HOUSE BILL NO. 466 An Act relating to investments of Alaska permanent fund assets; and providing for an effective date. Representative Foster MOVED to ADOPT work draft #23- LS1699\H, Cook, Craver, 5/5/04, as the version of the bill before the Committee. There being NO OBJECTION, it was adopted. ROBERT D. STORER, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND CORPORATION, DEPARTMENT OF REVENUE, commented that the request would increase investment flexibility. He noted that most funds must follow the prudent investor expert rule, however, that the Permanent Fund contains an extra obligation, a statutory list outlining what can be invested in. Four years ago, the Legislature gave the Permanent Fund Corporation the ability to invest up to 5% in types of investments not mentioned in the statutory list, referred to as the "basket clause". It provides a 5% limitation. After studying it for four years, regarding the various ways to use it, a strategy was implemented providing a modest amount in private equities and a conservative amount in a pilot program with an absolute return. Presently, there is a problem. If the strategy works and grows, the Permanent Fund will be forced to liquidate assets because of the statutory limitations. The proposed legislation requests two items: · On Line 14 provides "housecleaning items" from the existing intent of the basket clause; and · On Page 2, Line 3, instead of 5%, increasing it to 10%. Mr. Storer pointed out that the second change resulted from an amendment passed on the Senate side. The 10% would provide a few years of latitude and then "down the road", the Permanent Fund could come back and ask for increased flexibility. He indicated that Version H would be acceptable to the Permanent Fund. Representative Joule inquired if the 15% request had been based on projections. Mr. Storer advised that over the interim, there would be no change in the projection. It will take a number of years to implement the strategy. The 15% was intended to essentially give future administrators, greater flexibility in a dynamic industry while addressing a changing market as it occurs. The State would continue to target a 5% real rate of return. He hoped that by increasing the latitude, it would allow investors a better chance of achieving the 5%, while allowing latitude to reduce the volatility of the expected returns. Vice Chair Meyer asked why the Senate choose 10% over the requested 15%. Mr. Storer understood that the Senate was concerned about taking on too much risk. The Permanent Fund Corporation does not agree that would be the case. The history of the Permanent Fund has been very conservative in applications. During the technology bubble, the Fund did not own any of those types of stocks. He added that it took four years to implement the basket clause. The Fund Board is cautious and deliberative when making investment decisions. Vice Chair Meyer asked the current breakdown of asset allocations in the Fund. Mr. Storer noted that the asset allocation target was: · 56% equities and of that 18% is in non-dollar international equities · The U.S. bond portfolio is 28% · A 10% target in real estate · The non-dollar bond portfolio is at about 4% · A 2% private equity currently being implemented · A 1% target for absolute strategy or hedge fund Vice Chair Meyer asked clarification if the hedge funds included futures or commodities. Mr. Storer replied that they do not include commodities but have used futures from time to time. There must be a modest leverage. Representative Fate asked the return for the last five years. Mr. Storer pointed out that the investment board recommends a rolling 10-year average, which never has gone below a 5% rate of return average. One year, there was a 3% real and another with a 2% real; currently, the returns are up over the 5%. In a down turned market, there were two years with a less than a 5% return. Representative Fate inquired if protections would be made if the 10% number was given by the Legislature. Mr. Storer explained that would provide the latitude needed to increase flexibility in an amount of perhaps one quarter to one half percent. He noted that is a lot of money when dealing with a $28 billion dollar fund. The key in achieving the goal is allowing current investments to rise, taking advantage of the full market cycle. Representative Croft noted with a 5% internal target, it is appropriate to have a 10% ceiling, so that successful investments will not have to be sold. Mr. Storer agreed. Representative Croft inquired the target. Mr. Storer replied that with a 5% limitation, the fund is using 3% as a cushion, no matter what. Representative Foster MOVED to report CS HB 466 (FIN) out of Committee with individual recommendations and with the accompanying fiscal note. There being NO OBJECTION, it was so ordered. CS HB 466 (FIN) was reported out of Committee with a "do pass" recommendation and with zero note #1 by the Department of Revenue.