Best Practice Investment: An Alaskan Exemplar

Ashby Monk

I have to say, Frances Denmark’s profile of the Alaska Permanent Fund and its Chief Investment Officer Jeffrey Scott in this month’s edition of Institutional Investor is quite remarkable.

Weighing in at close to 6,000 words, Denmark offers more detail than you might want (such as the length of Scott’s bus ride to school when he was a kid in Idaho…52 miles). But (!) the article is still fascinating, as it goes in-depth and behind the scenes to show the process of reorganization and redesign that has taken place within this large public fund.

Over the past few years, the APF has undertaken some pretty innovative changes (some of which I’ve covered here, here, and here), but even I hadn’t grasped the extent to which Scott had changed things (and will continue to change things in the future). Here’s Denmark:

“Scott arrived in Alaska’s state capital in 2008, in the midst of the biggest economic downturn in 70 years, with a fierce determination to apply the latest and best thinking on investment management to the Permanent Fund. That would mean changing the way the fund’s assets had been allocated, invested and monitored for nearly three decades. Scott would have to create an industrial-strength risk management tool and redesign staff assignments. Most challenging of all, he would have to convince fund and state officials that this new path would lead the APF to a more secure future.”

What’s really interesting (and actually confirms my own experience working with public funds in the US) is that this process of “change” is anything but easy. Truth be told, these entities seem to crave the status quo, as entrenched stakeholders often have quite a bit to lose. Anyway, as Scott himself says in the article:

“You’re not going to go from Pension Fund 101 to Bridgewater in one fell swoop”.

No you’re not, and so Scott needed to be much more than a traditional CIO.

“He is a change agent who is sowing the seeds of a new investment management model far from the world’s financial capitals.”

What I also found particularly interesting (and gratifying) was the importance Scott placed on educating all of the stakeholders about the benefits of adopting his ‘best practices’:

“The board education process has been crucial.”

Agree to agree. And, as you might expect, Scott has been quite successful in his bid to revamp the APF (…which is why there are 6,000 words about him in Institutional Investor…); but, hold your horses, he isn’t finished yet:

“He also hopes to tackle the fund’s cost structure, a key area of inefficiency. “We spend a ton of money on gatekeepers,” he says. Possibilities include co-investment, strategic partnerships and consolidating to a few high-conviction managers, with resulting cost breaks for the fund. Limited resources remain a challenge. “That’s a difficult political situation,” Scott says. “The budget is set by the legislature. Compensation for professional asset managers with proven skill is higher than government scale.”

Anyway, it’s quite an interesting story, one worth reading in its entirety.

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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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