Alaska Contemplates Market Trends for Next Asset Allocation Strategy

CIO Marcus Frampton discusses the implications of each asset class while preparing for a new strategic asset allocation.

The Alaska Permanent Fund Corporation is working through a five-year asset allocation plan it launched in 2016, but it recently showcased it’s looking beyond 2021 by discussing myriad factors for each asset class.

The current plan steadily increases the fund’s exposure to private markets and subsequently lowers allocations for traditional investments, as seen below:

APFC Target Allocations

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FY ‘19

FY ‘20

FY ‘21

Public Equities

38%

37%

35%

Fixed Income Plus

22%

20%

18%

Private Equity & Special Opps

12%

13%

14%

Real Estate

11%

12%

13%

Infrastructure & Private Income

7%

8%

9%

Absolute Return

5%

5%

6%

Asset Allocation (60% Total Fund/40% Cash)

5%

5%

5%

Total

100%

100%

100%

Source; APFC

“Given the long-term pacing planning that occurs around private markets investments, now is the optimal time to begin discussions with the board around desired asset allocation mixes beyond 2021,” Frampton said in a presentation to the sovereign wealth fund’s staff.

Some of the major themes discussed in Frampton’s presentation were abnormally high equity market valuations, historically low interest rates, slowing global economic growth, and subsequent low expected returns. He also discussed his team’s practices to seek return premiums through increasing its allocation to private markets drawdown asset classes, the likes of which have grown from $2.6 billion in 2012 to $14 billion in 2019. He noted that private equity valuations have increased in tandem with other public markets such as the S&P 500 between 2005 and 2019.

Using metrics at hand, the staff at APFC calculated the portfolio’s adjusted return for every dollar reallocated from public markets and Treasuries to private equity. Their findings are summarized as follows:

1% re-allocation effect on expected return and risk, respectively

5% re-allocation effect on expected return and risk, respectively

Fixed Income to Private Equity

+ 9 bps / 19 bps

+ 43 bps / 98 bps

Public Equity to Private Equity

+ 6 bps / 2 bps

+ 30 bps / 10 bps

Source: APFC

Frampton also provided seven hypothetical portfolio mixes, but noted that “given uncertainty in forecasting markets and asset returns, it is worth emphasizing the importance of judgment in the decision-making process, ultimately every forecast in this presentation will be wrong (by a small degree or a large degree) and each decision is to be made on the margin.” The hypothetical mixes are:

Public Equities

Fixed Income

Private Equity

Real Estate

Private Infra/Credit

Absolute Return

Asset Allocate

2021 Target

35%

18%

14%

13%

9%

6%

5%

19% Private Equity from Public Equity

30%

18%

19%

13%

9%

6%

5%

19% Private Equity from Fixed Income

35%

13%

19%

13%

9%

6%

5%

24% Private Equity from Public Equity

25%

18%

24%

13%

9%

6%

5%

24% Private Equity from Fixed Income

35%

8%

24%

13%

9%

6%

5%

Heavy Alternatives Option One

17%

15%

24%

15%

14%

10%

5%

Heavy Alternatives Option Two

13%

15%

30%

13%

9%

15%

5%

Source: APFC

For its next annual meeting in May 2020, Frampton wants to establish five-year asset class projections that feature 1% annual increases to private equity and special opportunities target exposures, and keep other private markets asset classes at the FY2021 target, thereby resulting in a fiscal year 2026 target allocation of 41% for private markets.

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The S&P 500 Keeps Singing the Sour Earnings Song

After two small drops in 2019’s first two quarters, CFRA sees a 4.2% net income dive for the third period.

The blues continue for S&P 500 corporate earnings. The quarter ending September 30 will mark the third consecutive negative period this year, according to numerous estimates.

The third quarter, when all the reporting is done, will come in with a drop of 4.2%, according to research shop CFRA. FactSet, which compiles estimates from analysts, says the third quarter will be down 3.6%, compared to negative 0.4% in the second and off 0.3% in the first. This all pales against the double-digit advances in 2017 and 2018.

Sam Stovall, CFRA’s chief investment strategist, wrote in a recent report that the three sectors likely to do the worst in 2019’s third quarter are energy (down 31.4%), materials (minus 20.6%), and real estate (falling 16.7%). That makes sense: Oil and natural gas prices are in the dumps, materials suffer as manufacturing slows down, and real estate on the residential side has been no dynamo, despite lower mortgage costs.

Meanwhile, the effect of the big federal tax cut has pretty much run its course. The S&P 500, which has a strong presence overseas, lately is feeling the effects of a weakening Europe and the US-China trade war.

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Along with this downbeat assessment are a spate of companies announcing that their earnings will come in below what analysts expect. They probably are trying to avoid surprises that will punish their stock even more than has been happening now. Tyson Foods, Macy’s, and Wynn Resorts are ratting themselves out on this score.

Beyond the large corporations that populate the S&P 5oo, the situation is even grimmer.

During the past three years, index’s net income rose a heady 50%. During the same time, the US Bureau of Economic Analysis’s assessment, which covers all American businesses down to the local deli, shows their after-tax profits going down 6%. The tax reduction evidently did little to help them.

CFRA sees a slightly improved fourth quarter for the S&P 500 (positive 2.8%), and then a 10.3% rebound in 2020.

 

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