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State investment managers move to counter possible market downturn

  • Author: Pat Forgey
  • Updated: September 28, 2016
  • Published December 4, 2014

JUNEAU -- Here's another financial worry for Alaska and new Gov. Bill Walker.

Stock markets and many other investments have been on a tear recently, adding to Alaska's billions in savings and bulking up the state's troubled retirement trust funds.

But Department of Revenue staff and their outside advisers are worrying that markets may be headed for a fall.

Markets, especially stock markets, go up and down regularly and are currently "pricey," said Gary Robertson with Callan Associates, which advises Alaska agencies on investments.

He warned that markets have risen for so many years that they are likely to go down, because they always do, referring to the Wall Street adage about market cycles that "trees don't grow to the sky."

The last several years have been extraordinary, but "things just don't grow to the sky," he told the Alaska Retirement Management Board.

The Department of Revenue's chief investment officer, Gary Bader, translated that for Alaskans.

"We don't know when it is going to snow, but winter is going to come, and there will be snow," he said.

He recommended changes into more conservative investments, several of which the board made Thursday while meeting in Anchorage.

"We're trying to position us for the snow," he said.

But the changes were modest, he said, because the retirement trust funds have to be invested aggressively enough to meet an expected 8 percent average annual gain.

"We can't put our head in the sand," he said.

The new investments are being made in strategies that don't necessarily correlate with stock market returns, because the $26 billion in retirement trust funds that Bader oversees for the board are already heavily exposed to stocks due to how poor bond returns have been in recent years.

"We think it is wise to be positioned in a fashion were we will have less severe impacts if there is a market decline," he said.

Economists think market cycles seem to last about six years on average, he said.

"We have had more than six years of a bull market," Bader said. "Surely there will be a market decline."

The $50 billion Alaska Permanent Fund is managed separately and does not directly affect the state budget.

Alaska also has nearly $12 billion in the Constitutional Budget Reserve Fund, which the Department of Revenue also manages. A portion of that is invested very conservatively, but a subaccount is managed much more aggressively. In some years, those investments have added $1 billion to state savings, which are now available to be tapped to cope with anticipated deficits.

But a look at 2009 highlights the risks that Bader warned of.

During the stock market declines that year, the CBR's subaccount lost 15 percent, while the more conservatively managed portion gained more than 5 percent.

Contrast that with 2014, when the subaccount gained nearly 16 percent, while the conservative portion lagged at 1.35 percent.

But when the CBR losses of 15 percent happened in 2009, high oil prices were filling state coffers with money and bulking up those reserve funds even more. Now, deficits are anticipated for years to come and market declines could limit the ability of those funds to help out.

But Bader also warned it is difficult to time when market changes will come about. After the 2009 stock market crash, many public employees put their self-directed retirement savings -- $3 billion or more -- into conservative Treasury bill investments.

"I think people, when they entered that fund, they knew they weren't going to make a lot of money, but at least they weren't going to lose it," he said.

But now, years later, that money is still there and has missed the big stock market run-up.

"They're essentially earning nothing on their investment," Bader said.