Dividend checks expected to decline in the years ahead

GRAPHIC/Courtesy Peratrovich, Nottingham & Drage Inc.
The Alaska Permanent Fund took its lumps last year like most investment funds, but its managers say the fund did better than most pension funds and, despite a down market, beat the "benchmark" indexes and other funds that the fund’s trustees used as measures for performance comparison.

The annual dividend paid to Alaskans went down this year, and because of the annual five-year averaging of cash income used to calculate the dividend, the amount allocated for payments is expected to decline for the next five years, according to the permanent fund’s latest estimates.

According to an analysis of the past year, the fund’s total market value, the principal and the earnings reserve, declined from $26.5 billion on July 1, 2000, to $24.8 billion on June 30, 2001.

Short-term negative returns inevitably occur.

"It’s as inevitable as rain in Juneau, snow in Anchorage and cold in Fairbanks," said state Revenue Commissioner Wil Condon.

Still, "the fact that this is the first time in 25 years that we have had a negative annual return only shows what a remarkable run of good fortune the fund has had," according to Robert Storer, the permanent fund’s executive director.

"The eventual certainty of a down year is factored into the fund trustees’ analysis each year when they make the long-term asset allocation decisions," he said.

An averaging of five years’ of income is used to calculate the dividend, which is intended to soften the effect of yearly volatility in earnings on the amount of the annual payment. This year the dividend would have declined even more had it been based on income for the year, rather than based on an average of five-year income.

But even though the fund is projecting a return to earnings growth in the current year and continued increases in following years, the money available for dividends under the five-year averaging will decline. That, combined with expectation of continued population growth, will translate to lower dividends.

For the current year, cash income of $1.864 billion is estimated compared with $1.199 billion last year. Estimates are the fund will earn $1.952 billion in 2003, $2.051 billion in 2004 and $2.161 billion in 2005.

Because of the five-year averaging, however, the annual amount distributed for dividends will decline from $1.113 billion in fiscal year 2001, the year ending June 30 on which dividends are being distributed this fall, to $1.095 billion in fiscal 2002, the current state fiscal year, to $975 million in 2004 and $969 million in 2005.

In 2006 money for the dividend is expected to begin increasing again, with $1.082 billion in cash earnings estimated for that year.

For the past year, unaudited figures show the fund’s domestic stock portfolio was down 13.1 percent while foreign stocks were off 22.9 percent. Stocks account for about half the fund’s investments.

The other half of the fund, bonds and real estate, did better. Domestic bonds were up 11.4 percent in value, and foreign bonds were up 0.8 percent. The fund’s real estate holdings were up more than 10 percent in value.

Cash income by the fund, which is what is used to determine the annual dividend payout, was $1.2 billion for the year. This included dividends from stocks, interest on bonds, real estate earnings and about $150 million in gains from sales of assets during the year.

During the fiscal year, about $1 billion was added to the protected principal of the fund, which included some $686 million in "inflation-proofing" payments made from the earnings, and $339 million from state oil and gas royalties.

"Despite the negative return, each of the portfolios of the fund, consolidated by asset class, beat its benchmark," Storer said.

"The fund’s U.S. stocks outperformed the Russell 3000 broad market, the non-U.S. stocks outperformed the EAFE index, and the bond portfolio outperformed the Lehman Brothers Aggregate Index," he said.

Alaska’s investment fund did better than most pension funds because pension funds typically have a higher allocation to stocks than the permanent fund, Storer pointed out.

"We also stayed the course with our long-term asset allocation, which balances the risk of short-term losses against the reward of long-term gains," he said.

Evidence of the wisdom of sticking to a consistent plan was the fund trustees’ decision last March to sell $750 million in fixed income and reinvest the money in stocks, a "rebalancing" of assets.

Since that decision was made, the Standard and Poors Index of stocks has increased 4.8 percent, Storer said.

11/18/2001 - 8:00pm