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Alaska Permanent Fund managers see opportunity in low oil prices

  • Author: Pat Forgey
  • Updated: September 28, 2016
  • Published March 1, 2015

JUNEAU -- Low oil prices have Alaska's leaders in a state of anxiety, but the investment managers of the Alaska Permanent Fund are responding in their own way, and looking for investments that will allow the fund to take advantage of the global dip in crude costs.

While some are anticipating a rebound in collapsing oil and gas prices, others appear to be anticipating a long period of low oil prices.

Among those who think low oil prices are here to stay are some of the fund's top managers, the Alaska Permanent Fund Corp. Board of Trustees heard while meeting in Juneau last week.

But those managers also said while Alaska was hurting due to low oil prices, and royalties flowing into the fund have slowed dramatically, that might open up opportunities elsewhere.

Crestline Investors, which manages hedge fund investments for the permanent fund, said it thinks prices will stay low.

"I think we're in a new supply world, and I think you've got to find the new normal," said Doug Bratton, CEO of Crestline.

In oil-importing countries such as China and India, low oil prices mean a significant boost to their economies as money their citizens once used to pay for gas can now be spent elsewhere.

Another who said he thinks oil prices will remain depressed is Jay Willoughby, the permanent Fund's chief investment officer, who brought Lazard Asset Management Director Christian Frei to Juneau to talk with trustees about investment opportunities in Asian countries that may benefit while Alaska's finances suffer.

Frei said China has had a period of intense growth and change, but those changes are opening new ways for smart investors to make money.

There are big opportunities in public health, Frei said, ranging from sanitation systems to hospitals.

"China is hugely under-invested in hospitals," he said, and investors can help meet growing demand for health care.

China is trying to catch up with the U.S. in many areas, but has caught it in diabetes, he said.

"When you go from a lean vegetarian diet to eating Big Macs, bad things happen to your body," he said.

That, coupled with new Chinese wealth, is now creating a demand for more medical services, Frei said.

Another challenge in those emerging nations is pollution, where clean air has in the past been sacrificed for the sake of economic growth, but that is now changing.

"The good thing is, when politicians can't breath their own air, they tend to change things," he said.

China is "trying to learn, or re-learn, capitalism on the fly after abandoning communism" while India is opening its economy after having been "basically socialist" and Russia-leaning in the past, Frei said.

Trustees wanted to know how safe investments made in India and China would be, and Frei acknowledged those country's legal systems presented challenges.

"It's very hard to enforce contract law in China," he said.

In India, where there is an established British-style justice system, legal issues can take a long time to resolve, he said.

And might Alaska's investments get nationalized in China? asked trustees.

"You don't get nationalized," Frei responded, but there are still concerns. Sometimes a company which should be highly profitable will have very low-priced stock. That likely means investors fear that company's profits are being stolen and are not going to the shareholders, he said.

What's needed to invest successfully in any area, he said, is to hire "local money managers, with boots on the ground."

What makes China and India especially attractive for Alaska, compared to other investments, is that they are "inversely correlated" to the permanent fund's source of revenue, Frei said.

When oil prices are down in the $40-a-barrel level, that can add to gross domestic product in China.

India is a more consumption-based economy, he said. It has new opportunities as Indians are becoming tourists, and as its "Bollywood" film industry is exporting movies to other countries.

Permanent fund CEO Mike Burns said Lazard is already an important emerging market fund manager for Alaska, but its informational presentation was not tied to any specific investment.

"These are huge economies that are going to be a big part of our portfolio one way or another," he said. New China and India investments might include companies, infrastructure or real estate, he said.

The trustees were also told that the permanent fund is positioned to make money directly from direct investments in the oil and gas industry.

The permanent fund decided to move investments into oil and gas a year ago, when private equity investors Carlyle Group (co-founded by David Rubenstein, husband of Alaska Dispatch News Publisher Alice Rogoff) and Riverstone Energy were selected to lead investment of as much as a $1 billion of permanent fund money in the sector.

The good news, Willoughby told the trustees, is little of that commitment had been spent by the time oil and gas prices -- and company profits and values -- plunged.

Now, the two firms are poised to benefit from low prices.

"They've got guys on the ground hunting for good investments," Willoughby said.

"It's not like they're Johnny-come-latelys, hopefully we are going to have some good opportunities on that front," Willoughby told trustees.

While many oil and gas companies have seen their values fall, that can provide opportunities to buy strong companies that have fallen along with weak companies, he said.

"I'm actually really excited about the prospects in energy," he said.

The permanent fund is fortunate Riverstone and Carlyle hadn't invested much of that allocated money when prices began falling, and have another $850 million yet to invest.

"The good news is they haven't deployed that much," Burns said. "What they have deployed could be problematic, but most of it is still dry powder."

Burns also said, as the fund has grown, it has meant that the royalty money flowing in represents a smaller and smaller percentage of the fund.

"The royalties are a whole lot less right now," he said. "Sure, I'd rather have 800 or 900 (million dollars per year) or whatever had been going into the fund, but in a $53 billion fund it's not going to change strategy that much."

And that decrease won't have any immediate impact on permanent fund dividends, which are paid from money the fund earns on its investments, and are not tied to annual royalties.

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