Permanent Fund nets 5.95% return to start ‘22, but tougher times may loom

The Alaska Permanent Fund’s investments generated a 5.95% return in the first half of the 2022 state fiscal year.

While not the record-level returns seen in recent periods, the generally strong result is one fund managers say could become increasingly difficult to achieve in the near future.

The Permanent Fund held an unaudited value of $81.7 billion on Feb. 21, down slightly from $82.4 billion at the end of 2021, which was also the midpoint of the state fiscal year.

“It’s probably as difficult a period to earn a strong return as ever,” Alaska Permanent Fund Corp. Chief Investment Officer Marcus Frampton said in a Feb. 18 interview. “It’s a pretty precarious time period.”

Frampton’s view comes not only from rates of inflation not seen in decades, but also subsequently rising interest rates at time when the level of debt in the economy is much greater than at other times of high inflation, he said. More debt means rising interest rates are likely to have a greater impact on borrowers and the overall economy, according to Frampton.

He also added that stocks were on-the-whole cheaper during prior inflationary periods.

“Those are factors that are reasons to be pessimistic,” he said.

The incredible run-up in stocks that drove the Dow Jones Industrial Average up more than 90% following the March 2020 pandemic-induced sell-off put the Dow at more than 36,300 points to end the year, but the gains have largely plateaued since the middle of last year.

The fund similarly grew more than 25% in 2021, from approximately $65.3 billion to nearly $81.9 billion at the start of the 2022 fiscal year.

Leaders of the APFC’s investment adviser firm Callan LLC said they are forecasting a 10-year average annual return on global equities of 6.6% during the corporation’s most recent board meeting Feb. 16-17 in Juneau.

Callan is projecting a real return for the Permanent Fund of 3.95% per year over the next decade. That assumes an annual total return of 6.2% and inflation returning to an average of 2.25% per year.

Frampton said he believes the 6.6% stock return forecast is optimistic, particularly if inflation — currently around 7% nationally — remains high.

He also believes oil prices will remain high in the near-term, which is another factor that could weigh on returns.

“The consensus seems to be that inflation is going to come down to 3-4% this year and then be kind of subdued after that,” Frampton said, noting that a significant factor will likely be how quickly supply chains can return to a state of normalcy.

If those potentially disruptive forces ease, he said he expects annualized stock returns to be in the 3-4% per year range as well.

Frampton and Acting APFC Executive Director Valerie Mertz also emphasized that the December firing of then-Executive Director Angela Rodell by the board of trustees and the change in leadership and attention from the Legislature that ensued has not changed day-to-day investment operations.

“Staff is just continuing to do the same good work that they've always done. We'll continue to squeeze every basis point out of the market that we can,” Mertz said.

It all means APFC leaders are working to have the fund “positioned defensively” against those potentially destructive forces, according to Frampton.

To that end, he noted the fund is slightly underweighted in stocks right now and holding more cash than normal. APFC investment managers are aiming to have 36% of the fund in public equities, or stocks, in 2023 and ramp down to 33% by 2025, according to the corporation’s broad 5-year asset allocation plan. That comes after years of having 39-40% of the fund in stocks, which generated significant returns.

The Permanent Fund’s private equity and real estate portfolios will likely grow as a result in the coming years.

Frampton said real estate is an area with “very strong fundamentals” and the fund has been active in purchasing apartment buildings across the Lower 48, though it’s an expensive market to be in at the moment, too.

He said the Permanent Fund Corp. is in a somewhat unique position among its peers in that it is holding a relatively small amount of gold.

“I think commodities in general are an under-followed area for institutional funds right now,” Frampton said.

Elwood Brehmer can be reached at [email protected].