Alaska: Allocation Requires Additional Explanation

Ashby Monk

Pat Forgey of the Juneau Empire has a great story today on the Alaska Permanent Fund’s decision to change its asset allocation policy.

The new policy groups assets based on risk characteristics rather than by the type of investment. It is an approach that other large, long-term investors use. Because there are situations where corporate bonds behave like stocks, it is inappropriate to slap the “bond” label on these investments. This new policy will allow for a more nuanced understanding of the risks being taken by the fund, which in turn will ensure that the Fund is operating within its risk budget. If I had to guess, I would say that the Fund was overexposed to certain risky assets before the crash, and the new policy is designed to ensure this doesn’t happen in the future.

While the new asset allocation strategy is itself of interest, I was also intrigued by the internal (and indeed external) debate that this change is generating. Apparently, politicians and even some Trustees were unsure about the change:

“It may be fine, it may be legit, but we were totally caught off guard and nobody knows anything about it,” said Sen Kevin Meyer.

Given that the Trustees have oversight responsibilities for the Fund, it is surprising to see two of them expressing their concerns so publicly. From a governance perspective, this is significant; typically asset allocation within a large trust-based fund is the responsibility of the Trustees (the managers just implement the asset allocation policy and make the actual investment decisions). The remarks made by the Trustees in Forgey’s article seem to suggest that this is not the case, though more details are obviously needed.

So it will be interesting to see how this all turns out. Fund Executive Director Mike Burns will appear before the Legislative Budget and Audit Committee in August to explain the new system.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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