The offices of the Alaska Permanent Fund Corp. are seen Monday, June 6, 2022 in Juneau, Alaska. (James Brooks / Alaska Beacon)

For the first time in a decade, the Alaska Permanent Fund Corp., the source of more than half of the state of Alaska’s general purpose revenue, posted negative investment returns across the board. ‘exercise.

As of June 30, the last day of the just-ended 22 fiscal year, the fund reported gaining minus -1.32% over the previous 12 months.

The decline will not have an immediate negative effect on state finances, but continued losses over several years would reduce the amount of money available each year for state services and the Permanent Fund dividend.

Between June 30, 2021 and June 30, 2022, the market value of the fund fell from $81.8 billion to $77.3 billion. This decline includes withdrawals and deposits, as well as investment loss.

These figures come from the fund’s monthly performance report for the month of June, released this week, and contained preliminary unaudited figures that also include withdrawals and deposits, not just investment gains and losses. Final figures are expected later this month.

Each year, the fund attempts to earn at least 5% plus the cost of inflation, the minimum necessary to keep the inflation-adjusted value of the fund constant. Over the past year, the fund should have gained 14.06% to keep pace with inflation and withdrawals. Instead, he lost money on his investments for the first time since fiscal 2012.

Reasons for loss

Chief Investment Officer Marcus Frampton said the main reason for the loss was “the stock market”.

Between June 30, 2021 and June 30, 2022, the Dow Jones Industrial Average, a key indicator of public markets in the United States, fell nearly 11%. More than a third of the Permanent Fund is invested in public equities, primarily equities in the United States.

This caused many public investment funds to post significant losses. CalPERS, the California public pension fund, recorded a loss of 6.1% during the fiscal year just ended.

Frampton noted that despite losing money overall, the Permanent Fund Corp. outperformed its contemporaries, beating benchmarks in a bear market and generally losing less money than them.

“I’m encouraged by that,” Frampton said, “because anyone can make money in a bull market by taking more risk. But then having beaten the benchmark in a year bullish like last year, then having beaten it in a bearish year this year, I’m really encouraged by how our portfolio managers have navigated these two very different markets.

A notable failure was in Permanent Fund Special Opportunity Investmentswhich include investments where the Permanent Fund offers a company cash for a share of ownership which can then be converted into cash when the company begins to sell public shares.

Had the Permanent Fund hit its benchmarks on these investments, it would have earned a 22% return on $4.6 billion. Instead, he only gained 1.85%.

Frampton said this was because the Permanent Fund had invested heavily in biotech and medical companies that were particularly hard hit during recent stock market declines.

The Permanent Fund has invested approximately $130 million in a company called Therapeutic Denali in 2013 and then saw the value of his investment increase by 700% or 800%, Frampton said.

At the start of the fiscal year, the fund still held about $400 million in Denali Therapeutics stock, only to see its value fall by about half.

“That position represented a loss of a few hundred million,” Frampton said.

“Looking back, we would have liked to sell more aggressively, like a year ago,” he said.

Frampton said in hindsight he would have invested more in real estate, which the Permanent Fund keeps as a hedge against inflation.

Limited short-term effects, but possible long-term effects

In the short term, the one-year slowdown will have a limited effect on the Permanent Fund and on government finances.

In 2018, state legislators created an annual transfer from the Permanent Fund to the Treasury to pay both the Permanent Fund dividend and state services amid falling oil prices.

Last year, this withdrawal from the treasury was about $3.1 billion.

Another $222 million was withdrawn for operating costs, said Alexei Painter, director of the Legislative Finance Division, and about $718 million in oil royalties was deposited into the fund.

Investment returns, rather than oil fields, are the primary determining factor in whether the fund makes or loses money.

The creation of an automatic transfer was intended to discourage lawmakers from taking larger sums from the fund, which was allowed with a simple majority vote of the House and Senate, plus the assent of the governor.

The transfer is limited to 5% of the five-year average fund value. The average is calculated by omitting the most recent year and then taking the five years immediately preceding it.

If the current downturn only lasts a year, this smoothing effect means that the average transfer will not change significantly.

“We are invested for the long term,” said Paulyn Swanson, spokeswoman for the company.

Over the past three years, the fund has averaged returns of 9.33%, below the target of 9.98%. Over the past five years, the fund has averaged 9.03%, slightly above target.

Asked if he thinks the downturn will continue, Frampton said that with the Federal Reserve raising interest rates and an unstable geopolitical situation, “it’s a pretty worrying setup for investors. markets”.

Over the next 10 to 15 years, he said the Permanent Fund is designed to be successful, “but I think the current setup for investors, on a one to two year perspective, is quite challenging. So it wouldn’t surprise me if there were tougher times in the next year or two.

Alaska Beacon is part of States Newsroom, a network of news outlets supported by grants and a coalition of donors as a 501c(3) public charity. Alaska Beacon maintains editorial independence. Contact editor Andrew Kitchenman with any questions: [email protected] Follow Alaska Beacon on Facebook and Twitter.

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