Marcus Frampton, CFA, CAIA, is a stalwart alternatives investor who rose through the ranks at the Alaska Permanent Fund Corporation and was appointed chief investment officer in 2018. During his time at the fund, he’s demonstrated out-of-the-box thinking and pushed through the imagined constraints of how a sovereign wealth fund should behave to hit its risk and return targets.
One such example of Frampton’s unique style of work is the successful co-investment program he helped develop at the APFC. Initially, the program was limited to traditional private markets classes like private equity and infrastructure, but it’s since matured and expanded into new territories like private credit.
“We’ve been moving our portfolio towards a barbell strategy, where we’re aggressively growing our private equity portfolio, but at the same time, we’re also growing our cash, fixed income, and hedge funds,” Frampton says. The team’s ambition to raise its private equity allocation from 13% to 19% will be underscored by an approximate 20/80 ratio between direct and indirect investments.
“That’s a good mix for us, and it results in us spending more than half of our time on the direct investments, because they’re much more time intensive,” Frampton says. “Then getting most of the capital out through funds, and having such large fund investments that it’s really synergistic. It helps us be on the first call for co-investment opportunities.”
The APFC’s co-investment program has posted strong returns since it’s been in development. It could scale to become even larger, but one of the major inhibitors to its growth is tight control on the state’s budgets. “If we had a lot more budget flexibility, we might do more on the direct side,” he says.
Another such example of Frampton’s creative thinking is his idea to allocate a certain percentage of the portfolio towards gold. Not many investors have a dedicated gold allocation, given there is no revenue stream from the asset class, but Frampton asserts that gold can be a stable anchor for a portfolio in times of crisis. This potential addition to the menu of asset class options could be discussed at APFC’s first board meeting for 2020 in February.
A Free-Thinking Investor
After a sharp decline in worldwide oil and gas prices, the state of Alaska ran into some monetary issues, since almost 90% of its income is derived from oil royalties. It has since turned to the APFC for help funding its public operations, leaving Frampton and his team to support the local society on top of maintaining the annual dividend payouts to Alaskan citizens.
“With the drop in oil prices, our role has changed. We used to just pay dividends out to the state, we now pay a 5% endowment draw,” Frampton says. “We need to carry a little bit more liquidity and the state’s relying on us to fund its operations, whereas it didn’t previously, so there’s a little bit more at stake.”
“It’s unique within the US public fund role as to how reliant our one customer is, like the state is on oil prices,” Frampton says. “There’s no income tax for the state, the state gets over 90% of its revenues from oil royalties. So, we have one client who’s very exposed to oil prices and that creates unique challenges, and it’s impacted our operating budget because state agencies’ budgets overall here are under scrutiny.”
Luckily, Frampton believes, his position as a sovereign wealth fund allows him a certain degree of flexibilty that other public funds might not have.
“I think there’s a perception that sovereign wealth funds can be a little bit nimbler than state pension funds, and it helps a little bit on deal flow,” Frampton says.
“We tried from the beginning to set up an efficient direct investing effort that leverages the fund investments we were going to continue to make for a long time. I think that’s a unique program and it helps being a SWF for deal-flow and to set up smart investment approval processes.”
He also spoke about how the APFC has managed to dodge the public’s attention, such as when setting up new investment programs.
“We’re able to avoid some of the scrutiny that pension funds end up getting saddled with,” he says. “For example, if you look at all of the press CalPERS is getting on their new private equity program, it’s really hard to do something like private equity in that level of exposure. When [we] were setting up our private equity program, there was nothing like that intense level of public scrutiny, and nobody was writing articles every month about it.”
Tags: sovereign wealth funds