Alaska State Chamber of Commerce - Commonwealth North · Callan’s Capital Markets Forecast as of April 2018 Asset Category Projected 10-Year Geometric Return Annualized Standard

Commonwealth North

September 2018

ALASKA PERMANENT FUND CORPORATION 2

The Alaska Constitution

42 years ago, in 1976, Alaskans in a historic vote amended the Constitution of the State of Alaska by a margin of 75,588 to 38,518 and created the Alaska Permanent Fund.

Alaska Constitution Article IX, Section 15

Section 15. Alaska Permanent Fund

At least twenty-five percent of all mineral lease rentals, royalties, royalty sale proceeds, federal mineral revenue sharing payments and bonuses received by the state shall be placed in a permanent fund, the principal of which shall be used only for those income-producing investments specifically designated by law as eligible for permanent fund investments. All income from the permanent fund shall be deposited in the general fund unless otherwise provided by law.


APFC’s Vision“to deliver sustained, compelling investment returns as the United States’ leading sovereign endowment manager, benefitting all current and future generations of Alaskans”

Reflects statutory language and intent as well as Board and staff aspirations.

Emphasizes maximizing returns in a fully sustainable manner.

Underscores the intention for the Fund to be a perpetual resource for the State of Alaska.

Embodies core values of Integrity,

Stewardship, and Passion.


APFC’s Strategic 5 Year Plan

Priorities FY17-FY21

Gain greater control of resource allocations

Optimize APFC’s operational processes and use of financial networks and resources

Develop best-in-class investment management capabilities, partnerships, and geographic reach to maximize investment returns

Enhance talent and staff across APFC

How the Fund Works


How the Fund Works


Invested as One Fund

Pro Rata Shares of Each Investment

Principal ERA

One Target Asset Allocation

Stocks, Bonds, Real Estate, Alternatives

Alaska Permanent Fund Corporation

Investment and Management of the Fund


Assets Under Management in billions

45.0 45.6 44.2 47.0 46.0

6.2 7.2 8.612.8 18.9

F Y 1 4 F Y 1 5 F Y 1 6 F Y 1 7 F Y 1 8

Principal ERA


Principal

Contributions Since Inception In billions

Constitutional deposits from mineral revenues $ 16.9

Transfers from the ERA for Inflation Proofing $ 16.2

Special Appropriations from ERA and GF $ 7.1

The Principal is constitutionally established and permanently protected; it can only be used for income-producing investments.

The Principal is built through: royalty deposits; inflation proofing; and other special appropriations.

As of 6/30/2018


The Board of Trustees emphasized the importance of inflation proofing by unanimously adopting Resolution 17-01 during their September 2017 Annual Meeting.

Directing APFC to identify and pursue legislative support for inflation proofing the Principal of the Alaska Permanent Fund to preserve the purchasing power for all generations as stated in AS 37.13.020.

AS 37.13.145 (c) provides the inflation proofing mechanism which is calculated at the end of the fiscal year. Historically, the Legislature has included an estimated amount in the language of the operating budget to fulfill this statutory obligation.

The Legislature appropriated FY19 inflation proofing estimated to be $942 million.

Inflation Proofing

In millions

Fiscal Year

Inflation Transfer

Royalty Deposits

2009 $1,144 $651

2010 $0 $679

2011 $533 $887

2012 $1,073 $915

2013 $743 $840

2014 $546 $779

2015 $624 $600

2016 $0 $285

2017 $0 $365

2018 $0 $310

2019 $942* $416*

* Estimated based on projections


Earnings Reserve Account

The Earnings Reserve Account (ERA) is established in Alaska Statutes as an account to hold the realized earnings from the Permanent Fund’s investment portfolio.

The ERA can be appropriated (spent) by the Alaska State Legislature for any state purpose.

Historically, the ERA has been used to support the investment management and operations of the Fund, other state agencies involved with collecting royalties and distributing dividends, and to pay dividends to eligible Alaskans.


Paid out of ERA = $27.8 B

Dividend Transfers

GF Appropriations

Alaska Capital Income Transfers

Transfers from ERA to Principal = $20.6 B

Inflation Proofing

Special Appropriations

Unspent Realized Earnings in ERA = $13.7 B

Use of Fund Earnings from ERA Since Inceptionas of June 30, 2018


Throughout the 30th Alaska State Legislature much of the debate focused on the use of the Alaska Permanent Fund as a source of revenue to support state government by establishing -

a sustainable draw amount,

the distribution of those funds for dividends and general government,

the need to inflation proof the Principal of the Fund.

SB 26 passed the Legislature in May 2018 and was signed into Law in June 2018.

SB 26 – Chapter 16 SLA 18


POMV Draw from the Earnings Reserve Account (ERA)

Provides for a POMV draw of the average market value of the Fund for the first five of the preceding six fiscal years

5.25 % - Effective July 1, 2018 (FY19) and steps down to 5.0 % - Effective July 1, 2021 (FY22)

Subject to annual appropriation by the Legislature

The Legislature has the power of appropriation to designate the % that will go to pay dividends and the % that will go to general government.

Appropriation Limit from ERA

Stipulates that the Legislature may not appropriate from the ERA to the GF an amount that exceeds the POMV %.

Royalty Deposits

Maintains the constitutionally required 25 % of royalty deposits to the Principal of the Fund, and 50% of deposits from leases issued after 1979, which are above the constitutional requirement.

Inflation Proofing

Maintains existing inflation proofing mechanism, and places the inflation proofing transfer outside of the amount available for appropriation under the POMV draw.

SB 26 – Statutory Provisions

How We Invest


Board of Trustees As the fiduciaries, the Trustees have a duty to Alaskans in assuring that the Fund is managed and invested in a manner consistent with legislative findings: AS 37.13.020

The Permanent Fund should provide a means of conserving revenue from mineral resources to benefit all generations of Alaskans.

The Permanent Fund’s goal should be to maintain safety of principal while maximizing total return.

The Fund should be used as a savings device managed to allow the maximum use of disposable income from the Fund for the purposes designated by law.


Board of Trustees

As Fiduciaries of the Fund, Full Authority to Make Investment Decisions.

•Provide Authority to Invest Within Set Bands

•Approve Target Asset Allocation

•Adopt Investment Policy

Chief Executive Officer

Assures Strategies Adopted by the Board are Successfully Implemented

Chief Investment Officer

Makes Strategic and Tactical Allocations to Allow the Fund to Grow in Value

Portfolio Managers

Responsible for the Investment and Performance of Each Asset Class

Investment Oversight

AS 37.13 .120 Investment Responsibilities – Mandates Use of the Prudent Investment Rule


38%

22%

12%

11%

7%

5%5%

Target Allocation FY19

The Portfolio

41%

21%

12%

6%

6%

10%

4%

Allocation as of 6/30/2018Public Equities

Fixed Income Plus

Private Equity & IncomeOpportunities

Real Estate

Infrastructure, Credit, & IncomeOpportunities

Asset Allocation Strategies

Absolute Return


The Board of Trustees continue to work towards an optimal mix of in-house versus external management capabilities based on resources and opportunities.

Management of the Fund

62%

38%

FY17

External Internal

66%

34%

FY16

59%

41%

FY18estimates based on unaudited results

Outcomes


FY18 3 Years 5 Years Since Inception

Total Fund 10.74% 7.96% 8.91% 8.86%

Passive Index Benchmark (60 Stocks | 20 Bonds | 10 RE | 10 TIPs)

7.83% 6.49% 6.81% Not Available

Performance Benchmark

8.20% 7.08% 7.55% 8.98%

Total Fund Return Objective | CPI+ 5%

7.87% 6.83% 6.54% 7.68%

Fiscal Year 2018 Performance as of 6/30/2018


Value Generated

Revenues $ 5,671,500,000Operating/Investment Expenses $ 138,800,000

Value Generated based on 251 Active Trading Days thru FY18 Total Fund$5.67 B / 251 = $22.6 M per day

Statutory Net Income$6.3 B / 251 = $25.2 M per day

APFC Staff is actively engaged in making direct investments and overseeing our external manager partnerships:

APFC = 47 PFT / 2 PPT / 2 Summer Interns + 10 new PCNs in FY1928 External Public Equities Managers5 Real Estate Advisors Private Markets Partnerships:

Fund to Fund / Co - Investments / Direct Investments

Looking Forward


Callan’s Capital Markets Forecastas of April 2018

Asset CategoryProjected 10-Year

Geometric Return

Annualized Standard

Deviation

Global Equities 7.05% 18.85%

Cash Equivalents 2.25% 0.90%

US TIPS 3.00% 5.25%

US Fixed Income 3.00% 3.75%

Investment Grade Credit 3.55% 5.05%

Non US Fixed Income 1.40% 9.20%

Emerging Markets Debt 4.50% 9.60%

High Yield Fixed Income 4.75% 10.35%

Global REITS 6.40% 20.30%

Global Listed Infrastructure 6.40% 17.25%

Private Equity 8.50% 22.00%

Real Estate 5.75% 16.35%

Private Infrastructure 5.75% 14.50%

Absolute Return 5.05% 9.15%Methodology Description and Key AssumptionsCallan Associates Inc. April, 2018

TOTALUnrealized FUND

FY-Begin Dedicated (1) FY-End Gain (Loss) FY-End Non- Acct. FY-End FY-EndContrib. State Inflation Balance FY-End spendable Net Div/POMV Inflation Balance FY-End Assigned FY-End

FY Balance Revenues Proofing Contributions Balance Balance Income (2) Transfer (9) Proofing ACIF Realized Balance Balance FY Balance09 29,149 651 1,144 30,945 (1,449) 29,496 (6,394) 875 1,144 0 (5) 441 (21) 420 09 29,91710 30,944 679 0 (9) 31,624 421 32,045 3,517 858 0 (6) 0 (5) 1,194 16 1,210 10 33,25511 31,624 887 533 33,044 4,788 37,832 6,812 801 533 13 (5) 2,016 292 2,308 11 40,14012 33,044 915 1,073 35,033 3,220 38,253 (100) 605 1,073 17 1,905 175 2,081 12 40,33313 35,033 840 743 36,615 4,184 40,800 4,314 604 743 30 3,487 567 4,054 13 44,85314 36,615 779 546 37,941 7,062 45,002 6,848 1,235 546 32 5,237 975 6,211 14 51,21415 37,941 600 624 39,165 6,473 45,638 2,384 1,373 624 24 6,147 1,016 7,162 15 52,80016 39,165 284 0 39,449 4,750 44,199 398 (6) 696 (7) 0 (8) 18 7,649 921 8,570 16 52,76917 39,449 365 0 39,814 7,155 46,969 6,676 0 0 (8) 25 10,863 1,952 12,816 17 59,78518 39,814 353 0 40,167 5,863 46,030 5,526 726 0 (8) 43 16,461 2,403 18,864 18 64,894

Lo 19 40,167 416 913 41,496 1,254 42,751 (3,524) 2,723 913 21 15,813 478 16,291 19 59,042Mid 19 40,167 416 913 41,496 5,689 47,186 3,615 2,723 913 27 16,700 2,290 18,989 19 66,175Hi 19 40,167 416 913 41,496 8,581 50,077 8,746 2,723 913 33 17,586 3,637 21,223 19 71,300

20 41,496 402 943 42,841 5,804 48,646 4,069 2,933 943 27 16,769 2,272 19,041 20 67,68721 42,841 405 973 44,219 5,931 50,150 4,158 3,090 973 27 16,737 2,245 18,982 21 69,13222 44,219 400 1,004 45,623 6,054 51,677 4,247 3,092 1,004 27 16,759 2,224 18,983 22 70,66023 45,623 403 1,036 47,061 6,189 53,250 4,336 3,256 1,036 27 16,674 2,193 18,866 23 72,11624 47,061 413 1,068 48,542 6,331 54,874 4,423 3,364 1,068 27 16,531 2,156 18,687 24 73,56125 48,542 433 1,102 50,077 6,478 56,555 4,510 3,436 1,102 27 16,367 2,117 18,485 25 75,04026 50,077 454 1,137 51,668 6,629 58,297 4,599 3,510 1,137 27 16,182 2,076 18,258 26 76,55527 51,668 463 1,173 53,304 6,785 60,089 4,690 3,584 1,173 27 15,975 2,033 18,009 27 78,09728 53,304 479 1,210 54,992 6,944 61,937 4,783 3,658 1,210 27 15,748 1,989 17,736 28 79,673

Cumulative Totals Proj. for FY19-FY28 4,267 10,558 43,431 32,647 10,558 272

Assumptions: Total Return - Inflation = Total Real Return Statutory ReturnLo FY19 -5.25% 2.25% -7.50% Lo 5.00%

Mid FY19 (3) 5.95% 2.25% 3.70% Mid 6.40% Ending Fund ValueHi FY19 14.00% 2.25% 11.75% Hi 7.80% (ex Am Hess)

FY20-FY28 (4) 6.55% 2.25% 4.30% 6.40% FY17 $ 59,360.6 FY16 52,344.9

Notes related to financial history and projections: FY15 52,375.9 (1) FY14 50,789.4 (2) FY13 44,428.9 (3) $ 51,860.0 (4) Future returns are based on 2018 Callan capital market assumptions and median expected returns (the mid case). Actual results will vary. (5)

$ 2,722.6 (6) The statutory inflation calculation for FY 2010 was -.36%; therefore, there was no inflation proofing transfer during FY 2010.(7) The dividend transfer reported for FY16 was paid out in dividends during FY17.(8) There was no appropriation for inflation proofing in FY16, FY17 and FY18.(9)

FY18 $ 64,469.7 FY17 59,360.6 FY16 52,344.9 FY15 52,375.9

Interest, dividends, real estate & other income $ 82.9 Statutory net income (loss) $ 253.0 FY14 50,789.4 Realized gains (losses) on the sale of assets 181.3 Unrealized gains (losses) on invested assets 583.4 $ 55,868.1 Less operating expenses (9.6) AK Capital Income Fund realized earnings 1.7 Less AK Capital Inc. Fund realized earnings (1.7) $ 838.1

$ 253.0 $ 2,933.1

ALASKA PERMANENT FUND FUND FINANCIAL HISTORY & PROJECTIONS

Projections extend ten years, and are based on best available information ($ in millions)

Assigned Fund Balance - Earnings ReserveNonspendable Fund Balance - Principal

as of July 31, 2018

FY19 POMV Distribution

Statutory Distribution

Average Value

DistributionsUnrealizedGain (Loss)

During FY 2009, the ACIF realized losses of $33.3 million, which are excluded from statutory net income, and are included in the ending unreserved balance as a deficit account. During FY 2010 and FY 2011, the ACIF had realized income of $20.8 and $25.3 million, which is excluded from statutory net income, and served to reduce the FY 2009 deficit.

Dedicated State Revenues in current and future fiscal years are based on the Spring 2018 Department of Revenue forecast. Accounting net income is based on United States Generally Accepted Accounting Principles (GAAP).Current year returns and inflation are based on 2018 Callan capital market assumptions. Actual results will vary.

Average Value

FY20 POMV Distribution

Statutory Distribution

Income Year-to-Date as of July 31, 2018

FY19 Statutory Net Income FY19 Accounting (GAAP) Net Income

Per AS 37.13.140, beginning in FY19, transfers are based on a percent of market value (POMV) calculation and are to the General Fund. In previous years, transfers were based on an earnings calculation and were to the Dividend Fund.

Ending Fund Value (ex Am Hess)


Growing The Fund

Initiatives:• FY17

– $4.05 million capital appropriation for renovation & expansion of our offices at 801 W. 10th St., Suite 302, Juneau, AK

• FY19– 10 new positions

InvestmentsCompliance OfficerAccountingInformation Technology

Why:• Allows APFC to review due diligence

and invest in more global opportunities

• In turn reduces fees paid to outside managers, increasing APFC’s returns


www.apfc.org

Annual Report Daily Fund Market Value Financial Statements Performance Reports Current and Historical

Reports Fund News

Questions ?

Documents

Alaska State Chamber of Commerce - Commonwealth North · Callan’s Capital Markets Forecast as of April 2018 Asset Category Projected 10-Year Geometric Return Annualized Standard