The new chief investment officer of the $54 billion Alaska Permanent Fund arrives in Alaska at a crucial time, with the fund potentially playing a new role in state government as the governor and others consider tapping it to fill some of the revenue void once filled by oil.
Russell Read, who started work in May and earns $400,000 a year, must also shepherd the fund through an uncertain investing era, with once-reliable bond yields hitting historic lows, forcing money managers to continue finding alternative sources of income.
In an interview with Alaska Dispatch News, Read, 53, described the kind of investment opportunities he and his team are watching for, including in emerging markets such as India, and in market "dislocations" like the recent Brexit vote in the United Kingdom that offer buying opportunities.
Read was easy to reach and open with his time, but sometimes careful with his answers, particularly when it came to discussing the fund's investments.
"Discretion is a virtue," he said.
Read, who enjoys playing trumpet and trombone, said he's currently renting a place in Juneau with his wife, Andrea. Read said he'll look to buy a home there after a year, perhaps on Douglas Island, giving him time to explore the city. A 15-year-old son, Jack, will join the family once he's done hunting for fossils in Wyoming during the summer break.
Read's resume includes two years as the former top investment officer at one of the largest public pension funds in the U.S., the now-$300 billion California Public Employees' Retirement System.
Read left CalPERS in mid-2008. In 2009, he faced criticism for having steered the fund toward more international investments, with some blaming him for a $100 billion plunge following the global financial crisis that year.
Read says internationalization had nothing to do with the downturn, because all equity markets suffered during the financial crisis. And the CalPERS fund rebounded as markets recovered, underscoring the value of staying the course through economic turmoil, he said.
"The lesson there, in retrospect, is that having a structural chunk of global stocks means you're accepting short-term volatility in exchange for what you believe will be compelling long-term returns, and that's what transpired," he said.
Here's an excerpt of the interview, edited for length and clarity:
Alaska Dispatch News: With a plateaued market and bond yields at historic lows, how can we expand the Permanent Fund and how can we derive income in the future to keep dividends what they are?
Read: The backdrop is that the old model of having diversified investments in U.S. stocks and U.S. bonds, which proved so successful in general in the 1980s and 1990s, that strategy is likely to lead to disappointment. We believe the universe of investment opportunities has not shrunk in number or in scale, but rather they have shifted. They have shifted geographically and toward other types of investment structures. For instance, global infrastructure, which results from the burgeoning demand for infrastructure not only across the industrialized markets but even more across the emerging markets, has become a major source of income opportunity. That is just one example. But it underscores that in order to produce competitive and compelling returns, including income, top managers have to expand their geographies and how they are investing.
ADN: What are your investment return goals for the Permanent Fund?
Read: The long-term return history of the Permanent Fund is quite strong since its inception in 1981, with realized returns being in excess of inflation plus 6 percent. Going forward our objectives are to produce long-term targets of inflation plus 5 percent or better. In the context of today's lower prevailing-interest rate environment, reduced expectations for long-term returns make sense going forward.
ADN: What is an emerging market?
Read: Emerging markets are vast and contain most of the world's population and likely a good portion of its future economic growth. Some of the most compelling emerging markets we look at include India, which is forecast to become the world's largest country by 2022, in which 300 million people are moving from the countryside to the city.
ADN: So that's one area where the Permanent Fund may invest more?
Read: Exactly, thematically capturing growth opportunities as well as the infrastructure needs in the emerging markets. So fundamentally, successful investing is about determining where capital can best be utilized, and structuring the investments to capture those returns.
Themes of special interest for us have (also) included biotech venture capital, and … dislocations — distress opportunities in almost any market that gets overwrought.
ADN: Was Brexit one of those (dislocations)?
Read: Brexit was an event in which many markets were affected, so with dislocations you look for value discrepancies. One particular one we saw was a large equity retrenchment in Japan, which we believe overreacted to the Brexit event, given the difference in its geography and fundamental economic relationship to the UK and the European Union.
ADN: So did the fund benefit from Brexit, and did we do it through Japan?
Read: We did. I'm not going beyond that but that was a specific instance. (But) we thought there would be more of those, so our surprise is that we identified one that worked well, and we thought … Brexit would cause more dislocations like that.
A fourth area are income-yield opportunities (including real estate investments, infrastructure projects such as docking facilities and airports, and private credit.) Another opportunity is aircraft leasing, where compelling yields are available outside of the bond market. Aircraft leasing is the idea that there are opportunities where regularized income can be produced.
ADN: So we would own aircraft and lease them out?
Read: Essentially that's right.
ADN: There are other investors?
Read: Yes, and a yield associated with leasing out aircraft, and we would participate in that much like you would see in fixed-income security.
… We (also) believe natural resources infrastructure is a major opportunity that in concept could include Alaska.
ADN: Is that being discussed now?
Read: I'll leave it at we think natural resource infrastructure is a major opportunity globally, and in concept could include opportunities even in Alaska.
ADN: So the concept could include the gas line project, or being a partner in an oil field project, is that right?
Read: … I'll leave it at that general statement, that's as close as I want to get.
ADN: Globally, what do you see happening now that we have debt levels at record highs and yields at record lows for bonds, treasuries? Do you see a crash is coming?
Read: Overall, we are optimistic about the global economy, but anticipate that the industrialized markets might be in a relatively slow growth mode for some meaningful period of time. The U.S. is likely a bright spot among industrialized countries, so tactically the combination of U.S. and emerging markets are relatively attractive for us at this time.
ADN: Does the Permanent Fund Corp. have a role or a view in the (legislative) restructuring discussions?
Read: Interestingly, we do not, as a matter of policy and practice. Our mission is very focused on producing the best returns and leaving the policy discussion for the level of the dividend and potential appropriations for state government to policymakers.
ADN: How do you keep top staff from leaving, like the two investment managers who left for apparently higher-paying jobs?
Read: Having worked for both the private and public sector, the major way to attract and retain talent is by offering great work. The Permanent Fund is a unique and compelling organization and one that can attract top investment talent, despite not being able to offer top pay. That being said, ultimately being able to offer great work for a great institution with competitive pay is going to be important for us.
ADN: Why did you come here when you can make more elsewhere?
Read: I had three job offers, and this was the lowest-paying opportunity. But this was the most interesting job and it had the best public purpose, and doing something great here at the Alaska Permanent Fund has a material impact on every resident in the state, and that was meaningful to me, and that's true across the investment staff. You wouldn't come to work for the Permanent Fund if the public purpose wasn't a draw.
ADN: What were you making at your last job?
Read: My last job was chief investment officer and deputy chief executive of the Gulf Investment Corp. in Kuwait City (an investment company owned by six Arab states on the Arabian Peninsula with $5 billion in total assets). And my compensation was a base of $500,000, with comparable bonus potential and an expat package.
ADN: How long do you see yourself living in Alaska?
Read: As long as the people of the state of Alaska would like me in this role.