Alaska Permanent Fund rebounds to pass $70 billion as stock markets rally

Alaska’s Permanent Fund has rebounded strong from a tumultuous first half of 2020 to cross the $70 billion threshold for the first time.

The fund had an unaudited value of more than $72.3 billion on Dec. 7, according to the Alaska Permanent Fund Corp., despite falling to a balance of about $60 billion in late March during the most uncertain early days of pandemic.

The Permanent Fund started calendar 2020 with a balance of nearly $67 billion and ended the state fiscal year on June 30 with a value of $64.7 billion.

The gains have particularly accelerated over the last six weeks. APFC CEO Angela Rodell said that while the country is in the midst of a very challenging spike in COVID-19 cases, reports of initial doses of vaccines being dispersed in the coming weeks have buoyed markets domestically and abroad.

“There is a sense of a light at the end of the tunnel but it’s still a long tunnel to go. The idea that there is a solution out there I think has created a lot of optimism,” Rodell said in a Dec. 8 interview.

The Dow Jones Industrial Average closed trading Dec. 8 at 30,173 points, up 104 points on the day and was up nearly 14 percent since the end of October when the market was hovering around 26,500 points.

Public equities, or stocks, generally make up 35 to 40 percent of the fund’s overall investment portfolio. The fund’s stock portfolio generated a 6.72 percent return through the first four months of the 2021 state fiscal year, which started July 1, according to the October APFC performance report. However, the equities were still down 2.12 percent for calendar 2020.

While tourism and other consumer-centric industries have been hammered by travel restrictions and a general reticence towards public gatherings, Rodell said the global response to the virus has generated interesting opportunities in the logistics, telecom and biotechnology industries, to name a few.

“The pandemic has highlighted the need for technology, the need for broadband access services in ways that we knew, but we didn’t really know in March,” she said. “It’s things like that have helped spur growth in the markets both at home and abroad.”

The fund was positioned to benefit from the market improvements because APFC managers kept their cool while markets panicked from the litany of uncertainties everyone faced in spring, according to Rodell, a former state Revenue commissioner.

Managers largely maintained previously prescribed asset allocations during the spring downturn in markets but sold some bonds, which were performing well at the time given their inherent stability, to free up cash that was deployed into then-depressed stocks, she said. They were then able to capture the subsequent rise in value of those stocks.

“If you still have conviction on strategy or the asset itself it was an opportunity to invest in the sector,” Rodell added.

As for real estate — another uncertain sector given some competing forces of the pandemic — Rodell said APFC leaders continue to look for investment opportunities while acknowledging their current portfolio is slightly over-weighted towards retail properties that have been among the hardest hit.

“The pandemic has heightened a trend that has been happening, which is the movement towards online retail,” she said.

However, she also called APFC’s properties “gems of the retail world,” in that they are premier assets in destination locations better equipped to weather disruptions in consumer habits.

“We have very few, if any, for example, strip malls in small-market communities,” Rodell said.

Industrial and multi-family housing properties have helped offset challenges in the retail space, she said.

For the year, the fund’s $4.7 billion real estate portfolio had lost 0.57 percent of its market value through October, versus a five-year average annual return of 3.68 percent, according to the monthly APFC performance report.

Private equity investments have been particularly important for the fund of late, she added, as the $10.6 billion invested in private equity and special opportunities have netted an 11 percent return so far in 2020.

And while Alaska’s giant nest egg is back growing again after scares early in the year, the same cannot be said for much of Alaska’s economy hit by collapsed oil prices; poor salmon returns and low seafood prices; and the absence of more than 1.3 million tourists that were supposed to cruise to the state.

The economic situation, combined with ongoing battles within the Legislature and governor’s office over the proper Permanent Fund dividend amount, has led some newly-elected and sitting lawmakers to push even harder for “full,” statutory PFDs.

On the flip-side, lawmakers hesitant to spend upwards of $2 billion of the roughly $3 billion annual percent of market value, or POMV, draw from the fund on dividends highlight the Permanent Fund’s earnings now accounts for the lion’s share of annual state revenue and is needed for essential services more than ever.

While APFC leaders do not wade into the specific policy calls on how appropriations from the Permanent Fund Earnings Reserve Account should be spent, Rodell emphasized that the recent growth in the fund does not necessarily mean more money is available for dividends or education or other services and stressed the need to stay within the annual 5 percent draw limit.

“I do worry about the mindset of ‘we have money, let’s spend it’ because there is this desire to help out. We all have friends and neighbors, family members that are truly hurting with what’s going on,” she said. “I think there is an inclination to want to use more than the POMV draw to help the state at this time but it comes at a cost and one of my jobs is to remind people of the costs — that it doesn’t come for free.

“The cost is the impact on the future generations of Alaskans; and it’s not some imaginary group 20 years from now that are going to feel the cost. It’s much more near-term, more like FY ’23, ’24 ’25.”

According to the Legislative Finance Division figures, the state is back to facing a $2.4 billion deficit next year at current agency spending levels and with a statutorily calculated dividend payment appropriation of just more than $2 billion. The increase in the PFD appropriation — from $680 million this year — would add more than $1.3 billion to the deficit.

The Earnings Reserve Account currently holds approximately $6.7 billion in realized earnings available for spending with another $3 billion committed to fund state services this year.

Rodell also noted that the $72 billion value of the fund would not factor into the POMV calculation for another two years.

“I think we have to be really concerned about not just how we take care of people this year but how we take are of people next year and the year after,” she said.

“I promise you we will still need money next year and we will still have a need for services.”