For Marcus Frampton, CIO of the $81.8 billion Alaska Permanent Fund Corporation (APFC), a handful of issues are front of mind in the current investment climate.
Tight spreads for corporate bonds, despite the likelihood of a default cycle in fixed income, have been driven by the fall in corporate issuance as companies wait on the sidelines for rates to fall.
Fixed income accounts for 20 per cent of the fund, and Frampton’s current focus is on quality investments only, avoiding more risk in the asset class.
In public equity, APFC is hunting opportunities in areas like value over growth, an overweight to gold miners and in a more contrarian allocation, China. None of the plays are huge bets (there is a 2 per cent tracking error in equity) but he is looking for pockets that run counter to wider market sentiment.
Alaska is approximately 1 per cent overweight the MSCI World allocation to China A Shares via KraneShares and iShares ETFs using dedicated managers that can trade a mix of A and H shares. The allocation sits in a sleeve of the portfolio called tactical tilts where the fund leans into opportunities.
“Lots of people are shying away from China but our overweight has done well in recent weeks.”
Hedge Funds continue to deliver
Hedge funds aren’t transparent; they are expensive, rarely put on high returns in a bull market and can be a tough sell with trustees and stakeholders. But Frampton describes APFC’s 7 per cent allocation as one of the most exciting and valuable corners of the entire portfolio, delivering 8.13 per cent and 5.74 per cent over 3 and 5 years respectively.
The allocation has come into its own in an environment where stocks are expensive and corporate bond spreads tight, and in the last quarter the APFC has redeemed several funds to lock in profits and bring managers to the desired allocation. It has around 20 mangers on its books including names like Elliot and Millennium, invested in equity market neutral, growth and multi-strategy funds; commodities and CTA trend following strategies.
“If you are backing high quality macro, equity market neutral and zero beta managers it’s possible to outperform a 60:40 portfolio with no correlation.”
Real estate shows the cracks
In contrast, APFC’s slightly above target 11.5 per cent allocation to commercial real estate is showing some cracks. It makes the portfolio a natural place to source funds for recent asset allocation tweaks – namely increasing the allocation to private equity.
Alaska’s proactive build-up of real estate in recent years has focused on life sciences developments; apartments and industrial. Billion-dollar deployments also include active lending to construction projects via two separate accounts.
“If they don’t pay off at maturity, they are properties we don’t mind owning,” he says.
Still, the portfolio has experienced some lumpy patches. Like stakes in downtown office buildings, often only 20 per cent let, which remain an enduring drag on performance. The challenge lies in the fact these buildings are not easy to reconfigure into apartments. There are no balconies, and turning the existing space into apartment blocks would leave some like “the worst cabin on a cruise ship,” he says.
Frampton suggests the costs of converting offices into apartments may require subsidies from cities and reflects that many downtown office investments – often in the best locations – have now shifted to become a land play.
“Someone, at some point, will demolish the building and build apartments, but right now interest rates and construction costs are putting investors off.”
Turning up the heat in Private equity
APFC has just turned up the heat on private equity, increasing its target exposure by 3 per cent to 18 per cent, a tweak that brings the portfolio in line with the current overweight of 18.3 per cent.
With the S&P 500 up, the relative case for private equity is stronger than it was a year ago and Frampton is reaping the rewards of cutting programme pacing in 2021. Hitting the breaks back then meant allocations fell from $2 billion a year to $1.6 billion in 2021 and 2022, and $1 billion in 2023 and forecast for this year too.
“It caused us to pass on somethings which was hard, but at the time everyone felt it was important.”
More so now given that investors that hit the accelerator coming out of the pandemic are now struggling. Witness Kaiser Permanente, and LPs USS and Washington State, reportedly selling in the secondaries market at a discount.
“We are in a luxurious position because we didn’t deploy,” he says. “I think 2021 and 2022 will go down as the worst vintages for private equity and I think we are coming out of it, this is an attractive market now,” he says.
He says AFPC is finding opportunities in industrials and the old economy. And with a typical cheque-size of $30-$50 million the investor can be nimble, unlike larger funds with ticket sizes of $100 million.
The venture allocation, sitting within private equity, has also been reset. APFC has a mix of fund investments and directs, and Frampton is currently figuring out whether to re-up with existing managers or explore new allocations given venture with a bias to software and biotech, has been hit hard in recent years.
“If you look at the private equity performance this year versus other state pensions, we’ve had a tougher time as venture has taken heavier market downs that buyout.”
He thinks the fund will reup with some venture managers but will also add new relationships in the more traditional buyout space.
Still, the team are quick to act when they see an investment they like. AFPC recently concluded a venture co-investment with a new manager for the first time.
“We know the manager well and we didn’t go into the first fund. But we looked at it and respect the team and made an exception.”
