The US$32 billion Alaska Permanent Fund has taken a unique approach to asset allocation, re-organising the fund according to how investments respond to economic conditions and searching for four ‘external CIO’ mandates. Alaska Permanent Fund pays a dividend to the people of Alaska once a year, typically in July, and that has created an opportunity to rebalance the fund’s portfolio. But the volatility in the market in the past 18 months has meant funding a dividend that can be up to $1 billion in a 30-day period, putting unwanted liquidity and markettiming pressures on the assets. The board of the fund recently decided to counter this problem with a first-time allocation to cash of 2 per cent. Chief executive, Mike Burns, said with this decision came an overhaul of the way the fund views assets.

Where previously the fund allocated according to traditional asset classes, the new allocation from July is a 53 per cent allocation to company exposures; 21 per cent to special opportunities; 18 per cent to real assets; 6 per cent to interest rates, and the cash allocation. “We have some asset classes that are subject to capital draws, plus the payment of the dividend, so it made sense to create an allocation to cash to take the risk out of trying to pay the dividend,” he said. In addition, the volatility and the different behaviour of treasury and corporate bonds made holding them in one ‘defensive’ bucket no longer made sense.

“We are now grouping assets by economic conditions, what they respond to, and what their purpose is in the portfolio,” Burns said. Company exposures, with a return expectation of inflation plus 600 basis points, includes public and private equity, small caps and emerging markets, corporate debt, high yield debt and bank loans. The ‘special opportunities’ bucket, which has as much as 21 per cent of the fund allocated, is designed to take advantage of inefficiencies in the market, and invests in assets such as absolute return, distressed debt and commercial mortgage-backed securities.

This also includes a new allocation to real return mandates, with the fund searching for what have been dubbed “external CIO” mandates. In conjunction with Callan Associates the fund is looking to hire four managers, each with an allocation of $500 million, in what will essentially be global TAA mandates. The managers will be able to allocate to any assets, in any proportions, in the public assets the fund currently invests in. Burns says it is likely the fund will hire managers with four different approaches, allowing investment staff to learn from the managers in addition to their mandates adding value. The real assets allocation, which has a return expectation of inflation plus 400 basis points, includes infrastructure, real estate and a new allocation to TIPS, half of which is managed in-house.

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