Friday, June 15, 2012

Permanent Fund holds its own despite market turbulence

Tim Bradner
Alaska Journal of Commerce

Alaska’s Permanent Fund has been riding the roller coaster of financial markets and will probably end its fiscal year on June 30 in basically a break-even position, according to the Fund’s executive director Mike Burns.

The monthly performance report prepared for the Fund’s trustees for April 30 showed a 0.76 percent gain in value over the prior 12 months, although the fiscal-year-to-date (July 1 to April 30) was little better, a gain of 2.03 percent.

A target set by the Trustees is for the Fund to achieve a 5 percent real, or inflation-adjusted, return, but this goal won’t be met this year due to the market turbulence.

“The markets have been incredibly emotional in the last 18 months. Sometimes it seems like things are coated with Teflon, so bad news just rolls off. Other times it’s Velco, so that everything sticks,” Burns said.

Not surprisingly, the value of the Fund’s stocks and other liquid assets have taken a beating, with values down 12.78 percent for the 12-month period prior to April 30, according to the report to the trustees.

On the other hand, “illiquid assets” like real estate, infrastructure and some private equity investments have performed much better, Burns said. As of April 30, returns from real estate, as an example, were 13.48 percent up for the 12-month period.

“We’re really quite pleased at how well real estate has stood up all through the downturn. We’re invested mainly in high quality properties and these have never really lost their value, although some of this could also be the lenders just kicking some of the problems down the road, but we don’t think do,” Burns said.

The Fund’s managers are quite proud of some of the real estate investments. For example, 299 Park Ave. in New York is a $1.2 billion office building owned 50-50 with the Fisher Brothers, a long-established and well-known property investment group.

The Fund’s investment in its 50 percent share is $300 million.

Another high-quality property is Tysons Corner Center in Washington, D.C., a major retail center. This is 50 percent owned by the Permanent Fund with the Macerich group as a partner. Macerich is a well-established U.S. firm specializing in major retail properties.

A major expansion at Tysons Corner is now under way that will add a 550,000-square-foot office building, a 450-unit apartment complex and a 300-room hotel, but these additions are mainly seen as adding value to the retail complex.

“The retail is the key. We’re excited about the additions of the apartments, hotel and offices but mainly as they enhance the retail,” Burns said.

The Permanent Fund has $500 million invested in Tysons.

Another major investment is Simpson Housing, based in Denver, which owns and manages 17,000 apartments in several parts of the nation. The Permanent Fund owns 48 percent of this, Burns said, with the State of Michigan’s public employee retirement system as a partner.

Burns said the Fund will invest with partners in real estate in certain cases but the preference overall is to own 100 percent of a property. An example is Parc Huron, a large, high-quality apartment property in Chicago, a $120 million investment for the Fund.

One recent real estate decision of the Fund which has prompted some criticism, mostly in the form of letters to the editor following articles in local newspapers, is an investment in groups of distressed U.S. homes which were foreclosed by banks.

The investment is in American Homes 4 Rent, a group that buys foreclosed homes from banks. Critics feel the Fund is taking advantage of peoples’ misery in foreclosures, “but we’re buying these after the foreclosures. The misery has already happened,” Burns said.

These days the Alaska Permanent Fund’s ability to invest for the long-term and in illiquid assets like real estate and infrastructure is an advantage because many other institutional investors, like public pension funds, are now more focused on short-term cash needs and must pursue an investment strategy that is more short-term, Burns said.

That puts the Permanent Fund in a class of investors more like sovereign wealth funds of countries like Norway and Abu Dhabi. In fact, there is now an association of sovereign wealth funds that Alaska has joined. Having a line of communications with these groups is very important and could someday lead to cooperative investments, Burns said.

Market outlook

Meanwhile, for financial markets today, attention is now focused on the situation in Europe, which Burns describes as “a slow-moving, controlled train wreck.”

If there’s anything good about it, it is that things are moving at a slow enough pace that the markets have time to adjust, he said.

““I don’t think there are any surprises left in Europe. It’s not like we wake up in the morning and Lehman Brothers has gone down,” he said in reference to the debacle in 2008 when that major U.S. financial institution came apart and triggered tumult that helped spark a recession.

Burns is optimistic that the financial markets will manage to sort through these problems eventually, if left to their own. However, some unexpected major event could upset things, something like a major terrorist attack, he said.

The U.S. meanwhile has its own problems to deal with, which mainly have to do with business confidence.

“A lot of companies have strong balance sheets and are sitting on cash, but there is a lot of uncertainty. People are unwilling to let go of cash,” he said.

Much of the uncertainty is politically created by the impasse in Washington, D.C., over federal taxes and debt, although Burns said the agreement by Congress to extend tax-cuts has had a soothing effect.

But the pending elections, the effect on the elections of an expected Supreme Court decision on President Obama’s health care law, and the return to intense debate over the debt ceiling and federal spending cuts next January will continue to add to the uncertainty.

A similar cautious dynamic affects U.S. hiring, and more than anything else it is continued high unemployment that has slowed the recovery. Firms are reluctant to staff up if they may have to let people go again.

“People lose sight of how difficult it is for companies to reduce their workforce and how hard it is for them, as well as for communities,” Burns said.

This is why so many firms are outsourcing work, like major oil companies are doing in Alaska.

“If they have to lay people off, they push this off on their contractors,” he said.

China is, of course, a wild card, but Burns points out that recent news of an economic slowdown is only reduced rate of growth, not a move into negative territory.

There are important fundamentals behind China’s growth, such as an improved diet, that will continue to put pressure on world resources and commodities, Burns said.

When this is combined with the economic and population growth of other developing countries like India, there will be continued pressure on sources of energy, protein and water.

Water is really important,” and it may become the most scarce resource, Burns thinks.

“When you think about it, the U.S. exports a lot of food but what we’re really exporting is water,” because of the water it takes to grow food.

Improving diets in China is expect to lead to per capita consumption of beef and pork increasing to 20 kilograms a year in the next five years, up from 10 to 12 kilograms.

“The amount of water it will take to create that additional supply of beef and pork per year is about the same as Europe consumes in a day,” he said.

Burns is thinking a lot about these long-term trends, and possible scarcities in natural resources, not only because of how they will affect the world and Alaska, a natural resource-producing state, but also as a guide to potential long-range investment by the Fund.

“This is something we’re just thinking about. We haven’t developed it into a strategy in any sense,” Burns said. “If you think about something like water scarcity, how do you position yourself? Do you invest in water-related technologies like companies specializing in water treatment and desalinization, or should you invest in water rights?

“If you do this, you have to keep in mind the security of the investment. If there is water scarcity a government may decide to give its citizens priority access to water over any ownership claims of an investor.”

The Fund is investing in technology firms including those working in water quality, but not yet as part of an overall theme.

The same is true in protein, he said.

“We really like to invest in farmland but you have to do it in scale,” which means that acquiring farmland in North America is problematic because land units of sufficient acreage is less available, he said.

“There is tremendous potential for farmland in places like Brazil and southern Africa, but there is no infrastructure, no ports or railroads.”

Agriculture investments like these will have to be part of a broader plan that includes the infrastructure.

Tim Bradner can be reached at

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