The Alaska Permanent Fund has made allocations to three alternative investment programs and begun a new push into timber and diversified inflation funds hiring Callan to conduct searches.
At its recent board meeting the fund also had an additional $18.5 million approved for funds manager and custody fees in fiscal year 2011. This is up from the fiscal year 2010 where the fund spent $59.7 million on investment management and custody fees, the year before that $52.94 million.
While the fund’s chief investment officer, Jeff Scott, was quick to point out that there were no changes to existing allocations, he said these latest asset decisions are moving in that direction.
“This would be a logical step in that process but we have not officially or unofficially changed our asset allocation but this could be building blocks towards those steps,” he said.
If a change in strategic allocations was to happen, it would be likely to occur at the fund’s September board meeting, Scott said.
Scott said Callan Associates would look for diversified inflation fund managers to invest in liquid assets that would be a good hedge against what he described as “unanticipated short-term rises in inflation and also potentially long-term rises in inflation”.
“Security types could include, but not (be) limited to TIPS, Global TIPS, commodities, equity investments where the companies have either a contractual arrangement with inflation or CPI or where companies tend to prosper in inflationary environments,” he said.
There have been no allocations decided yet for either timber or the diversified inflation funds.
In private equity, the fund’s two existing providers, HarbourVest and Pathway Capital Management, will have an extra $600 million to invest.
This is in addition to the existing $3.1 billion the fund plans to invest in private equity by June 30. The new investment is in line with lifting the fund’s current private equity exposure from 3 per cent of the fund to 6 per cent.
Scott said funding will come from public equity investments.
To meet its existing target of a 2 per cent strategic allocation to private credit, APFC will invest an additional $750 million for the 2012 financial year.
The funds will come from a combination of reducing exposure to public corporate credit and public equities.
The board also agreed to amend its existing investment policy pertaining to credit opportunity funds such as distressed and mezzanine debt.
It authorised investment via funds-of-funds in addition to direct investment.
Callan Associates also received a broader approval than the previous hedge fund mandate which now includes corporate private credit, including high yield.
The fund also uses Oaktree Capital Managers to invest in high yield, mezzanine debt and distressed debt.
Spending in infrastructure will be boosted by $400 million and a search will be undertaken for up to two new infrastructure managers.
This extra $400 million will take its infrastructure allocation from its current level of 2 per cent to the already stated aim of a 3 per cent strategic asset allocation.
The extra infrastructure funds will come from equity and interest rate investments.
While the move towards timber, infrastructure and diversified inflation funds would indicate an overall strategy of seeking to hedge against inflation, Scott said it had not made a firm call on that.
“We are concerned both about deflation and inflation and have neither a bent on one or the other, that is, we don’t have the ability to see the future,” Scott said.
“The future in the US could either be like Japan or it could be Brazil, we don’t really know.”
While other State funds have liked timber funds for some time, Alaska Permanent Fund has been slower to take up the asset class.
Scott said it had the combined benefit of returns that were not correlated to equity markets as well as providing some inflation hedge characteristics.
“The driver of return for many of the (timber) funds is a function of biological growth so the greatest return being biological growth, then that is a different risk than we have in equities, credit or in interest rates,” he said.
Scott notes that the timing of timber harvests and the eventual price is a function of the marketplace, which is heavily influenced by the construction industry, particularly the housing market.
While not going as far as saying he saw good value in timber due to the current record low numbers of housing starts in the severely depressed domestic US housing market, Scott noted the long-term fundamentals looked attractive.
“In the US housing starts are quite low and – – we are not trying to time the market – – but we are hiring managers that do a good job of buying property and this could be an interesting time,” he said.
“We are going to put money in the hands of managers that we think make good value decisions and we want to look for those that have a history of selling when markets are frothy and buying when markets are stressed.”
He compared the current move into timber with the fund’s previous real estate investments, which benefited from a long-term outlook where some properties held for more than 20 years had provided good returns.
Scott said potential timber investments would include both domestic and international assets.
The fund is more than half-way through a five-year plan to examine its risk culture and make subsequent changes to the fund’s portfolio.
“We are educating staff, trustees, the public about the current composition of the portfolio and how we can make improvements to the portfolio to minimise drawdowns in stressed events,” he said.
This focus on risk has involved a move away from standard asset buckets to five categories for its target allocations.
These are company exposures, real assets, special opportunities, interest rates and cash.
Scott said changing the weights in these five major buckets would be an important step to improve diversification.
