Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of the Odd Locks Podcast.
Speaker 3: I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 2: Tracy, we're back here in New York City, where it's
Speaker 2: warm and the sun sets at a normal hour of
Speaker 2: the day and I don't need to have blackout curtains.
Speaker 2: But I had a really good time on our recent
Speaker 2: voyage to Alaska.
Speaker 3: Alaska was great. I don't know why the overall state
Speaker 3: population has been declining.
Speaker 2: Yeah, it's great you moved there.
Speaker 3: There's nice weather, at least in the summer. In the summer,
Speaker 3: beautiful scenery, as much salmon as you can fishes out
Speaker 3: of the rivers. And every year you get paid some
Speaker 3: money by the state.
Speaker 2: Yeah, yeah, that's exactly right. No, there's a lot to
Speaker 2: like about it. I think it's first type of person.
Speaker 2: It certainly has a lot going for it. But it
Speaker 2: was really nice. You know, I didn't really know much
Speaker 2: about Alaska. I didn't have much fuel for its layout,
Speaker 2: it didn't might have much feel for its geography. I
Speaker 2: truly did feel like I was sort of at the
Speaker 2: far western edge of the Empire out there, very very distant.
Speaker 3: It has a very frontier feel. I mean, that's why
Speaker 3: they call it the last frontier.
Speaker 2: Extremely frontier field. And of course we talk to people
Speaker 2: in all kinds of industry there, et cetera. But as
Speaker 2: you mentioned, one thing that people know about Alaska, I mean,
Speaker 2: people know there's oil, and also people know that there
Speaker 2: is something that kind of resembles perhaps a sovereign wealth fund,
Speaker 2: and also that every citizen over I think the age
Speaker 2: of like eighteen months or whatever, ten months or something
Speaker 2: gets a check from the state, which sounds pretty nice.
Speaker 3: It sounds nice. It also sounds like a loaded political
Speaker 3: and financial hot potato, right, and I can imagine every
Speaker 3: year there is probably lots and lots of debate about
Speaker 3: exactly how much is going to be dispersed, what it
Speaker 3: means for the future of the fund, how it interacts
Speaker 3: with state and federal funding. Yeah, I'm excited to talk
Speaker 3: about all of that, but I think we should also
Speaker 3: add that this has new relevance right to the wider
Speaker 3: United States in America because there is talk about starting
Speaker 3: a US sovereign wealth fund, and there is also the
Speaker 3: payments for kids for infants from the Trump administration.
Speaker 2: That's right, that's right. Whether anything at the federal level
Speaker 2: that resembles a sovereign Well's fund or any sort of fund.
Speaker 2: What actually happened, who knows, But we have certain models
Speaker 2: of all this stuff, and it's worth learning a little
Speaker 2: bit more how they work. And I do think to
Speaker 2: sort of conclude our intellectual journey and our literal journey
Speaker 2: to Alaska, we sort of have to touch.
Speaker 4: On this element.
Speaker 3: Absolutely, let's do it.
Speaker 2: Okay, Well, I'm really excited to say we literally have
Speaker 2: the two perfect guests to talk about the Alaska Permanent
Speaker 2: Fund and what it is. We're going to be speaking
Speaker 2: with Marcus Frampton, he is the CIO of the Alaska
Speaker 2: Permanent Fund, and Devin Mitchell, CEO of the Alaska Permanent Fund.
Speaker 2: So Marcus and Devin, thank you so much both for
Speaker 2: coming on the Odd Lass Podcast.
Speaker 4: Yeah, thank you. We're happy to be here.
Speaker 2: Why don't we start with maybe one of you could
Speaker 2: just give us the very clicked like what is the
Speaker 2: size of the fund and how, when and why was
Speaker 2: it started?
Speaker 5: So this is Devin Mitchell and I'll take that question.
Speaker 5: When you think about Alaska, and you guys have a
Speaker 5: just a small sample of Alaska, of course, when you
Speaker 5: think about it. You went to the largest city in Alaska,
Speaker 5: but if you superimposed Alaska over the continental US, you
Speaker 5: would have each of the coasts touched by Alaska, as
Speaker 5: well as the southern and northern borders.
Speaker 6: So it's a huge state.
Speaker 5: Let's say you went to Nebraska, so you didn't really
Speaker 5: experience all that Alaska has to offer, but certainly it
Speaker 5: sounds like you got a good sample. The state's a
Speaker 5: young state. We became a state in nineteen fifty nine,
Speaker 5: and when Alaska became a state, there was a lot
Speaker 5: of concern about the ability of Alaska to support itself
Speaker 5: economically because of a relatively small population, remote location, lack
Speaker 5: of understanding about the state. And so the state was
Speaker 5: created as a resource state, meaning that the state retained
Speaker 5: the right the sub service mineral rights of the land
Speaker 5: in Alaska that it selected at statehood. And so in
Speaker 5: nineteen sixty eight, Prudo Bay was discovered, the largest oil
Speaker 5: field in North America, and the next year, in nineteen
Speaker 5: sixty nine, there was a lease sale that generated nine
Speaker 5: hundred million dollars of revenue.
Speaker 6: For the state.
Speaker 5: And this is at a time when the state's budget
Speaker 5: was one hundred and fifty million dollars and so an
Speaker 5: incredible amount of money for the day for this state.
Speaker 5: People thought it was so much money they couldn't possibly
Speaker 5: spend it all. It initiated a process that resulted in
Speaker 5: the Trans Alaska Pipeline being constructed, but by the mid
Speaker 5: nineteen seventies, that money was clearly going to be finally
Speaker 5: expended before the Trans Alaska Pipeline was completed, and that
Speaker 5: set the stage for people to recognize that oil was
Speaker 5: a one time, finite resource and a revenue generator, and
Speaker 5: there were forward thinking people of that generation that were
Speaker 5: willing to set aside I had a portion of their
Speaker 5: current year revenue for the benefit of future generations of Alaskans,
Speaker 5: and that culminated with a constitutional amendment in nineteen seventy
Speaker 5: six that dedicated twenty five percent of royalty revenues to
Speaker 5: the State of Alaska. It required that that revenue, once saved,
Speaker 5: be invested, and it required that the earnings of the
Speaker 5: fund be made available to the state. And so we've
Speaker 5: subsequently initiated the Permanent Fund Dividend program to allow residents
Speaker 5: to have a stake in the program, and it's evolved
Speaker 5: today to where it's our largest single revenue source at
Speaker 5: approximately sixty percent of the state's revenue.
Speaker 3: Yeah, that's a that's a hefty chunk. Marcus, Why don't
Speaker 3: you give us from the sort of portfolios downpoint talk
Speaker 3: to us about how the fund has evolved over time.
Speaker 3: So nineteen seventy six, you know, it gets set up.
Speaker 3: What do the initial investments look like, and what do
Speaker 3: they look like today?
Speaker 4: Yeah?
Speaker 7: Sure, So this is Marcus Frampton. I'm the chief investment officer.
Speaker 7: Initially when the fund was set up, we were in
Speaker 7: a very high interest rate environment. At the end of
Speaker 7: the seventies, equities had kind of fallen out of favor,
Speaker 7: and so it was very much a fixed income fund
Speaker 7: up until the mid nineteen eighties. Real estate was introduced
Speaker 7: at that point as the second asset class. In the
Speaker 7: early nineties, first domestic stocks and then later in the
Speaker 7: mid nineties, international stocks were added. In the early two thousands,
Speaker 7: we added hedge funds and private credit and private equity
Speaker 7: and have grown those alternative asset classes. Like many of
Speaker 7: our peers, the university endowments and pensions have grown, so
Speaker 7: today the fund itself is around eighty five billion dollars.
Speaker 7: Our largest asset classes is public equities. That money's managed
Speaker 7: against the all country world index, so very global index.
Speaker 7: We'd trade bonds internally high yield through investment grade, and
Speaker 7: then have alternative and privates that are kind of forty
Speaker 7: percent of the fund today. So our asset allocation is
Speaker 7: not unlike you know, many university endowments or pension funds today.
Speaker 7: And we manage to an inflation plus five percent return
Speaker 7: with the aim of dispersing roughly five percent of the
Speaker 7: fund to the state both for state spending and the
Speaker 7: dividend program, and then having the remainder maintain its value
Speaker 7: with inflation.
Speaker 4: Is why we target that inflation plus five.
Speaker 2: I'm curious. You know, markets are markets, and sometimes as
Speaker 2: valuations go down any year, what happens then for either
Speaker 2: the fund or Alaska when there's a bad year. Maybe
Speaker 2: it's like twenty twenty two and stocks have a pretty
Speaker 2: rough year, or two thousand and eight and two thousand
Speaker 2: and nine and stocks have a rough year. What happens
Speaker 2: when you can't satisfy the demand for state revenue or
Speaker 2: you know, I guess partly those dividends. What happens both
Speaker 2: with the fund in terms of how and how this
Speaker 2: state budget works.
Speaker 7: Yeah, well, at a high level, we've got a very
Speaker 7: complicated system with the constantually protected principle and then an
Speaker 7: earnings reserve that accumulates realized earnings. And so at the
Speaker 7: investment level, we're rebalancing, we're buying stocks and doing all
Speaker 7: the things all investors do. But I'll hand it to
Speaker 7: Devin on how we think about the pressure on the
Speaker 7: earnings reserve in those situations.
Speaker 5: Sure, So, as I said earlier, the Constitution was pretty
Speaker 5: broad in how it established the fund, and then there's
Speaker 5: a statutory overlay on top of that, and the statutory
Speaker 5: overlay defines earnings or revenue that's available to appropriate as
Speaker 5: realized income. And so when we have unrealized income, we
Speaker 5: hold it in either principle or what we call the
Speaker 5: earnings reserve account. That's where we hold the realized earnings
Speaker 5: of the fund and a pro rata allocation of unrealized earnings.
Speaker 5: So when you break down that eighty five billion that
Speaker 5: Marcus referred to earlier, you have about fifty nine billion
Speaker 5: that's actually protected principle of the permanent Fund. Then you
Speaker 5: have about thirteen billion of unrealized gains allocated to principle,
Speaker 5: and then you have the earnings Reserve Account, which is
Speaker 5: the portion that the legislature can appropriate out of it
Speaker 5: has about six point four billion that's available for appropriation
Speaker 5: at this point, has about two point three billion of
Speaker 5: unrealized gains that are allocated towards it, and then that combined.
Speaker 6: Is around nine billion dollars.
Speaker 5: And then we have the current years POMB and our
Speaker 5: POMV structure has only been in place since twenty nineteen.
Speaker 5: It's a historical five year average five percent draw structure
Speaker 5: and has, like I said, been providing the majority of
Speaker 5: state revenue since. But prior to that, the only thing
Speaker 5: funded out of the permanent fund were Permanent Fund dividends.
Speaker 5: So that was a big shift timeframe that we've gone
Speaker 5: through in the last six or seven years. As far
Speaker 5: as what we would do in a negative earnings year,
Speaker 5: if we had unrealized losses, it would just diminish that
Speaker 5: war chest of unrealized gains we currently have.
Speaker 6: If it were to.
Speaker 5: Erode beyond that level, then you would be in a
Speaker 5: situation at some point where the earnings Reserve Account would
Speaker 5: be deficient and there wouldn't be an ability to provide
Speaker 5: for a transfer to the state of Alaska, and that
Speaker 5: in part is why we've been advocating at the fund,
Speaker 5: based on our trustees direction, to evolve the fund from
Speaker 5: this historical model created fifty years ago to something that's
Speaker 5: a little more modern and a little more in line
Speaker 5: with a true endowment or sovereign wealth fund and recognize
Speaker 5: the importance to the state's annual revenue stream that it
Speaker 5: now represents.
Speaker 3: So in a year like twenty twenty five, if Joe
Speaker 3: and I were flies in the room when you were
Speaker 3: maybe actually mosquitos in the room, given that it's Alaska,
Speaker 3: if we were in the room when you were making
Speaker 3: the decision about what this year's dividend payout is actually
Speaker 3: going to be, what would the conversations actually sound like.
Speaker 3: What are the considerations that you were thinking about as
Speaker 3: you announce this number.
Speaker 6: So, first of all, we're not those flies.
Speaker 5: We don't decide how big the permanent fund dividend is
Speaker 5: going to be. We just earn and provide the annual
Speaker 5: transfer to the state. The policymakers that decide how much
Speaker 5: the dividend is going to be, or the legislature and
Speaker 5: the governor. So in twenty nineteen, when they created the
Speaker 5: percent of market value statutory structure.
Speaker 6: They left in.
Speaker 5: Place the historic, the historical or legacy Permanent Fund Dividend statute,
Speaker 5: which was in earnings model. It was twenty one percent
Speaker 5: of the last five completed fiscal years earnings. You take that,
Speaker 5: you split it in half. Half goes to the Permanent
Speaker 5: Fund dividend. Half goes theoretically of the state, although the
Speaker 5: state always just put their half back into the fund,
Speaker 5: and so our governor has proposed each year of his
Speaker 5: administration that that formula be followed for purposes of establishing
Speaker 5: the permanent Fund dividend. The difficulty has been that oil
Speaker 5: revenues have diminished for the State of Alaska. They're no
Speaker 5: longer robust enough to provide for the services that residents expect,
Speaker 5: and so the legislature has gone through a process of
Speaker 5: determining how much can they provide for a permanent fund
Speaker 5: dividend at the same time they provide some level of
Speaker 5: services that the residents expect, and as you might be
Speaker 5: able to predict, during an election year, miraculously they find
Speaker 5: ways to have a little bit larger permanent fund and
Speaker 5: during non election years maybe they're a little more austere.
Speaker 5: But it's been a struggle in a more of a
Speaker 5: debate these last six years.
Speaker 2: Yeah, Aly, can you talk about that a little bit
Speaker 2: more from your perspective of thinking about the long term
Speaker 2: health of the State of Alaska, the long term health
Speaker 2: of the fund and so forth, How can either political
Speaker 2: elected leaders or people such as yourself whose job is
Speaker 2: to safeguard the fund for the long term, for the
Speaker 2: benefit of the state of Alaska, you know, avoid essentially
Speaker 2: people eating the seed corn, right, because that's what we're
Speaker 2: talking about. Right of course, in an election year, everyone
Speaker 2: Democrat or Republican is going to be about protecting or
Speaker 2: expanding the dividend, regardless of the performance, regardless of how
Speaker 2: big oil royalties are. How do you sort of keep
Speaker 2: you know, I think there's versions of this debate that
Speaker 2: happened in DC. What is the discussions like to keep
Speaker 2: those choices essentially fiscally responsible for the long term.
Speaker 5: I think the discipline that's required in any financial system
Speaker 5: is something that we circle around to continually that in
Speaker 5: the event that you exceed what we've determined to the
Speaker 5: best degree possible as a reasonable draw. The five percent
Speaker 5: historical draw is a reasonable draw if you want to
Speaker 5: ensure that you have an inflation proof fund into the
Speaker 5: future that to the extent you deviate from that, because
Speaker 5: there's available money in the stats, in the earnings reserve account.
Speaker 6: That's just the first time that.
Speaker 5: You're going to overspend, and next year there's going to
Speaker 5: be another reason that you overspend, and you're almost ensuring
Speaker 5: that the system's going to fail. And I circle around
Speaker 5: to why does this money even exist. It exists because
Speaker 5: there were fifty generations of Alaskans before this generation that
Speaker 5: didn't spend all of the current year revenue that came in.
Speaker 5: They put some of that revenue aside, and they didn't
Speaker 5: do that for the benefit of any individual that was
Speaker 5: going to live in the state of Alaska in twenty
Speaker 5: twenty five or twenty twenty six. They did it for
Speaker 5: the state of Alaska so the state of Alaska would
Speaker 5: have the resources to survive into the future. And so
Speaker 5: that sacrifice of the past generations of Alaskans to ensure
Speaker 5: that we have this incredible resource and revenue source for
Speaker 5: the state to provide for not just services. Remember we're
Speaker 5: not just arguing about school funding and public safety and
Speaker 5: roads and the normal things. We're arguing about how much
Speaker 5: money to give away that to our residents. That's such
Speaker 5: an incredible gift that the past generations have given to
Speaker 5: this generation, and that same gift needs to be enshrined
Speaker 5: for the future of the state.
Speaker 3: Marcus, How does declining oil revenue or just the cyclicality
Speaker 3: of the oil business feed into your actual investment decisions?
Speaker 3: You know, if the price of crude goes down, is
Speaker 3: that a year where maybe you invest in risky, er,
Speaker 3: higher yielding things. Do you calibrate it in that way?
Speaker 4: Yeah? Sure.
Speaker 7: So today the royalty income for the fund is less
Speaker 7: than a billion a year, and we're dispersing over three
Speaker 7: billion a year to the state through the five percent
Speaker 7: draw So movements in oil do impact our inflows, but
Speaker 7: very marginally relative to the size of the fund. And
Speaker 7: there have been arguments at times whether we should invest
Speaker 7: in oil and gas given the state's exposure, and we've
Speaker 7: ended up deciding that we do want exposure to oil
Speaker 7: and gas investments, and so in periods like twenty twenty
Speaker 7: and twenty twenty one have leaned into energy, private equity
Speaker 7: and things like that. So we like investing in energy,
Speaker 7: but it doesn't have an outsized impact on the cash
Speaker 7: flows of the fund.
Speaker 4: Given the size of the royalties.
Speaker 2: I'm actually really intrigued by that. Can you talk more
Speaker 2: about that, because I remember sometimes you hear about these
Speaker 2: questions should people in finance have exposure to fund banks
Speaker 2: right in their portfolio? There's a good reason to say no,
Speaker 2: because their career is going to be levered to the
Speaker 2: cycle of the financial cycle, and if they get laid off,
Speaker 2: it's probably going to be at a time when bank
Speaker 2: stocks low and so forth. So that's actually a very
Speaker 2: interesting dimension. Can you talk a little bit more about
Speaker 2: the reasoning for this sort of in a way double
Speaker 2: exposure to energy that the fund has.
Speaker 7: Yeah, I mean, we feel like energy is an attractive area,
Speaker 7: so many investors don't want to be in fossil fuels
Speaker 7: that even today, I mean in twenty twenty one, there
Speaker 7: was a clear scarcity of capital and there were comments
Speaker 7: being made that people weren't me using fossil fuels in
Speaker 7: ten years, which like clearly in our opinion, contradicted the data.
Speaker 4: So we just liked it from an opportunistic standpoint.
Speaker 7: I mean, I think that it's a small enough portion
Speaker 7: of the S and P five hundred and our private
Speaker 7: equity benchmark that you know, if the index is at
Speaker 7: four percent and we're at five.
Speaker 4: It's it's not like an outsized impact.
Speaker 7: I mean, you see tech people that work at Google
Speaker 7: and their whole portfolios and tech and I would advise
Speaker 7: against that, but I think our sizing is reasonable.
Speaker 4: And we like the outlook for Weill and gas, so
Speaker 4: we're active there.
Speaker 5: Just to give you an idea of the magnitude of
Speaker 5: the royalties that are coming to the fund at this point,
Speaker 5: the high and the low over the last ten years
Speaker 5: are only two hundred million dollars apart, three hundred fifteen
Speaker 5: ish for the low and five forty ish for the high,
Speaker 5: and so in comparison to revenues and investments of the fund,
Speaker 5: fairly inconsequential.
Speaker 3: Other than generating a return and being able to fund
Speaker 3: the state and pay out a nice bonus to citizens,
Speaker 3: which you know in itself are two big things to
Speaker 3: be doing. Are there any other goals that you have
Speaker 3: in terms of investment. Are you trying to build out
Speaker 3: more infrastructure in Alaska? Are you conscious of the specific
Speaker 3: projects that you're funding.
Speaker 7: We invest entirely with a financial lens, and that was
Speaker 7: with the exception of one. There's one state law that
Speaker 7: says if we're in our rags that say that if
Speaker 7: there's an investment of equivalent risk and return, we should
Speaker 7: prefer the Alaskan investment. And it's very difficult to measure that. Like,
Speaker 7: if you look at the stock market, I think there's
Speaker 7: one stock Northern Bank that's an Alaskan based stock on
Speaker 7: an exchange. So a strict interpretation would be that we
Speaker 7: have to like compare Northern Bank to every community bank.
Speaker 4: And I like Northern.
Speaker 7: Bank, and like we own stock at Northern Bank, but
Speaker 7: there's a limit to how much you can have in
Speaker 7: a three hundred million market cap community bank.
Speaker 2: And so pretty well, I just pulled up the church.
Speaker 2: It's a pretty success. Just a small little bank, but
Speaker 2: it looks like this. It's a nice yeah, and I have.
Speaker 4: An account there. I like Northern Bank. But so none
Speaker 4: of this is meant to denigrate Northern Bank. We love
Speaker 4: Northern Bank.
Speaker 7: But so when there are opportunities in Alaska, we will
Speaker 7: take a look, probably more frequently than we would if
Speaker 7: it's a random opportunity in another state. But our mandate
Speaker 7: is very much highest and best return financially, and some
Speaker 7: of our private equity managers have done deals in the state,
Speaker 7: and we have some minor investment activity in the state,
Speaker 7: but that's the overall look that we take.
Speaker 5: And again it goes back to the development fund model
Speaker 5: versus a public trust model, and that was the debate
Speaker 5: that happened in the nineteen seventies, from seventy six to
Speaker 5: nineteen eighty, and the public trust model one, rather than
Speaker 5: we're going to try to invest this money in Alaska
Speaker 5: and develop Alaska. Alberta Heritage Fund is actually a good
Speaker 5: proxy for how you might expect a fund to have
Speaker 5: performed if it were a development model. And when you
Speaker 5: compare the performance of their fund relative to ours, it
Speaker 5: certainly financially has worked out to Alaska's benefit to have
Speaker 5: the public trust and just looking for the best investment,
Speaker 5: as Marcus described.
Speaker 2: Marcus, while we have you here, can you tell us
Speaker 2: a little bit about your sense of the state of
Speaker 2: private assets because two things. A, you always hear it's
Speaker 2: the golden age of private credit. I don't really know
Speaker 2: what that means. Are you just hear about private all
Speaker 2: the time, But also with private assets in general, you
Speaker 2: hear it particularly on the private equity side, and maybe
Speaker 2: you hear it on the VC side too. The sort
Speaker 2: of paucity of distributions and so forth, and this idea
Speaker 2: that they haven't been coming in questions about returns. Like
Speaker 2: you sitting here on August thirteenth, twenty twenty five, how
Speaker 2: are you thinking about the past results but also opportunities
Speaker 2: set right now that exists in private.
Speaker 7: Yeah, sure, I would say generally, I'm quite cautious on privates.
Speaker 7: I mean, I started my career at Lehman Brothers in
Speaker 7: one and I remember going through LBO training and you know,
Speaker 7: you sketch out your typical LBOs maybe five six times
Speaker 7: EBITDA with three four times leverage, and the debt pays
Speaker 7: down and by the end of the two thousands, buyouts
Speaker 7: or eight nine times EBITDAH. Now on average US mid
Speaker 7: market buyouts or mid teens EBITDAH multiples, and a lot
Speaker 7: of money's gone into privates. So we're we benefited from
Speaker 7: leaning into privates from call it twenty ten in the
Speaker 7: twenty twenty and we just felt kind of in twenty
Speaker 7: twenty one that it's unlikely that investors are going to
Speaker 7: get the return premium and I'm not on private equity now,
Speaker 7: so like we've cut our commitment pace to.
Speaker 4: Private equity about in half in end of twenty twenty.
Speaker 7: One, and we've kept it around there and ticked it
Speaker 7: up a little bit, but we're still like well below
Speaker 7: where we.
Speaker 4: Were deploying five years ago. We have an allocation to
Speaker 4: private credit.
Speaker 7: I think that's something we debate regularly, and it's maybe
Speaker 7: four percent of our fund. I think if you look
Speaker 7: at the unlevered yield on middle market direct lending versus
Speaker 7: high yield or levered loans versus where it was five
Speaker 7: years ago, I think maybe you're getting one hundred basis
Speaker 7: points spread today versus several hundred and a few years ago.
Speaker 4: I mean, it's just not.
Speaker 7: Even debatable that it's less attractive than it was. And
Speaker 7: then if you go through a recession cycle default cycle,
Speaker 7: I think it'll really get tested.
Speaker 4: So we're kind of ben tapping the.
Speaker 7: Brakes on private it's the last few years, and are
Speaker 7: pretty cautious on the outlook.
Speaker 3: Right now, what have you been doing this year in
Speaker 3: terms of allocation, Because the word uncertainty seems to come
Speaker 3: up a lot in conversations nowadays. There's uncertainty over policy
Speaker 3: and of course uncertainty over the direction of the economy.
Speaker 3: Are you more cautious or are you I guess changing
Speaker 3: any of your traditional allocations.
Speaker 7: I think right now is a really tough time to
Speaker 7: make that macro calls. I mean, you've got big budget
Speaker 7: deficits that aren't going to come down anytime soon any
Speaker 7: probably have FED funds coming down rapidly in the next
Speaker 7: year with a new FED share so to want to
Speaker 7: be like underweight equities right now, So like we're kind
Speaker 7: of like hugging benchmarks on that wanting to be under
Speaker 7: or overweight equities.
Speaker 4: But it's just an expensive market.
Speaker 7: So if you didn't have that dynamic of rates coming down,
Speaker 7: I think you'd want to be really cautious right now.
Speaker 7: But then given that backdrop, you kind of just have
Speaker 7: to take the long view allocate in line with benchmarks.
Speaker 7: And like I said, on privates, we're definitely tapping the
Speaker 7: brakes we deploy every year because we cut our pacing.
Speaker 7: We're still deploying, but just much less. And we're getting
Speaker 7: more in distributions than contributions on our private equity portfolio,
Speaker 7: which is unique and kind of a luxury. So even
Speaker 7: though we're kind of in line with our benchmarks, I
Speaker 7: sort of root for a dislocation because we're very well
Speaker 7: positioned from a liquidity standpoint with the reduced private pacing.
Speaker 2: Devin, can you talk more about the sort of the
Speaker 2: legal status of the fund? There was an amendment to
Speaker 2: the Alaska State Constitution that establish it. I have to
Speaker 2: imagine that an amendment is like a very difficult it
Speaker 2: is a very legally secure backing for you. I don't
Speaker 2: know the Alaska constitutional process, but constitutions are hard to change.
Speaker 2: But when you think about past your tenure, past all
Speaker 2: of our tenures, like how legally durable is the fund
Speaker 2: and how hard would it be? Yes, politicians are always
Speaker 2: going to one year try to give more way to
Speaker 2: the voters, et cetera. But how hard is it if
Speaker 2: enterprising politicians actually wanted to change the legal strength of
Speaker 2: the fund.
Speaker 5: It's very difficult to change the structure of the fund
Speaker 5: in a durable way. Statutorily, it's not that difficult. That's
Speaker 5: a simple majority and concurrence of the governor, and you
Speaker 5: can change statutes. The reason it took a constitutional amendment
Speaker 5: to create the Permanent Fund is our constitution as a
Speaker 5: prohibition on dedication of revenues, and so in order to
Speaker 5: have a dedicated revenue pledge there had to be an amendment.
Speaker 5: It was an overwhelming majority. It was just about two
Speaker 5: thirds of the people of the state voted for it. Today,
Speaker 5: the idea of shifting the fund into what I alluded
Speaker 5: to earlier, a true endowment structure with a five percent draw,
Speaker 5: rather than the noise that I described in the earnings reserve,
Speaker 5: the potential of a failed draw, the potential of an overdraw,
Speaker 5: the inflation discussion, and the intergenerational compact discussion, that we
Speaker 5: really need a constitutional amendment to get to that point,
Speaker 5: and it would require two thirds vote of the legislature
Speaker 5: and then a vote of the people to ratify it.
Speaker 5: And what quickly happens because we've had forty five years
Speaker 5: of people getting a dividend that when they think about
Speaker 5: the permanent fund, they don't really consider some of those
Speaker 5: larger issues. They tend to gravitate towards Hey, I got
Speaker 5: a check last year. What's my check going to be
Speaker 5: next year? Where's my check? How came my check's not bigger?
Speaker 5: How can you not following that statutory formula and I'm
Speaker 5: not getting four grand instead of fifteen hundred. That's the
Speaker 5: conversation that people are having, and once you dive in,
Speaker 5: they go, oh, oh, I understand it actually is funding
Speaker 5: my child's school, or it's actually keeping me safe on
Speaker 5: the road.
Speaker 6: It's doing these.
Speaker 5: Other things at this point, and that's where that educational
Speaker 5: process has been the challenge. We have had decent traction,
Speaker 5: and we have a bi annual legislative session, so a
Speaker 5: two year session where they meet one year and then
Speaker 5: they carry forward those bills to the next. This is
Speaker 5: the second year of that session. We had a number
Speaker 5: of hearings last session on the concept of a constitutional amendment,
Speaker 5: and there's I don't know, maybe it's a fifty to fifty.
Speaker 5: Maybe it's not quite that good shot that will be
Speaker 5: able to get the legislature to consider something like that
Speaker 5: because you're opening discussion about the seed corn of the
Speaker 5: state being potentially eiden that appeals to I think the
Speaker 5: right and the left likes the idea of making sure
Speaker 5: that you can fund your much needed project or programs
Speaker 5: every year, and so there's kind of a balance across
Speaker 5: the too. It's just how do you bridge that dividend question,
Speaker 5: I think is the sticky wicket.
Speaker 2: I don't know.
Speaker 3: I could see school services versus down payment on a
Speaker 3: new snowmobil y being a tough choice for some Alaskans.
Speaker 3: But on this note, I realized this isn't necessarily your wheelhouse.
Speaker 3: But do you've noticed any like macro economic impacts from
Speaker 3: the dividend or maybe a broader question would be how
Speaker 3: does it fit into Alaska's overall culture? You know, around
Speaker 3: dividend time, do you start to see advertisements for how
Speaker 3: to spend that extra money? How does it actually impact
Speaker 3: Alaskan's behavior?
Speaker 6: Oh?
Speaker 5: Absolutely, you see, there will be sales the airlines that
Speaker 5: sort of alask all have permanent fund dividends, sales you
Speaker 5: have if you go buy a costco on the day
Speaker 5: that dividends are distributed, you will be waiting in line
Speaker 5: a long time. There is absolutely an economic impact on
Speaker 5: the state, and similarly from the the transfer that's used
Speaker 5: for state services that cycles within the state as well.
Speaker 5: I mean, Alaska still has a relatively small GDP. It
Speaker 5: vacillates based on the price of oil, but forty to
Speaker 5: seventy billion a year, and so when you compare that
Speaker 5: to some of the larger states, it's pretty pretty small
Speaker 5: and fairly concentrated. Even though there's diversity from an employment perspective,
Speaker 5: from a revenue perspective, still a lot of concentration in
Speaker 5: oil and now investment income from the Permanent Fund, and
Speaker 5: so it's interesting to consider if the Permanent Fund didn't exist. Alaska,
Speaker 5: you were talking about a shrinking population, and I think
Speaker 5: that's driven by a number of different factors, some of
Speaker 5: which are economic opportunities maybe being more comparable to what
Speaker 5: they are in the continental US, where at one point,
Speaker 5: if you move to Alaska you expected to make more
Speaker 5: than you would make in the Continental US. I have
Speaker 5: a guy that I used to work work with, he
Speaker 5: moved to Alaska to work in the Longest National Forest,
Speaker 5: is a logger. He said that he made enough money
Speaker 5: in one month to buy a brand new pickup truck.
Speaker 5: And so you think about today and how many months
Speaker 5: you have to work to buy a brand new pickup truck,
Speaker 5: and he would be making, you know, let's say it's
Speaker 5: not that nice of four wheel drive pick ups, fifty
Speaker 5: thousand dollars.
Speaker 6: He made that month, which wages aren't the same.
Speaker 5: And of course logging isn't happening on that industrial scale
Speaker 5: and Alaska anymore either, But even a slope worker is
Speaker 5: not making fifty thousand dollars a month, and so when
Speaker 5: you look at some of the other sectors in the
Speaker 5: economy that there are bright spots, but certainly there's some
Speaker 5: struggles as well.
Speaker 2: Is it another question? I guess it's sort of looking
Speaker 2: for and again not necessarily the wheelhouse of the fund
Speaker 2: per se, but just thinking about the economy of Alaska.
Speaker 2: When we were there, we heard a couple different things like, Okay,
Speaker 2: so you're talking about the oil royalties in general, like
Speaker 2: sort of long term decline. We heard someone talk about, well,
Speaker 2: maybe like Alaska could one day be a hydrogen hub.
Speaker 2: There's a lot of opportunity to harness solar and wind
Speaker 2: and wave power to turn water into hydrogen, and that
Speaker 2: could be a new boon for the state of Alaska.
Speaker 2: I know there's talk maybe one day Alaska could be
Speaker 2: an important destination for data centers because you could save
Speaker 2: on cooling costs by just constructing them in a cold climate,
Speaker 2: et cetera. When you think about either the state of
Speaker 2: Alaska or the future of the Fund, do you try
Speaker 2: to think about possible right tail upside scenarios for what
Speaker 2: the economy of Alaska could look like ten twenty five
Speaker 2: years down the road.
Speaker 5: From the funds perspective, we tend to just focus on
Speaker 5: institutional investing. From the policy Alaska perspective, those are obvious,
Speaker 5: the all very.
Speaker 6: Interesting things to consider.
Speaker 5: And when you're thinking about Alaska, and again it's a
Speaker 5: huge state, five hundred and eighty six thousand square miles,
Speaker 5: and so you can cut Alaska in half and make
Speaker 5: Texas the third largest state, it's huge.
Speaker 3: It's people measures Alaska in number of Texas tech funny, yeah.
Speaker 2: And Texas do that to the other states too, So
Speaker 2: it's this Russian nesting doll of states lording over loading
Speaker 2: their square miles over other states.
Speaker 5: Anyway, keep going, but it's maybe we're a little defensive
Speaker 5: because Alaska is on a different scale. On most maps,
Speaker 5: we're out in the Pacific Ocean and it looks like
Speaker 5: we're about half the size of Texas, and so oh yeah,
Speaker 5: perhaps that's.
Speaker 6: What drives that that emphasis.
Speaker 5: But certainly from a resource development perspective and the open
Speaker 5: skies or if somebody needed space, there's incredible spaces in Alaska. Obviously,
Speaker 5: we have a lot of beautiful spaces that are protected
Speaker 5: for both at the national and state level for future generations.
Speaker 5: But there's a lot of land that's available for other uses,
Speaker 5: and so as those ideas come along and they make
Speaker 5: economic sense. I think that's the critical hurdle for Alaska
Speaker 5: is that we have historically dreamed big and the states
Speaker 5: had enough revenue surplus revenue to make attempts at stimulating
Speaker 5: economic development, and it's proven to be very difficult for
Speaker 5: government to force economic development. It has to happen more organically.
Speaker 5: And so as people recognize the strengths that Alaska represents,
Speaker 5: and maybe there's the distances don't make as big a
Speaker 5: difference because of satellite communications or other technologies that make
Speaker 5: the delivery of information seamless from other locations. And like
Speaker 5: you said, then that with low cost energy combined with
Speaker 5: colder climate could result in data center development trend that
Speaker 5: I think all of it's a little we're going to
Speaker 5: wait and see at this point be supportive from our
Speaker 5: perspective that we're just going to focus on investing money.
Speaker 3: Marcus, I want to go back to private credit for
Speaker 3: one second, because I found what you were saying really
Speaker 3: interesting that you've dialed down your exposure since twenty twenty.
Speaker 3: You know, a lot of big funds out there, a
Speaker 3: lot of endowments would argue that one of their competitive
Speaker 3: advantages is that they can buy and hold illiquative investments
Speaker 3: because they don't necessarily face the same outflow pressures as
Speaker 3: say a mutual fund or someone like that. How do
Speaker 3: you actually use your or deploy your I guess illiquidity
Speaker 3: premium is that something you think about and if you're
Speaker 3: not doing it in private credit, are you sort of
Speaker 3: letting that competitive advantage go to waste.
Speaker 7: I don't think of it as like an illiquidity premium
Speaker 7: that you get. I think it's an illiquity premium that
Speaker 7: you have to demand.
Speaker 4: I mean, like in.
Speaker 7: Private credit or allocation has stayed roughly the same, We've
Speaker 7: just committed less and so across in private equity too,
Speaker 7: and across the industry you see investors that are over
Speaker 7: their target allocation now and they may in the future
Speaker 7: have to reduce down their pacing. And so I feel
Speaker 7: like if you look at private credit, the illiquidity premium
Speaker 7: that you're getting without adjusting.
Speaker 4: For defaults has declined in the last five years.
Speaker 7: And so we've been less enthusiastic about it, and if
Speaker 7: you adjust for default you may not even be getting
Speaker 7: a premium. In private equity, in private credit today, it's
Speaker 7: like a debate like.
Speaker 4: Are you getting an appropriate illoquity premium?
Speaker 7: And so I think of it as kind of like
Speaker 7: keeping our powder dry for a different environment where there
Speaker 7: is real opportunistic situations that you can demand a very
Speaker 7: high return premium for locking up your money for ten years.
Speaker 4: I don't think it's like.
Speaker 7: I think it's a market thing that in different markets
Speaker 7: you may not even get an ill liquidity premium, and
Speaker 7: we may be close to that now, and in those situations,
Speaker 7: liquidity should be value. And I think liquidity should be
Speaker 7: valued now, whereas ten years ago it was a real
Speaker 7: compelling environment for harvesting and aliquidity premium.
Speaker 3: Yeah, you kind of touched on this earlier, the idea
Speaker 3: that you're hoping for some sort of dislocation to take
Speaker 3: advantage of, which we're journalists. We like it when stuff
Speaker 3: happens and we have a lot to talk and write about.
Speaker 3: But what dislocation are you sort of envisioning here, Well.
Speaker 4: It depends on the asset class.
Speaker 7: I mean, in fixed income, for example, we've had like
Speaker 7: very tight spreads for a very long time, and our
Speaker 7: fixed income team is kind of just trying to stay
Speaker 7: out of trouble. If you look at a month like April,
Speaker 7: the first two days the market was down over ten percent.
Speaker 7: Most pension funds and endowments rebounced monthly. Because our benchmarks
Speaker 7: rebounced monthly, we've decided that we just are going to
Speaker 7: ignore that, and so we like bought the dip graduations. Yeah,
Speaker 7: and then it was so it was so brief that
Speaker 7: it's a lip in the perform roaments. But I mean,
Speaker 7: I think that there's could be trouble lurking and private equity,
Speaker 7: there could be trouble lurking commercial real estate. I don't
Speaker 7: know on private credit. I'm not like making a call
Speaker 7: that it's headed for disaster. I just don't think you're
Speaker 7: getting a real compelling premium for lock hamp your money.
Speaker 7: But in some of those areas that could get dislocated,
Speaker 7: like private equity or commercial real estate, like we want
Speaker 7: to be the buyer with deep pockets in a dislocation.
Speaker 7: And when you look around the industry people that are
Speaker 7: over allocated to private equity, I think we'll find that
Speaker 7: they don't have that luxury, and like we want to
Speaker 7: have that luxury.
Speaker 4: You know, and a cycle will come.
Speaker 7: It may not be, it probably will not be next
Speaker 7: year with rates coming down, or maybe it will be
Speaker 7: because no one thinks it will.
Speaker 2: I have a real short question, then a real question.
Speaker 2: The short question is if there's some manager, all manager
Speaker 2: of any sort, do they have to fly to Juno
Speaker 2: and be you or do you go to the lower
Speaker 2: forty eight or how do those introductions work?
Speaker 4: Yeah.
Speaker 7: When I started here about ten years ago, we were
Speaker 7: really building out private markets, and we had this idea
Speaker 7: that we should kind of haze managers and not only
Speaker 7: should they come out, that should come out in January and.
Speaker 2: Do a glacier cruise with high high waves.
Speaker 7: Anyway, when we started trying to get into the real
Speaker 7: premiere venture funds and stuff, we realized that was not
Speaker 7: a good model. So we've been using our Alaska air minds.
Speaker 2: Okay, real question. This is the last thing for me.
Speaker 2: So it occurred to me and I bring this up
Speaker 2: because of the mention of logging and your mention of oil.
Speaker 2: Earlier famously, David Swinton at Yale made timber allocation a
Speaker 2: core part of his portfolio, and there's all this thinking
Speaker 2: that like natural resource environment investments like that could play
Speaker 2: a good diversifying role that they were sort of acyclical
Speaker 2: in certain ways, and they're very natural indie endowment setting.
Speaker 2: You're in a resource extraction state, and so I'm curious
Speaker 2: if you have any thoughts today, setting aside the point
Speaker 2: you made about oil and maybe was or not enough
Speaker 2: capital exposed to it in twenty twenty one, whether you
Speaker 2: have any thoughts about in the modern era, do resource
Speaker 2: industries can they still play that role in a long
Speaker 2: term portfolio where they deliver returns that aren't necessarily in
Speaker 2: line with what like quote risky assets are doing in
Speaker 2: a given year.
Speaker 4: Oh, I think so.
Speaker 7: I think commodities and resources have always been an interesting
Speaker 7: area to look but like one of my favorite investment
Speaker 7: quotes is Barton Biggs quote that there's no investment idea
Speaker 7: that's so good that too much capital can destroy it,
Speaker 7: ruin it for everyone.
Speaker 4: And that was definitely the case.
Speaker 7: Like once David Swinson, yeah, publicly that anything. Usually a
Speaker 7: lot of people followed him, and so Timber kind of
Speaker 7: got uninteresting. But I mean, I think resource development, mining
Speaker 7: are areas that have been like underinvested in the United
Speaker 7: States at least the last decade. So, I mean that's
Speaker 7: a that's a real interesting area for some of our
Speaker 7: private market managers.
Speaker 3: I have one more question, which is I am looking
Speaker 3: at the White House website right now. I'm looking at
Speaker 3: a page that says up plan for establishing a United
Speaker 3: States Sovereign Wealth Fund, And as we discussed in the beginning,
Speaker 3: who knows if that's actually going to happen, but certainly
Speaker 3: there are some discussions around it. If the US at
Speaker 3: a federal level were to establish a sovereign Wealth fund
Speaker 3: and SWF, what advice would you have for something at
Speaker 3: that level.
Speaker 7: Well, I mean, I think setting up something with like
Speaker 7: clear rules based investment policy makes a lot of sense.
Speaker 7: I mean, anytime you're investing public funds, like one of
Speaker 7: the most important things to do is to get the
Speaker 7: trust of the citizenry, your stakeholders, and how you're making
Speaker 7: investment decisions, how you do due diligence, how you build
Speaker 7: a portfolio. So I would encourage them to think about
Speaker 7: the fact that it will likely live beyond the current
Speaker 7: administration the future administrations, and just have real thoughtful governance,
Speaker 7: investment committee process, things like that.
Speaker 4: I don't know if you have anything.
Speaker 6: To haven those were my thoughts as well.
Speaker 5: I'm later on it's when the idea initially came out
Speaker 5: just from a personal perspective. I had a little bit
Speaker 5: of a hard time understanding why we would be doing
Speaker 5: that when we're in a recurring fiscal deficit situation. The
Speaker 5: reason that most sovereign wealth funds exist, or maybe all,
Speaker 5: is that there's windfall revenue that shows up that people,
Speaker 5: like I said earlier, have a vision of providing for
Speaker 5: their residents in perpetuity from a one time revenue source,
Speaker 5: and so if there were something along that line that
Speaker 5: showed up at the national level, it might make some sense.
Speaker 5: But you would, I think hope that you had a
Speaker 5: balanced budget. You would have some methodology for why you
Speaker 5: would be pursuing creating a sovereign wealth fund despite having
Speaker 5: a budget that was in imbalance.
Speaker 2: Yeah, it definitely seems though. All around the world, if
Speaker 2: you look at sovereign wealth funds, they frequently associated with
Speaker 2: oil oil and frequently associated with economy that are too
Speaker 2: small for the money to be deployed in a short
Speaker 2: period of time without creating a lot of waste inflation. Anyway,
Speaker 2: fascinating conversation. Devi and Marcus. Thank you both so much
Speaker 2: for coming on odd lots thinking a conversation A lot
Speaker 2: of people are very curious about and I really appreciate
Speaker 2: you both taking your time.
Speaker 4: Yeah, thank you.
Speaker 6: Thanks.
Speaker 5: I forgot to mention I saw a bear on the
Speaker 5: way to work this morning.
Speaker 2: Black bear, Just a black bear.
Speaker 3: We have those in Connecticut exactly.
Speaker 5: I didn't see when yesterday where on my mom's roof,
Speaker 5: which is that's unusual.
Speaker 2: Yeah, Tracy, I love that conversation. First of all, I'm
Speaker 2: glad we did that after after we had returned from Alaska,
Speaker 2: because I just felt like understanding just what a distinct
Speaker 2: economy is Alaska is, and the specific needs of the
Speaker 2: Alaskan economy, et cetera, and the sort of weirdness and
Speaker 2: the exposure to booms and busts, and whether an economy
Speaker 2: that farflung can even like support itself, it gives me
Speaker 2: a deeper understanding of like why a state would have
Speaker 2: the equivalent of a sovereign wealth fund, or why would
Speaker 2: have the equivalent of like a small like little universal
Speaker 2: basic income.
Speaker 4: Yeah.
Speaker 3: Well, on that note, I did think it was interesting
Speaker 3: when we asked about what would their advice be for
Speaker 3: a federal sovereign wealth fund, and they said something rules based, Yes,
Speaker 3: where you you know, you stick to a certain payout
Speaker 3: formula in order to insulate the fund from political whims
Speaker 3: which change on a sort of mid term basis. I
Speaker 3: thought that was really interesting, and it also reminded me
Speaker 3: actually of the conversations we had with Claudia sam about
Speaker 3: the Psalm rule and the idea that like, one of
Speaker 3: the reasons you want these rules based economic formulas is
Speaker 3: in order to her stimulus formulas is to insulate them
Speaker 3: from political rust.
Speaker 1: Yeah.
Speaker 3: I thought that was interesting. I also thought, I mean,
Speaker 3: it sounds like being a portfolio manager at the Alaska
Speaker 3: Fund would be like a nice job.
Speaker 2: I thought, yeah, but would you but the Alaska part?
Speaker 2: Would you take it?
Speaker 3: I haven't done an Alaskan winter, so I highly suspect
Speaker 3: my opinions of living in the state would change drastically
Speaker 3: if I was there in January versus August.
Speaker 2: Can I say something that is not meant to be
Speaker 2: insulting to anyone who lives there or any of the
Speaker 2: wonderful guests that we've had, is certainly not meant to
Speaker 2: be insulting to anyone. Yeah, who anyone who lives in Alaska.
Speaker 2: There are a lot of bars and anchorage. There are
Speaker 2: a lot of dive bars. I feel like there's a
Speaker 2: reason I do not Yes that too. I suspect that
Speaker 2: there is a link between all those bars in like
Speaker 2: eight months where the sun comes up at like eleven
Speaker 2: am and goes down at four peu.
Speaker 4: It's a long winter.
Speaker 3: You got to go somewhere.
Speaker 2: You gotta do something that seems like pretty tough on
Speaker 2: the human condition. Two other things that I thought were interesting,
Speaker 2: So on that point about whether or nation sovereign wealth
Speaker 2: fund makes sense, I do agree with, like this basic idea,
Speaker 2: like we're it's most logical is if you have this
Speaker 2: big windfall of money and you can't put it all
Speaker 2: into the economy right now because you act the capacity right,
Speaker 2: you create inflation or whatever. I think that we don't
Speaker 2: have anything like that condition. We don't have big some
Speaker 2: big windfall of money, et cetera. And then the other
Speaker 2: thing too is I like getting their takeout just asset
Speaker 2: markets right now and private credit, and it's just that, yeah,
Speaker 2: this is not as maybe it's not the golden.
Speaker 6: Age right now?
Speaker 3: All right, shall we leave it there, Let's leave it there.
Speaker 3: This has been another episode of the Authots podcast. I'm
Speaker 3: Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 2: And I'm Joe Wisenthal. You can follow me at the Stalwart.
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