Global financial markets are in the midst of turmoil unseen in the past 75 years. Given this investment climate, it is no surprise that the Alaska Permanent Fund has been hit with losses similar to those suffered at other large investments funds, as well as businesses and individual retirement accounts around the world. As a member of the Fund's board of trustees, I believe that Alaskans deserve to know how the board is responding.
A recent opinion column in the Anchorage Daily News suggested that the Alaska Permanent Fund Corp. staff and board had not responded to the current market crisis (Gregg Erickson, Nov. 30). The writer even suggested that this lack of response was possibly the result of Gov. Palin being out of state and thus not here to give direction to the Trustees.
The accusation is not only unfair to Gov. Palin, it is also dangerous to suggest that any Alaska governor should play a direct role in investment decisions for the Fund. Alaska law properly shields the management of the Fund from politics and popular opinion. As their terms expire, Gov. Palin appoints the public board members, and then must step back and allow the board to do its job.
When the board sets the Fund's investment strategy (known as its "asset allocation"), we do not focus on short-term market conditions. We focus on the long term, building a portfolio that is well diversified and will help the Fund maximize return while minimizing risk over time.
The asset allocation is reset at least annually and is based on input from a large number of advisers, both inside and outside the APFC. We do not attempt to guess on the overall market, individual stocks and bonds, or on which class of assets looks the strongest for the coming year. Instead, we adopt an asset allocation that will provide the best risk-reward balance we can create, knowing the markets could move in any number of directions.
Markets do move, constantly changing the value of the assets we hold. When this happens, we need to "rebalance" the Fund's assets to bring them back in line with the adopted asset allocation. This means we sell from the investment classes that are doing well (thus becoming too large a percentage of the Fund's overall value), and buy from the investment classes that are under their asset allocation range.
Given the significant drop in value across a number of our asset classes, the Fund has recently gone out of balance from our established asset allocation. The opinion writer suggested that because the staff had not immediately rebalanced the Fund, something was amiss. This is not the case.
Rebalancing takes careful thought and strategy and must consider the timing, magnitude and sources of rebalancing. The board looks to APFC staff to identify the most advantageous methods to rebalance. It is no surprise that, given the unprecedented nature of recent market movement, staff is carefully evaluating the options for rebalancing.
The opinion writer also suggests that the governor's office has not been responsive to other administrative issues facing the APFC. Again, this is not true. A question was raised internally regarding whether moneys could legally be paid out of the Permanent Fund to cover the APFC's operating expenses when the Fund's value has declined to such a large degree. The APFC believed that it could, and sought guidance from the governor's budget office (OMB) and Department of Law. Within a week we received confirmation that both OMB and Law agreed with the APFC's interpretation of our operating statutes.
Alaskans can take comfort that the Permanent Fund board of trustees is well aware of the issues currently facing the global markets in general, and the Permanent Fund in particular. We are working with our professional staff and consultants to respond appropriately to weather this storm and protect the Permanent Fund for Alaskans' long term benefit.
Pat Galvin is commissioner of the Alaska Department of Revenue and sits on the Alaska Permanent Fund board of trustees.
By PAT GALVIN