The Alaska Permanent Fund, a sovereign wealth fund supported largely by oil revenue, has a goal to reach $100 billion in assets under management, but the question is: How much risk to take to get there?
The board of the Alaska Permanent Fund Corp., which manages the fund, publicly discussed at an October 30 special meeting the potential of increasing its long-term target return rate in a bid to juice up its returns. That would increase the fund’s exposure to risk, but it could also help reach the $100 billion AUM target more quickly. The board is expected to vote on the decision at its next quarterly meeting, to be held December 13 or 14. All meetings are open to the public in person, by telephone or via online webinar.
The Alaska Permanent Fund managed $81.1 billion in assets, as of the June 30 end of its fiscal year. “$100 billion should be thought of as a key milestone that we anticipate achieving in the future, but the timing of that achievement and the implied rates-of-return are subject to discussion,” CIO Marcus Frampton said via a spokesperson.
The fund presented four scenarios to explore in hopes of reaching the target AUM, all based on investment consultant Callan’s current return assumption:
- To reach $100 billion in three years (fiscal 2026), the fund would need an annual return of at least 12.8%;
- To reach the target in five years (fiscal 2028), it would need an annual return of 9.3%;
- To achieve its target in seven years (fiscal 2030), it would need an annual return of 7.9%; and
- To achieve $100 billion in AUM in nine years (fiscal 2032), the fund would need to achieve an annual return of 7.2%.
The fund currently has a long-term return target of 5% above the Consumer Price Index. In fiscal 2023, the CPI-based target was an 8% return, and the fund returned 5.18%.
To reach its target of $100 billion AUM by as early as 2026, the fund would have to pursue aggressive and quick returns, potentially taking riskier investments.
While the board reviews its plans ahead of a December vote, Frampton expressed his confidence in the current investment lineup and return target.
“After hearing input, APFC’s trustees elected to leave the fund’s return objective unchanged at CPI + 5%,” Frampton said. “We will continue to monitor market conditions; however, today I believe that our current asset allocation gives the Fund a good chance of achieving this return objective.”
In the APFC report shared at the special meeting, Callan identified potential asset allocations that could be made to increase returns. For example, each 1% shift from fixed income to private equity represents a four-basis-point increase in returns. Introducing about 25% of fund-level leverage at market interest rates would increase expected annual returns by around 75 bps.
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Tags: Alaska, Alaska Permanent Fund, APFC, Callan, Marcus Frampton