Legislature(2017 - 2018)SENATE FINANCE 532
02/24/2017 08:30 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Projections and Forecasting Alaska Permanent Fund | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE
February 24, 2017
8:38 a.m.
8:38:55 AM
CALL TO ORDER
Co-Chair Hoffman called the Senate Finance Committee
meeting to order at 8:38 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Click Bishop, Vice-Chair
Senator Mike Dunleavy
Senator Peter Micciche
Senator Donny Olson
MEMBERS ABSENT
Senator Anna MacKinnon, Co-Chair
Senator Natasha von Imhof
ALSO PRESENT
Steve Center, CFA, Senior Vice President, Callan
Associates; Greg Allen, President and Director of Research,
Callan Associates.
SUMMARY
^PROJECTIONS AND FORECASTING ALASKA PERMANENT FUND
8:39:54 AM
STEVE CENTER, CFA, SENIOR VICE PRESIDENT, CALLAN
ASSOCIATES, introduced himself.
8:40:14 AM
GREG ALLEN, PRESIDENT AND DIRECTOR OF RESEARCH, CALLAN
ASSOCIATES, introduced himself. He explained the functions
of Callan Associates. He discussed the PowerPoint,
"Callan's Return Projection Methodology for the Alaska
Permanent Fund; Capital Market Expectations, Total Return,
and Statutory Return" (copy on file).
Mr. Allen addressed slide 2, "Projected Returns for the
Alaska Permanent Fund; Background":
Alaska Permanent Fund for the past 15 years, and
provides projections to assist the Board and Staff in
the management of the Fund.
maintained by Callan, Fund specific information
provided by APFC Staff, and a sophisticated and
flexible model of the accounting framework to allow us
to test various spending and asset allocation
proposals.
full range of potential outcomes from best-case to
worst-case, with associated probabilities.
financial variables including
- Total Return
- Statutory Return
- Market Value
- Earnings Reserve Balance
- Distributions
s been used many times over the years to
analyze various proposals related to the Permanent
Fund, including three legislative proposals in
February of 2016.
8:44:15 AM
Mr. Allen looked at slide 3, "Return Projections FY 2017;
Latest Projections for Total and Statutory Return":
Return projection period was assumed to begin July
1, 2016.
-basis inputs were as of June
30, 2016.
-year returns for FY 2017 do not take into account
performance in the first half of the fiscal year.
-year total real return expectation is 4.70
percent, below the 5 percent real return expectation
that has been employed as a target by the
APFC.
-point of these distributions is just one
potential outcome. It is important to recognized that
the Fund takes on risk therefore there can be
significant variance relative to the mid-point
projections.
8:48:05 AM
Co-Chair Hoffman noted that Callan advised trillions of
assets for other entities. He wondered how the
recommendations differed from the current breakdown. Mr.
Allen explained that the calculations were created using
the different assets that made up the Permanent Fund
portfolio. He stressed that the numbers should be
considered "consensus numbers." He remarked that Callan was
not necessarily different than their peers. He explained
that the difference with the Permanent Fund model, was
based on the specific investment strategy. He referred to
slide 6, which was the asset allocation of the Permanent
Fund.
8:50:52 AM
Co-Chair Hoffman wondered whether Mr. Allen was familiar
with SB 128 from the previous session. He wondered whether
that would significantly alter the allocations. Mr. Allen
replied that he would discuss what might alter the
Permanent Fund.
8:57:10 AM
Co-Chair Hoffman wondered whether there were steps to
forego the drastic problems with two bad years in a row.
Mr. Allen replied that the Permanent Fund was in a better
position than 15 years prior, because the Earnings Reserve
was currently very large. The ending value of the Earnings
Reserve was the largest that it had ever been at the end of
a fiscal year.
Senator Micciche noted the five-year running average,
resulted in a lower effective rate. He wondered whether the
FY 18 rate of 4.56 percent the referred to the effective
amount or the POMV. Mr. Allen replied that he was referring
to the actual POMV amount, assuming that it was applied to
five out of six. That would translate into an effective
rate of 4.6 or 4.7 percent over time. He stated that the
expected real return over ten years was 4.7 percent. He
counseled that the committee choose an effective POMV,
which was close to the expected real return.
Mr. Allen highlighted slide 4, "Capital Market Assumptions;
Projected Return and Standard Deviation":
-year capital market
expectations for all models.
annually and used for
strategic planning work for all client types.
-term consensus expectations.
optimization and
simulation analysis.
evolve slowly with only
modest year-to-year changes.
Mr. Allen addressed slide 5, "Capital Market Assumptions;
Projected Correlation Matrix":
re the
third dimension of capital market expectations.
pair in the matrix.
-
definite) as a set in order to work properly in
optimization and simulation analysis.
Mr. Allen looked at slide 6, "Assumed Asset Allocation;
Used 2017 Target Allocation Adopted by Board in September,
2016":
allocation across
entire 10-year projection period.
very close to actual
asset allocation as of June 30, 2016.
assumed which yields more
comparable results across the models.
important because they
impact turnover in the portfolio which results in
gains realization.
Expected Return: 6.95 percent
Standard Deviation: 12.38 percent
Expected Real Return: 4.70 percent
Mr. Allen addressed slide 7, "Statutory Net Income and
Permanent Fund Mechanics":
can lend some insight into the expectations for
Statutory Net Income which determines Statutory Net
Return.
and realized capital gains in each fiscal year.
to a number of factors which, in turn, will influence
the Statutory Net Return over time.
- Ratio of income producing assets to capital
gains oriented assets;
- Turnover;
- Active versus passive management;
- The use of illiquid asset classes such as real
estate, private equity, infrastructure;
history of a number of important variables to help put
Statutory Net Income into context.
- Fund Market Value;
- Oil revenue;
- Statutory Net Income (realized income);
- Earnings reserve balance;
9:01:01 AM
Mr. Allen recalled slide 4, with the projected return of 3
percent for fixed income for the following ten years. That
was one of the lowest fixed income return projection that
he had seen, which reflected the low-income rates.
Vice-Chair Bishop remarked that wondered if there was an
anticipated change in asset allocations. Mr. Allen replied
that the new chief investment officer laid out a five-year
plan for the asset allocation of the Permanent Fund. That
plan did not involve big changes. He stated that the
mixture between income producing assets and growth
producing assets would not change in the five-year plan.
The change was that there would be more allocated toward
the private investments.
Mr. Allen continued to discuss slide 7. He discussed the
concept of statutory net return or "realized return" and
its relationship to total return. He stated that the
statutory return would sometimes be negative. He shared
that the statutory return was the ratio of income-producing
stocks versus growth-producing assets. He announced that
bonds generated coupons, which represented income and was
reliable. The Permanent Fund began as a bond portfolio, so
the entire return was income. He stated that, over the
years, there was less income and more growth-producing
assets in pursuit of the higher rate of return. The growth
assets did not earn the return until the stock was sold.
The earnings were not realized until the turnover occurred,
or the percentage of the buying and selling within the
portfolio.
9:06:37 AM
Mr. Allen discussed slide 8, "Mechanics of the Permanent
Fund; Market Value over Time":
year to year based on market performance.
downturns in 2001-2002, and 2009-2009.
roughly $53 Billion.
distributions, and to a limited extent, oil revenue.
Vice-Chair Bishop surmised that the statutory returns were
real money. Mr. Allen replied in the affirmative.
Vice-Chair Bishop stressed that using statutory returns
dealt with real money, so they were less apt to "get the
fund in trouble." Mr. Allen replied that he "would not take
that leap." He stated that examining statutory returns was
important, because until the return was realized it did not
get moved into the earnings reserve. If the money was not
in the earnings reserve, the money could not be spent.
Vice-Chair Bishop announced that the state would be
realistic in the multiplier to avoid the negative
situation. Mr. Allen agreed.
9:10:09 AM
Senator Micciche looked at slide 8, and wondered what an
overlay of a similar sovereign fund would look like as a
comparison. Mr. Allen replied that it would be similar.
Senator Micciche wondered whether the other funds would
have a similar slope. Mr. Allen replied that there was a
measure called "maximum draw down" that measured how much
the fund lost. He ranked the maximum draw down of the
Permanent Fund versus all the other institutional
investors. The Permanent Fund ranked in the top tenth
percentile in avoiding the losses.
Mr. Allen addressed slide 9, "Statutory Net Income;
Statutory Net Income over Time":
tory Net Income is the total of realized income
and realized capital gains.
yields have declined) Statutory Net Income has become
increasingly dominated by realized gains and losses.
market value.
positive total fund returns but very low to negative
Statutory Net Income.
9:16:23 AM
Mr. Allen highlighted slide 10, "Statutory Net Income
Projection; Conclusions":
f
different dynamic factors besides the total return on
the portfolio.
appreciation focused investments will have a
significant impact.
focused investments will also have an impact.
have a meaningful impact.
realization of gains or losses in the portfolio and
will have an impact.
s for statutory net income are
probably on the high side due to the assumption of
quarterly rebalancing. APFC Investment Staff employs a
much more efficient and sensible rebalancing approach
in practice.
Co-Chair Hoffman noted that the legislature gave the board
the authority to invest on the international market. He
queried the last major investment guideline change to the
board from the legislature. He wondered whether there were
any other changes that other major funds had considered.
Mr. Allen responded that there was a point approximately
ten years prior at which the fund was given a "prudent
person perspective." He stated the fund could invest in
almost anything, as long as a "prudent person in a similar
position would also invest in that."
9:19:47 AM
Senator Dunleavy wondered whether the demand to sustain a
draw to lead the corporation to sell prematurely to reach a
goal. Mr. Allen replied that he did not believe so. He felt
that sensible choices in terms of POMV.
Senator Micciche surmised that the max payout was known,
but not the subtracted amount. Mr. Allen replied that
certainty helps.
9:26:19 AM
Senator Micciche wondered whether the revenue limit could
be a diversification method. Mr. Allen replied that there
would be more in the fund at higher oil revenue.
9:27:27 AM
Vice-Chair Bishop wondered whether birth rate projections
should be factored into the model of the percentage. Mr.
Callan did not have an opinion on the impact of birth rate
on the cost of government.
Vice-Chair Bishop stressed that the newly born would be
given a dividend. Mr. Allen replied that the dividend would
be a fixed dollar amount under the new formula.
Senator Micciche noted that the proposal was a fixed payout
for three years, then was adjusted to a formula that would
be the total amount divided by the number of qualified
Alaskans. Mr. Allen replied that the model showed that the
population did not change significantly year to year.
Co-Chair Hoffman queried closing comments.
ADJOURNMENT
9:31:38 AM
The meeting was adjourned at 9:31 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 022417 Return Projection Methodology APFC 01.17.17.pdf |
SFIN 2/24/2017 8:30:00 AM |
APFC |
| 022417 Callan - APFC - SFC.pdf |
SFIN 2/24/2017 8:30:00 AM |
APFC |