“Tom is a critically important contributor on APFC’s investment team and has been active on the forefront of several areas that we have brought in-house around our fixed income portfolio. Today, Tom is the portfolio manager of APFC’s $1.5 billion internally managed cash strategy where he manages a portfolio of government securities, commercial paper, certificates of deposit, corporate bonds, and asset backed securities. He also was an important contributor in the development of our in-house high–yield effort and in bringing in house FX trading at APFC. Tom is a go-to person in the Investments Department for questions on our analytical systems and is an all-around great team player. Tom’s colleagues and I value him as a reliable and consistent collaborator who is well versed on our systems, such as Bloomberg and Aladdin, and has great credit instincts.”
— Marcus Frampton, CIO, Alaska Permanent Fund Corp.
Alaska Permanent Fund Corp.’s Tom O’Day has brought significant changes to the sovereign wealth fund in just a short two-and-a-half year time span; bringing FX in-house, launching a cash management program, and building a high–yield bond portfolio working with a relatively small team of portfolio managers. Tom’s efforts have earned him the responsibility for oversight of a more than $1 billion portfolio benchmarked to 90-day T-bills.
He joined the institution after a six-year stint as an investment analyst at Endurance, where he worked with external asset managers to help manage the company’s assets. Subsequently, he joined the Alaska team as a senior fixed income analyst and worked his way up through innovative ideas to enhance the institution’s portfolio.
O’Day speaks with CIO about what sparked his ideas to reshape the portfolio, notable strategic allocations, and competing in triathlons and a 52.4–mile ultra-marathon.
CIO: What makes 2019 an interesting investing climate? How are you handling it?
O’Day: Investors have been benefitting from a bull market for the past 10 years and risk assets are very expensive right now. Equity valuations, real estate cap rates, and multiples on private equity deals are all very rich. Central banks around the world are holding rates low and the market is implying that further cuts are more likely than hikes. At the same time, fears of a global recession, trade war, or geopolitical conflict are worrying investors. It will be interesting to see how investors deploy capital to meet return expectations in this climate.
APFC is navigating the market by overweighting cash and investing in market – –neutral absolute return strategies. The short-term credit market offers attractive yields right now, so we added $2 billion to a cash strategy that I manage in–house.
CIO: After this year, what are the largest opportunities and the largest threats you see on the horizon?
O’Day: There is a lot of opportunity in the emerging markets right now. As countries in Asia, the Middle East, and Africa further develop their economies, they will attract foreign capital. China has entered global benchmarks and is starting to open its local markets to foreign investors. Early investors in these markets have the opportunity to take advantage of market inefficiencies and earn a premium over developed markets.
I believe the biggest risk in the market is a global recession. Valuations are very high right now and a catalyst like a global trade war could trigger a correction.
CIO: How did you arrive at your current position? And why did you choose this part of the financial services industry?
O’Day: My first job after college was on the investment team of an insurance company. I was part of a small team that managed the company’s assets through external asset managers. I enjoyed working for an asset owner because it allowed me to meet some of the best minds in the industry and follow broad market trends from a high level at a young age.
I decided to transition to my current position at APFC because it allows me to continue to work for an asset owner while managing assets in–house. I also believe in the fund’s mission. Every citizen of Alaska receives an annual dividend from the fund. Living in the community makes me appreciate how important the fund is to the people of Alaska. It makes my efforts feel worthwhile.
CIO: What was the most important strategic allocation of your career?
O’Day: At APFC, the chief investment officer, based on the direction of the board of trustees, makes the asset allocation decisions between various asset classes at the fund level. The teams responsible for each asset class have the freedom to make asset allocation decisions between the portfolios within their asset class. Over time, the fixed income team has generated one-third of our alpha from asset allocation decisions while performance within each strategy generated two-thirds of our alpha. Our strategy is to make small, opportunistic moves as valuations in the market change. The most impactful allocation decisions the fixed income team has made has been to underweight inflation risk and overweight credit risk.
CIO: Tips for money managers who want to work with you, especially what not to do.
O’Day: APFC is making an effort to manage more assets in–house. If an external asset manager wants to work with us, they would have to offer exposure to an asset class that we cannot effectively manage from Juneau. An example of this would be frontier emerging markets. I would not call and pitch an investment strategy that we already manage in–house.
CIO: Biggest goof a money manager has made with you?
O’Day: When assets I am responsible for are managed externally it is very important that the portfolio manager is transparent and accessible. At a previous employer, a core fixed income asset manager told me that I could only ask questions about distressed bonds they hold in our portfolio once a quarter. Relationship management and communication are very important in making a client feel comfortable that their assets are in good hands.
CIO: Who in the financial world would you like to have lunch with and why?
O’Day: Jay Willoughby, he was the CIO at APFC a few years before I moved to Alaska and he built the infrastructure that is still in place today. He is a bit of a legend around the office and I hear people talking about his contributions to the fund several times a week.
CIO: What are changes you’d like to see the institutional investing community make in 10 years?
O’Day: I would like to see more asset owners manage money internally. Global markets are becoming more and more efficient, so state funds can save a significant amount of money in fees by building internal programs. For example, APFC launched a $450 million high–yield bond portfolio that is managed by investment professionals in Alaska. The fee on a high-yield ETF or separately managed account of that size could be as high a $2 million a year. Since APFC already manages high–grade bonds in–house. we were able to leverage existing staff to manage the portfolio for no additional cost. We are currently in the process of hiring a credit analyst so we can bring more of our high–yield assets in–house. This strategy gives the fund more control of its assets, saves the fund in fees, and creates jobs in the state. I think US funds should follow the lead of the large Canadian funds and compete with the big asset managers for talent.
CIO: What are your hobbies not correlated to work?
O’Day: I like to spend time outdoors when I am not in the office. I am based in Alaska but work East Coast hours so I usually get out of the office by 2 p.m. This gives me the opportunity to go on a long hike or fish every day. I also like to participate in endurance races. Over the last few years, I have completed an Ironman triathlon and a 52.4–mile ultra-marathon.
