Legislature(2021 - 2022)SENATE FINANCE 532
03/05/2021 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Callan - Permanent Fund Performance Measures | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
March 5, 2021
9:01 a.m.
9:01:35 AM
CALL TO ORDER
Co-Chair Bishop called the Senate Finance Committee meeting
to order at 9:01 a.m.
MEMBERS PRESENT
Senator Click Bishop, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Donny Olson (via teleconference)
Senator Bill Wielechowski
Senator David Wilson
MEMBERS ABSENT
Senator Lyman Hoffman
Senator Natasha von Imhof
ALSO PRESENT
Angela Rodell, Executive Director, Alaska Permanent Fund
Corporation.
PRESENT VIA TELECONFERENCE
Greg Allen, Chief Executive Officer and Chief Research
Officer, Callan; Steven Center, Senior Vice President,
Callan.
SUMMARY
PRESENTATION: CALLAN - PERMANENT FUND PERFORMANCE MEASURES
Co-Chair Stedman discussed housekeeping.
^PRESENTATION: CALLAN - PERMANENT FUND PERFORMANCE MEASURES
9:03:17 AM
GREG ALLEN, CHIEF EXECUTIVE OFFICER AND CHIEF RESEARCH
OFFICER, CALLAN (via teleconference), provided a brief
introduction.
Co-Chair Stedman relayed that the pace of the presentation
would be quick as the committee had only an hour and a half
before floor session.
9:04:25 AM
Mr. Allen discussed the presentation "Alaska Permanent Fund
and Alaska Retirement Plans Update" (copy on file).
Mr. Allen turned to slide 2, "Outline":
?Callan's capital market projection process
?Current economic and capital market environment
?Summary of Callan's 2021 capital market projections
?Projected return and risk for APFC policy portfolio
?Alaska Permanent FundRecent Performance Review
?Projected return and risk for Alaska Retirement Plans
PERS/TRS
?Alaska Retirement Plans PERS/TERSRecent
Performance Review
?Concluding observations
9:04:50 AM
Mr. Allen showed slide 3, "Callan Capital Market Projection
Process":
?Callan updates long term capital market projections
each year in January and uses them for the full year
with all clients for strategic planning purposes.
?Projections take into account long term relationships
balanced with current market conditions.
?Consensus expectations (central banks, economists,
asset managers, consultants, etc.) are carefully
considered as an integral part of the process.
?Each number return, risk, correlation for every
asset class must be individually defensible, and the
numbers collectively need to work together as a set to
generate reasonable portfolios during strategic
planning exercises.
?Projections change slowly over time and are not
designed to provide tactical insights.
?Process is executed by Callan's capital markets
research group and projections are peer reviewed by
Client Policy Review Committee as well as the hundreds
of the clients that use them every year.
?Process is battle proven it has evolved and
improved, but hasn't fundamentally changed over the
last four decades.
9:08:01 AM
Co-Chair Stedman interjected that Allen could pick up the
pace of the presentation. He shared that the committee
received this same presentation each year and was familiar
with the work of Callen and Associates.
9:08:15 AM
Mr. Allen discussed slide 4, "Callan Capital Market
Projection Process - Historical Rolling 10-year Return US
Large Cap Equity":
?Historical 10-year return for US large cap has
averaged 10.5 percent.
?2021 Projection is 6.5 percent.
?Very few periods historically of negative 10-year
return for US equities.
?Current outlook is in lower third of historical
distribution, driven by relatively high valuations and
low inflation outlook.
?Generally lower return periods have been associated
with higher valuations at the beginning of the period
or recession events
9:09:04 AM
Mr. Allen reviewed slide 5, "Callan Capital Market
Projection Process - Historical Rolling 30-year Return US
Large Cap Equity":
?Historical 30-year return for US large cap has
averaged 11.16 percent.
?2021 Projection is 6.5percent.
?Worst historical 30-year return for S&P 500 was 8.47
percent.
?30-year annualized returns in fairly tight range
around long term average.
?Longer time horizons reward equity risk takers with
more consistent positive return
Mr. Allen explained that in 30 years the volatility calmed
down the longer the horizon, the bigger risks that could
be taken.
9:09:44 AM
Mr. Allen spoke to slide 6, "Stock Market Returns by
Calendar Year," which showed a graph entitled 2020
performance in perspective: History of the U.S. stock
market (231 years of returns. He explained that the graph
on the slide was a histogram. He highlighted the returns in
the stock market over the last 10 years. He thought there
was an all-time level of healthiness in terms of the ERA
and assets.
9:10:39 AM
Mr. Allen addressed slide 7, "Unprecedented Shock to Global
Capital Markets Unprecedented Recovery?":
V-shaped recovery in equityback in black by mid-
August, up 18.4 percent for the year!
The sharpest and fastest equity market decline ever:
16 trading days to reach bear market; -33 percent
after just 23 days
Incredible rebound in U.S. equity market in 2Q and 3Q
The S&P 500 recovered all of its COVID-19
related losses by August 10, only 97 days from
the bottom
70 percent return from the market bottom through
December 31, 2020
Positive return year-to-date (+18.4 percent
through December 31, 2020)
Mr. Allen relayed that the graph on the slide was designed
to show the unprecedented pandemic response.
9:11:41 AM
Mr. Allen referenced slide 8, "U.S. Equity Projections":
Valuations are 1.8 standard deviations above the 25-
year average based on forecast earnings
Longer term historical valuations are also elevated
Shiller's cyclically adjusted price earnings
(CAPE) ratio is 1.1 standard deviation above
average
Stock prices reflect anticipated rather than
historical earnings
Market is concentrated in Tech and Consumer
Discretionary which both have high valuations.
Mr. Allen relayed that the purpose of the slide was to show
equity valuations and that the current valuations were
above one standard deviation, relative to the long-term
average.
9:12:16 AM
Mr. Allen looked at slide 9, "Callan Capital Market
Projection Process - Historical Return US Fixed Income":
?Historical 10-year return for US bonds has averaged
5.5percent.
?2021 Projection is 1.75 percent.
?No periods historically of negative 10-year return
for US bonds.
?Current outlook is in bottom decile of historical
distribution due to low yields and low inflation
outlook.
?Rising interest rates will eventually allow higher
forward looking returns but will reduce return in the
intermediate term.
Mr. Allen addressed slide 10, "Starting Yield Strongly
Predicts Forward Returns":
There is a strong relationship between starting
yields and subsequent 10-Year returns.
Current yield on the Bloomberg Aggregate index is
below 2 percent.
Projection includes assumption of gradually rising
yields over 10-year period.
9:13:51 AM
Mr. Allen spoke to slide 11, "Relative Returns Stocks
versus Bonds 10-year Roll - Long Term Relationship
Between Stocks and Bonds," which showed a line graph
entitled Rolling 10 Year Relative Returns US Stocks versus
US Bonds. He noted that stocks had generally returned 5
percent more than bonds and capital market projections
reflected the same. He said that bonds were beneficial to
portfolios even if the return projections were not
substantial.
9:14:33 AM
Co-Chair Stedman noted that the data books with different
asset classes and historical returns were in his office and
were available to committee members.
9:15:09 AM
Senator Wielechowski had read a few articles in which
people had suggested that federal banks had been injecting
a great deal of money into the system. He asked whether the
federal dollars flooding the system with such low interest
rates was cause for concern when considering projections.
Mr. Allen stated that Callan had considered the issue. He
thought the projections were consistent with central banks
and other who had also considered the issue. He thought
there was good reason to be concerned about the amount of
liquidity. He thought there would be pockets of exuberance
and potentially small bubbles but did not believe the trend
was inflationary. He noted that inflation and bonds yields
were not of great concern right now.
9:17:45 AM
Senator Wielechowski thought at some point all the money
would have to be paid back. He wondered how the experts
were predicting what would happen and what would be the
potential impact on the market.
Mr. Allen thought there was a general assumption that as
the economy recovered taxes would be increased, which would
counter the inflationary trend. He said that democrats
overseeing all three branches on the federal level meant
that taxes would increase. He thought that at some point
there would be a need for fiscal restraint and discipline
in the system. He worried about passing on the debt to the
next generation.
9:19:56 AM
Mr. Allen discussed slide 12," Rolling 10-Year Standard
Deviation - Asset Class Volatility Over Time," which showed
a line graph. The point of the slide was to show the risk
relationships were relatively stable. The red line showed
the trailing volatility of the Permanent Fund. He drew
attention to the ten-year trailing risk, which had come
down, providing the state with a period of fairly stable
markets.
9:21:08 AM
Co-Chair Stedman asked about real estate, and how Callan
gauged the volatility and derived the underlaying numeric.
Mr. Allen acknowledged that real estate did not trade on a
daily basis and was not subject to the kind of volatility
of peoples opinions changing regularly. He explained that
returns on the real estate index were driven by the income
produced and appraisals. He said that when projecting for
real estate the standard deviation was increased to reflect
the economic risk in real estate. He noted that there had
been no transaction in the last year, which made the
appraisers hesitant to change the appraisal price. He
relayed that real estate had help up well, despite the drop
off in shopping mall traffic. He said that declines in
retail rental prices were expected. He thought that the
pandemic would alter the view of office work versus working
from home, which would lead to vacancies in office space.
He asserted that industrial properties were doing fairly
well, which provided some balance.
Co-Chair Stedman asked Mr. Allen to address private equity.
Mr. Allen thought that private equity held more risk than
public equity. He commented that the Permanent Fund had one
of the best private equity portfolios across their client
base, which was reflected in the returns over the last 4
years. He added that there was a wide dispersion of results
in private equity. He shared that private equity was
valuation driven. He said that private equity observed
volatility masked the actual volatility; if private
companies had sold their companies at the end of 2018, a
much greater drop would have been observed than was what
reflected in the private equity return.
9:25:22 AM
Mr. Allen reviewed slide 13, "Relative Returns Stocks
versus Bonds - Correlations to US Equity Over Time," which
showed a line graph. He elaborated that the correlations
were all relatively stable in terms of their relationships.
He relayed that what drove the volatility of the permanent
fund was the equity markets. He emphasized that it was
impossible to remove equity risk from a long-term
investment portfolio. He thought the Alaska Permanent Fund
Corporation and the Alaska Retirement Management Board had
done a well finding diversifying strategies that reduced
risk on the margin but at the end of the day the equity
market was the top driver.
Co-Chair Stedman asked if the correlations deviated from
normal practices and whether they ever ended up aligning.
Mr. Allen thought 2008 and real estate was a good example.
He reminded that real estate correlation masked the actual
underlying risk of real estate. In 2008 and 2009 there was
a real estate driven financial crisis, which had resulted
in a drop in real estate prices at the same time as a drop
in equities, and the slide reflected the ten-year
correlation at that time. He said that all asset classes
that involved risk could have low correlations during
relatively stable periods, but when people were dumping
risk assets would go down, which increased their
correlation to equities.
9:27:42 AM
Co-Chair Stedman offered an adage about boats and tides.
Mr. Allen concurred with the assessment.
9:27:55 AM
Mr. Allen addressed slide 14, "Periodic Table of Investment
Returns - Diversification Over Recent Calendar Year
Periods," which showed a stack of asset classes for each
calendar year with the highest at the top and the lowest at
the bottom. He stated that there was not a single asset
class that was at the top every year, so diversification
was key. He pointed out to the committee that the red
squares represented the permanent fund, which contained a
variety and was somewhere in the middle due to the
diversified portfolio.
Mr. Allen noted that it had been a bad period for non-U.S.
equity. He said that when the dollar rose, the value of
non-U.S. investments decreased.
9:29:12 AM
Mr. Allen referenced slide 15, "Periodic Table of
Investment Returns - Diversification Over Ten-Year
Periods." He thought the table demonstrated that over a
long-time horizon the risk of the asset classes came out on
top. He shared that private equity had been one of the top
performing asset classes for the charted time period.
9:29:47 AM
Mr. Allen turned to slide 16, "Highlights of 2021 Capital
Market Projections - Changes and Observations":
?GDP growth of 2 percent to 2.5 percent for the U.S.,
1.5percent to 2 percent for developed ex-U.S. markets,
and 4 percent to 5 percent for emerging markets.
Embedded in all of these economic forecasts is the
expectation that the path to this longer-term growth
will include cycles with recessions.
?Inflation expectation lowered to 2.0 percent.
?Global equity, projected return of 6.85 percent with
a standard deviation (or risk) of 18.3 percent,
roughly a 50 bp. reduction from last year.
?For APFC public fixed income, projected return of 2.2
percent (risk: 3.75percent), roughly an 85 bp.
reduction from last year reflecting the low yield
environment for fixed income.
?Gradually ratcheted down our expectations over recent
years for equities to reflect higher valuations, a
lower growth environment, and lower inflation.
?Continue to project a premium for private markets
portfolios over public markets assuming long term
commitment and institutional implementation.
Private equity 8.0 percent projected return;
Private real estate 5.75 percent projected
return;
Private infrastructure/credit 6.40 percent
projected return.
9:30:58 AM
Mr. Allen turned to slide 17, " Capital Market Projections
- Projected Return, Standard Deviation, and Yield," which
showed a table entitled 'Summary of Callan's Long-Term
Capital Market Projections for APFC Asset Allocation Model
(FY 2022 - 2031).' He relayed that the slide listed all the
individual asset classes Callan projected. He did not have
significant comments on the slide and suggested that the
members view the slide at their leisure.
9:31:12 AM
Mr. Allen discussed slide 18, "7percent Expected Returns
Over Past 30+ Years,":
1991
In 1991, our expectations for cash and
broad U.S. fixed income were 6.95percent and
8.95percent, respectively
Return-seeking assets were not required to
earn a 7percent projected return
2006
15 years later, an investor would have
needed over a third of the portfolio in public
equities to achieve a 7percent projected return,
with 6x the portfolio volatility of 1991
2021
Today an investor is required to include
97percent in return-seeking assets to earn a
7percent
projected return at almost 16x the volatility
compared to 1991
He spoke to slide 18, which showed three pie charts
depicting a history that reflected that declining bond
yields had made it increasingly complex to achieve a 7
percent return.
9:32:47 AM
Mr. Allen showed slide 19, "Alaska Permanent Fund
Corporation - Projected Returns and Recent Performance
Review." He turned to slide 20, APFC FY 2022 Total Fund
Policy Target Projected Return and Standard Deviation.:
? Projected median 10-year annualized
return of 6.20percent is a reduction of roughly
55 basis points relative to last year.
? Inflation expectation reduced from 2.25percent
to 2.00percent.
? Projected median 10-year annualized real
return of 4.20percent is a reduction of roughly
30 basis points relative to last year.
? Projected standard deviation of 13.50percent is
roughly the same as last year.
? Percent probability of exceeding 5percent
annualized real return over 10-year
horizon is estimated to be 45.6percent.
APFC Total Fund Target
APFC Public Fixed Income 20 percent
Private Equity 16 percent
Real Estate 8 percent
Private Infra/Credit 9 percent
Absolute Return 6 percent
Cash 2 percent
Risk Parity 1 percent
APFC Public Equities 38 percent
Expected 10-year Geometric Return 6.20 percent
Expected Standard Deviation 13.50 percent
Expected Inflation 2.00 percent
Expected real return 4.20 percent
9:33:43 AM
Senator Wielechowski asked Mr. Allen to compare the
riskiness of the permanent fund investments to other
sovereign wealth funds around the world.
Mr. Allen thought it would fall in the middle risk area. He
commended the permanent fund did not over-reach for returns
but had worked methodically in their investment practices.
He said that sovereign wealth funds generally had long-time
horizons and could take illiquidity risks. He said that
remaining risk in the portfolio was equity risk and there
was a substantial amount of fixed income. He urged that now
was not the time to stretch for return and believed that
the permanent fund was in a good place relative to their
peers.
9:36:04 AM
Senator Wielechowski spoke of the bond to stock ratio. He
thought it seemed like the permanent fund split that ratio
75 percent and 25 percent.
Mr. Allen agreed. He related that Callan and Associates had
done an analysis of the level of risk implied by the
portfolio, translated into a simple stock and bond mix, and
had determined the 75 percent 25 percent split.
9:36:43 AM
Co-Chair Bishop asked whether collapsing the ERA and
putting it into the corpus of the fund would change the
investment suggestions to the permanent fund board.
Mr. Allen asked for more clarification of the question.
Co-Chair Bishop clarified that that he meant drawing the
POMV from the corpus and not the ERA.
Mr. Allen stated that generally such a change would allow
for the Permanent Fund to take more illiquidity risk and
increase their private margins exposure. He said that one
of the concerns with the ERA model was if there was a
significant period of negative equity markets, combined
with a bigger draw on the ERA, the draw could not be made
because the ERA would be depleted. He thought that
collapsing the ERA could be beneficial but that it did not
make much of a difference form an investment standpoint.
9:39:40 AM
Co-Chair Stedman wanted to discuss the draw rate. He noted
that Mr. Allen had mentioned the draw rate of 4 and 4.5
percent. He asked how reasonable the 4 to 4.5 percent draw
rate was versus 5 percent or 8.5 percent or some other
number.
Mr. Allen thought the current formula at 5 percent was
sustainable and was consistent with best practices with all
of the endowments they worked with. He stated that going
above 5 percent for a long period of time would erode the
purchasing power of the corpus. He stated that Callan
considered a four percent draw was consistent with
maintaining the purchasing power of the principal. He
thought that the current formula was sustainable and would
maintain over time but would not result in the growth of
purchasing power.
9:42:00 AM
Co-Chair Stedman asked whether Mr. Allen was referring to
four percent of the annual value or the trading average.
Mr. Allen clarified that the current formula was five
percent of the average market value for the previous five
years. He stated that, given the expectation that the
permanent fund was growing by 6 percent over time, and
using market values from the past that were smaller on
average, the result was not 5 percent of the current market
value. He estimated that the actual spend was 4.2 percent
to 4.3 percent each year. He thought that there was a 50
percent chance of earning 4.2 percent real, which meant
that the principal stayed the same on an inflation adjusted
basis.
9:43:36 AM
Co-Chair Stedman asked to see a standard deviation graph on
the returns, with a normal distribution. He asked for a
bugle chart on ending values, which he thought made the
risk component easier to identify. He observed that the
return expectations for the next ten years could be over
the projections. He asked at what point would the
projections come down and at what point discussions about
lower the payout should occur.
Mr. Allen recalled that Callan and Associates had gone on
record suggesting that the state move to 4.5 percent as
soon as possible. He believed 4.5 percent would be more
sustainable. He mentioned that lowering of return
expectations should happen slowly and commented on the
perverse relationship between having too high a draw while
pressuring investment staff to take higher investment
risks.
9:47:23 AM
Mr. Allen continued his remarks in response to Co-Chair
Stedman's question. He said that the POMV model allowed the
state to budget properly with a predicable draw, but that
to ensure a sustainable payout the percentage draw should
be lowered.
9:48:12 AM
Senator Wielechowski asked whether Mr. Allen thought the
annualized return would increase under a POMV.
Mr. Allen explained that typically when discussing an
expected return on the portfolio, it was in terms of the
overall objective. He thought the POMV took risk off the
stable for the state. He said that the state was currently
operating under a hybrid, with a POMV coupled with
consideration of the ERA. He stated that the ERA created
potential conflict of objectives and introduced volatility
in the draw. He noted that the ERA was healthy and market
value to cost was high, which was a good time to consider
eliminating the ERA.
9:51:24 AM
Senator Wielechowski relayed that the ongoing discussion
about going to a constitutional POMV was heightening. He
wondered how much the returns would increase with a stand-
alone POMV.
Mr. Allen clarified that the 4.5 percent was 2.5 percent
above inflation, and the rest of the amount was to preserve
the principal. He said that dealing with the APFCs
complex portfolio, there was no silver bullet that would
gain an extra percent. He mentioned "alpha," which was the
excepts return created by beating benchmarks and was not
considered in their projections. He relayed that the
permanent fund had generated positive alpha overtime and
there was a little cushion built into Callan's projects
because there was an assumed zero alpha. He thought the
main benefit in eliminating the ERA was to take away the
spending cliff. He thought stable spending had become a
priority to APFC.
9:54:54 AM
Co-Chair Stedman clarified that Mr. Allen's reference to
"spending' was the payment from the permanent fund to the
treasury and not government spending.
Mr. Allen replied in the affirmative.
Co-Chair Stedman referenced the previous day's
presentations, which had shown the elimination of the ERA
in the future under the status quo. He asked Mr. Allen to
discuss what size of the ERA would be prudent with the
added risk level.
Mr. Allen did not think there was anything that could be
done to control the size of the ERA.
Co-Chair Stedman clarified that about the ERA he was
referencing the multiple against the draw.
Mr. Allen affirmed that the smaller the ERA, the higher the
possibility that the draw could not be taken in a down
market. He noted that anything taken from the ERA increased
the risk of the ERA getting too low to take a draw. He
thought that if the ERA was kept at 4x the draw, and then
it increased to 5x the draw, there would be the temptation
to take money out of the ERA and put it in the corpus. He
stated that anything taken form the ERA increased the risk
that the ERA would become too low to support the draw.
9:58:06 AM
Co-Chair Stedman felt that the issue was complicated by
politics. He said that to ensure that the ERA was not
exposed to ad hoc draws could put the APFC in the position
of having to restructure their asset class or assume higher
risk.
Mr. Allen had been modeling the ERA since the mid-1990s. He
had appeared in front of the committee in 1997 or 1998, at
which time the legislature had done an ad hoc inflation
proofing appropriation back to the principal that took the
ERA to zero. He had made the case with a model that there
was a 25 percent chance that the dividend would go to zero
within two years. He thought at the time the legislature
was being fiscally conservative. He noted that the ERA got
healthy again in time to payout dividends. He thought
starting with zero in the ERA would increase the
probability that there could be no draw, particularly
because the draw was currently 3x to 4x higher.
Co-Chair Stedman clarified he was not suggesting taking the
ERA to zero. He expressed the concern about facing a
precipitous draw rate and putting the state in a position
of difficulty with the planned 5 percent draw. He feared
the responding to the erratic appropriation request from
the legislature could spook the APFC board. He said that
discussions on the declining return expectation with the 5
percent draw rate highlighted problems, and that issues
were compounded with the addition of politics. He said that
the committee would be reaching out to APFC to get a better
feel of the impacts to the ERA and liquid assets. He
expressed concern that a falling nominal could be put in
place that would create an intolerable situation for the
state.
10:03:16 AM
Mr. Allen remarked that if the legislature increased the
draw above the formula, it strained the ERA. He furthered
that if the legislature increased the draw under the POMV
model it eliminated the ERA worry but increased the
concerns for sustainability of the fund. Increasing the
draw would be unsustainable and would result in a more
illiquid portfolio overtime.
10:04:31 AM
Co-Chair Stedman recalled past proposals for a $10 billion
draw. He spoke to the proposed appropriations at play that
were significantly higher than the draw rate.
10:05:16 AM
Mr. Allen likened the PF and every sovereign wealth fund to
a fishery or a forest, that which had a limited amount of
resource to give. He suggested managing the fund as a
sustainable resource.
10:05:56 AM
Senator Wielechowski asked whether Mr. Allen suggested that
the APFC become aggressive in response to government
spending demands.
Mr. Allen credited the corporation for resisting the urge
to become more aggressive because of the bigger draw. He
thought that the current formula was sustainable and did
not put undue pressure on the APFC investment staff. He
thought that there had been an increased focus on liquidity
management and that the corporation had resisted taking on
additional risk.
Co-Chair Stedman requested moving to slide 26 of the
presentation.
10:08:44 AM
STEVEN CENTER, SENIOR VICE PRESIDENT, CALLAN AND ASSOCIATES
(via teleconference), spoke to slide 26, "ARMB PERS/TRS
Current Total Fund Policy Target - Projected Return and
Standard Deviation":
? Projected median 10-year annualized return of 6.15
percent is a reduction of roughly 65 basis points
relative to last year.
? Inflation expectation reduced from 2.25 percent to
2.00 percent.
? Projected median 10-year annualized real return of
4.15 percent is a reduction of roughly 40 basis points
relative to last year.
? Projected standard deviation of 13.56 percent is
roughly the same as last year.
Real Assets 13.0 percent
Private Equity 12.0 percent
Opportunistic 6.0 percent
Fixed Income 22.0 percent
Public Equity 47.0 percent
Expected 10-year Geometric Return: 6.15 percent
Expected Standard Deviation: 13.56 percent
Expected Inflation: 2.00 percent
Expected Real Return: 4.15 percent
10:10:38 AM
Co-Chair Stedman wanted to see a bugle graph and a standard
deviation graph of the information on the slide
Mr. Center admitted that the presentation did not include
any risk charts. He affirmed that the PERS plan
historically had a risk level that was slightly below
median when compared to other public funds.
Co-Chair Stedman said that the bugle chart would give the
committee a graphical representation of the risk going
forward.
Mr. Center agreed to provide the requested charts.
Co-Chair Stedman relayed concerns about payments for
unfunded liability that extended to the end of the century.
He referenced historical challenges for various reasons for
hitting the dollar target on the portfolio that had led to
increased contributions, which had put pressure on the
Operating Budget. He lamented that as agency budgets had
been reduced the pension obligation had increased.
10:13:30 AM
Senator Wielechowski reference the slide and thought it
looked like there was a 5 basis point less return in the
permanent fund and an increase in the standard deviation.
Mr. Center relayed that the numbers reflected the higher
allocation to public equities versus the permanent fund. He
said that public equities were valued on a daily basis and
had a higher volatility than public equity.
10:14:15 AM
Co-Chair Stedman thought the committee could have a
conversation with the ARM Board after receiving the
requested charts.
10:14:43 AM
Mr. Center discussed slide 27, " Alaska PERS Total Fund
Annualized Historical Returns - Total Fund versus Total
Fund Target," which showed a bar graph. The slide looked at
historical performance of the PERS plan. He shared that the
PERS and TRS plans had the same asset allocation with
slight variances overtime. He relayed that PERS had
performed well relative to its benchmark.
10:15:45 AM
Co-Chair Stedman asked members to consider the information
on the slide when looking at contribution increases and the
suggested rate when dealing with unfunded liability.
10:16:27 AM
Mr. Center referenced slide 28, "Alaska PERS Total Fund
Cumulative Returns Last 10 Years - Total Fund versus
Total Fund Target," which showed a line graph depicting
cumulative returns for 10 years ending December 31, 2020.
Co-Chair Stedman expected that, when looking at forward
projections of the value of the portfolio from 2011, the
portfolio would be higher than the projected forward
values.
Mr. Center replied in the affirmative. He asserted that the
plan outperformed the projected return from 10 years ago.
Co-Chair Stedman restated his interest in seeing the
information converted to actual dollars.
Mr. Center affirmed that the PERS market value at the end
of December 2020 was approximately $10.8 billion. He did
not have the liability numbers.
Co-Chair Stedman thought that the yearly dollar projections
would be helpful to the committee.
Mr. Center agreed.
10:18:47 AM
Senator Wielechowski asked how the target index was
selected and if it had changed over the previous 20 years.
Mr. Center said that the target index changed frequently
due to implementation, such as the addition of an asset
class or a change in underlying asset class. He directed
the committees attention to the bottom of the slide, which
detailed the current benchmark makeup. He stated that the
benchmark makeup changed for year to year. He offered an
example of the real estate portfolio within PERS. He
related that the goal of the benchmark was to provide a
return hurdle for the PERS portfolio that was indicative of
the asset allocation for any fiscal year.
10:20:23 AM
Senator Wielechowski assumed the PERS total fund return was
inclusive of costs and fees when compared to the target
index.
Mr. Center explained that the return was a blend of gross
and net of fees. He agreed to get back to the committee
with more information.
Co-Chair Stedman suggested that, due to time constraints,
the presenter choose from the remaining slides which were
most important to share with the committee.
Mr. Center recommended looking at slide 21, which offered a
chart illustrating APFC total fund annualized historical
returns.
10:21:30 AM
Mr. Center referenced slide 21, "APFC Total Fund Annualized
Historical Returns - Total Fund versus Total Fund Targets,"
which showed a bar graph entitled 'Returns for Periods
Ending December 31, 2020.' He said that the fund had
several benchmarks that it was tracked against. He spoke to
the green bar, which was a blended benchmark that reelected
the overall asset allocation of the fund. He related that
the orange bar was the passive index, which was a blend of
publicly traded benchmarks. He shared that the third was
the return investment of CPI, plus 5. He said that the fund
was up 10 percent over the last five years and was ahead of
all benchmarks. He asserted that the AFOC team had done a
stellar job at implementation. He said that the PERS team
did a good job of staying on top of asset allocation
targets.
10:23:39 AM
Co-Chair Stedman thanked Mr. Allen and Mr. Center for the
continued work. He thanked Ms. Angela Rodell and her team
for their great work in their management of the permanent
fund.
Co-Chair Stedman discussed housekeeping.
ADJOURNMENT
10:24:58 AM
The meeting was adjourned at 10:24 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 030521 Callan AK Senate Finance Committee.pdf |
SFIN 3/5/2021 9:00:00 AM |
APFC |