the past year to
carbon. He added that APFC had money already committed, but
as of yet uninvested, in the energy sector.
9:18:27 AM
Mr. Burns presented Slide 5, "$52.4 billion as of 12/31/14":
He pointed out the unrealized gains, represented by the
smallest yellow triangle on the pie chart. He explained that
should the legislature want to appropriate money from the
fund, the small yellow triangle was not available. The slide
included "assigned earnings reserve", $7.8 billion; and
"nonspendable principal", $44.6 billion.
9:19:24 AM
Mr. Burns moved to Slide 6, "Target asset allocation":
· Stocks - 36 percent
· Bonds - 20 percent
· Real Estate - 12 percent
· Other - 12 percent
· Absolute return - 6 percent
· Private Equity - 6 percent
· Infrastructure - 4 percent
· P/P credit - 2 percent
· Cash - 2 percent
He noted that many of the smaller pieces of the pie chart
had equity-like returns. He pointed out that the states
investment stocks was not really as low as 36 percent once
exposure to equity was considered.
9:20:31 AM
Mr. Burns presented Slide 7, "The effect of
diversification." He explained that the yellow line was what
the total fund had done over the years.
9:20:50 AM
Vice-Chair Micciche stated that he would like to see Fund
returns by asset class over the past 10 years.
9:21:23 AM
LAURA ACHEE, DIRECTOR OF COMMUNICATIONS AND ADMINISTRATION,
ALASKA PERMANENT FUND CORPORATION, DEPARTMENT OF REVENUE
interjected that the information was accessible on the APFC
website. She returned to Slide 6 to discuss how the
investment policy had changed over time. She explained that
in 1980 the Fund was invested entirely in bonds and in the
early 1980's U.S. stocks and real estate were added to the
mix. She continued saying that in early 1990, APFC moved
into non U.S. stocks and bonds. She relayed that in 2005,
shortly after APFC began adding alternative assets, the
legislature removed the statutory list, which gave the board
authority to pass regulations that defined the corporation's
investments. In 2013 the corporation added the first direct
investments to private assets, made by the staff and not
through gatekeepers, and in 2014 investments in non U.S.
directly head real estate was added to the portfolio.
9:22:38 AM
Mr. Burns turned to Slide 8, "Fund advantages":
Size - Access to investments
Ability to negotiate fee savings
Time Horizon - No set liability
He stated the APFC had access to all of the best investments
and investment advisors in the world and were a preferred
client, which gave them the ability to negotiate better
fees. He noted providers were much more attuned to customers
wants than in the past. He said that there was no set
liability because the Fund was not a pension fund, did not
have monthly draws to accommodate, and had the ability to
take a long term view while investing. He believed that the
state, like the corporation, should take a long term view
when making future investments.
9:24:19 AM
Mr. Burns moved to Slide 9, "Fund Challenges":
Location - Business travel to financial centers
Recruitment from financial centers
Flexibility - New resources often arrive long after
needed due to lengthy budget process
Staff size - Small staff limits bench strength, creates
gaps during travel and vacancies
Mr. Burns relayed that attracting and retaining talent to
the state was a challenge. He shared that people self-
selected into the market and once they arrived in the state
they wanted to stay, but the challenge existed. He furthered
that the resource resourcing of the corporation was
difficult through the slow budget process; the investment
world moved faster than the political world.
9:25:33 AM
Senator Bishop commented that he would be interested in a
cost benefit analysis on the three Fund challenges of
location, flexibility, and staff size.
Mr. Burns noted that, contrary to popular opinion,
outsourcing was not cost effective. He added that when the
corporation paid someone out-of-state to manage its money,
the cost was "gargantuan." He clarified that the corporation
would not pay for mediocrity simply to insource, but that
outsourcing was very expensive.
9:27:11 AM
Vice-Chair Micciche asked whether it was appropriate to
purposely look to hire from outside of the state.
Mr. Burns responded that APFC frequently look outside the
state for new hire, and at least half of the current 37
employees were from out of state, 80 to 90 percent of which
were on the investment side.
9:28:38 AM
Co-Chair MacKinnon announced that she had been involved in
putting together a tour of the APFC operations center. She
encouraged members to take the tour.
Mr. Burns turned to Slide 10, "Stock Portfolio," which
boasted $20.4 billion as of June 30, 2014. The slide listed
the breakdown of the stock portfolio; by country or region;
by mandate: U.S., Global, Non-U.S.; by management: Active,
Passive, Quasi-passive.
9:30:11 AM
Mr. Burns stated that in 2014 the U.S. portfolio returned 27
percent, non-U.S. returned 20 percent, and the global
portfolio returned 25 percent.
9:30:55 AM
Mr. Burns moved to Slide 11, "Top 5 stocks as of
12/31/2014," and noted that Apple was at $195 million.
9:31:12 AM
Mr. Burns continued to Slide 12, "Bond portfolio
composition. The portfolio showed $12.0 billion as of June
30, 2014, comprised of:
· U.S. Corporate - 45 percent
· U.S. Treasuries - 20 percent
· Non-U.S. Corporate - 16 percent
· Non-U.S. Government - 10 percent
· Mortgage-backed - 7 percent
· CMBS - 3 percent
9:31:26 AM
Mr. Burns spoke to Slide 13, "Bond Portfolio management,"
and highlighted that the corporation had increased internal
management, this was due to the legislature giving APFC the
resources to bring international fixed income in-house.
Ms. Achee interjected that the total cost for the change had
been under $300,000.
Mr. Burns said that the move had saved APFC approximately $1
million in fees.
9:32:26 AM
Senator Dunleavy asked whether APFC invested in Alaska.
Mr. Burns responded infrequently due to lack of opportunity.
He said that the scale in-state was too small.
Senator Dunleavy inquired whether regulations had prohibited
the APFC from investing in large-scale projects, for
example, the Alaska Gas Pipeline.
Mr. Burns replied that regulations would not prohibit the
corporation from investing, but that it might to be prudent
to invest too much money.
9:33:40 AM
Ms. Achee added that there was a statute that directed the
corporation that if two investments were equal in risk and
return profiles, the in-state project must be chosen. She
relayed that the Funds investments in infrastructure had
come from discussions at the board level regarding investing
in a gas pipeline. The investment size would depend on the
scope of the Fund.
9:34:21 AM
Mr. Burns turned to Slide 14, which was a map of APFC real
estate holdings.
9:34:37 AM
Mr. Burns moved to Slide 15, "Real estate," which was a pie
chart detailing various real estate investments properties:
· Office - 27 percent
· Retail - 26 percent
· Multifamily - 23 percent
· REITs - 20 percent
· Industrial - 5 percent
· $5.9 billion as of June 30, 2014
· 5 U.S. direct equity managers
· 1 Real Estate Investment Trust manager(REIT)
9:34:49 AM
Mr. Burns moved to Slide 16, "Tysons Corner Center." The
project was near completion. The slide illustrated a 400
plus unit apartment building that would begin leasing in
April 2015. The building in the center was a 550,000 square
foot office building, which was 80 percent leased. The
smallest building on the page was a 340 room Hyatt-Regency
hotel. The slide also showed the new plaza at the entrance
of Tysons Corner Mall and the new walkway out to the metro.
The structures $600 million addition to the property.
9:36:31 AM
Co-Chair MacKinnon asked where the property was located.
Mr. Burns clarified that it was at Tysons Corner Shopping
Center in Fairfax, Virginia. He added that the center was
referred to as a "fortress mall" because there was nowhere
to build another mall near it, stifling competition.
9:36:58 AM
Senator Hoffman asked for the percentage of investment APFC
had in the center.
Mr. Burns replied 50 percent. He said that the
corporation's partner was a publicly traded, real estate
investment trust that managed malls.
9:37:17 AM
Mr. Burns presented Slide 17, "Simpson Housing LLLP," and
explained that the corporation was 50/50 partners with the
state of Michigan in the ownership of 20,000 apartment
units across the country. He highlighted that the
corporations share was valued at $992 million as of June
30, 2014.
9:37:42 AM
Mr. Burns noted that Slide 18 and 19 pictured several of
the properties housed under Simpson Housing LLLP.
9:37:49 AM
Mr. Burns showed Slide 20, "American Homes 4 Rent." He said
that the corporation's special opportunities were divided
into two categories: generating excess returns or reducing
risk. He shared that the balance had been heavily toward
reducing risk, but more was currently being done to
generate excess returns. He stated that America Homes 4
Rent had begun as a partnership with friends in California,
buying single family homes in foreclosure. He furthered
that a private real estate investment trust was formed, all
of the real estate was put into one company, the company
went public, and APFC now owned 24 percent of the public
company. He relayed that the corporation currently had
approximately $800 million in market value shares.
9:39:55 AM
Mr. Burns presented slide 21, "CityCentre II, III and IV,"
which illustrated an office and retail, 400,000 square foot
building in Huston, TX.
9:40:16 AM
Mr. Burns continued to Slide 22, "Parc Huron," which showed
the 221 unit, residential, Parc Huron building in Chicago,
IL.
9:40:39 AM
Mr. Burns spoke to Slide 23, "The Shops at North Bridge,"
which was in Chicago on the corners of Michigan and Rush
Streets. He clarified that the state and its partners owned
the retail spaces and expected to expand.
9:41:25 AM
Mr. Burns continued to Slide 24, "Non-U.S. real estate,"
which consisted of the Golden Square Shopping Center in
Warrington, UK and Zenia Boulevard Shopping Center in
Alicante, Spain. He shared that the corporation was looking
into two centers in Portugal and one in Poland.
9:41:51 AM
Co-Chair MacKinnon asked about the investments in retail
real estate. She wondered how online shopping played into
the corporation's future.
Mr. Burns replied that all successful retail currently went
through three channels: the traditional brick and mortar
center, online, and discount retailers, such as Nordstrom
Rack. He assured the committee that APFC was mindful of the
channels when making investments. He added that adding the
hotel, offices and apartments to the Tyson Corner Center
created live, work, play environment, complete with mass
transit.
9:43:46 AM
Senator Bishop understood that Nordstrom Rack was where one
could find good deals on merchandise.
Mr. Burns replied in the affirmative.
9:44:04 AM
Co-Chair MacKinnon interjected that the discount retailers
included outlet malls and other areas where people brought
in a low price on designer items.
9:44:39 AM
Mr. Burns moved to Slide 25, "Real estate management," and
noted that the APFC had had no additional staff since 1998.
He pointed out to the committee that in 1998 the value of
the portfolio was $1.2 billion, with a 32 percent
controlling ownership percent of the portfolio. He said
that in 2015, the APFC had $5.9 billion in real estate and
an 80 percent controlling ownership.
Ms. Achee states that the rise in percentage created a
different workload for their investment staff; minority
owners were waiting primarily for reports to come in,
majority owners were dealing with things more hands-on.
9:46:09 AM
Vice-Chair Micciche understood that the APFC had a lower
percentage of real estate holdings in 2015, than in 1998.
Ms. Achee responded that in 1998 the corporation portfolio
was approximately 10 percent in real estate and now the
target was 12 percent.
9:46:43 AM
Co-Chair MacKinnon surmised that the APFC board had been
established in state statute in order to keep politics out
of investment decisions.
Mr. Burns replied yes. He felt that the balance was working
well.
9:47:30 AM
Mr. Burns turned to Slide 27, "Infrastructure holdings,"
which illustrated that assets valued $1.1 billion as of
June 30, 2014; the corporation had properties in the U.S.,
U.K., India, Argentina and Canada and had implemented a co-
investment program in FY 14. The circle graph on the slide
showed 45 percent holdings in transportation, 41 percent in
energy and 14 percent in water and waste management. He
spoke to the details of the co-investment program and noted
that the corporation needed more staff to manage the
program.
9:49:50 AM
Vice-Chair Micciche asked if the legislature moved forward
with Percent of Market Value (POMV), how would asset
allocations, investment policies and fund managers
specialties change. He wondered whether the fund would be
managed differently if it were to be drawn from to help
balance the budget.
Mr. Burns replied that management of the fund would remain
the same. He said that the fund was currently managed for
total return, and would manage it the same was if it were a
POMV. He said that it would be similar to drawing funds to
pay out the dividend.
Vice-Chair Micciche expressed concern that reducing risk
significantly would also reduce returns and that a draw
could drive the board to be more conservative in future
investments.
Ms. Achee interjected that the POMV concept brought forward
by the board did not mandate a draw from the fund, it would
change the accounting of what would be available from the
fund if the legislature chose to appropriate it.
9:51:52 AM
Co-Chair MacKinnon thought that the public would be
concerned that their permanent fund dividends could be
affected. She asked whether a POMV in 2009 would have
resulted in higher dividends over the years, or would the
destabilization of the market lowered and averaged it out
to current numbers.
Mr. Burns believed that it would average out the same.
Co-Chair MacKinnon felt that the issue warranted further
discussion. She noted that time was short and hoped that
the committee could invite the presenters back to finish
their presentation.
9:53:12 AM
Mr. Burns offered that approximately fifteen months ago,
APFC formed several partnerships and put funds into forming
a company called Juneau Therapeutics, which had gone
public. He said that APFC owned one-third of the company,
totaling 25 million shares at $40 per share. He expressed
excitement at the long-term possibilities of the company
and its success at fighting cancer.
9:54:45 AM
ADJOURNMENT
9:55:13 AM
The meeting was adjourned at 9:55 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 020615 SFC APFC.pdf |
SFIN 2/6/2015 9:00:00 AM |
SB 27 |