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APFC Board hires stock, mezzanine debt and real return managers

FEB 24 - The APFC Board of Trustees hired four new managers and approved changes to the stock, bond and absolute return investment policies at its regular meeting on February 23 and 24 in Juneau.

The Board hired managers for a new allocation to mezzanine debt, which was approved at the December meeting. Oaktree Capital Management and Audax Management Company will receive initial allocations of $250 million each.

"We believe that mezzanine debt is a good addition to the Permanent Fund's portfolio because it provides returns in line with high yield bonds, but at lower risk levels," said Board Chair Steve Frank. "As a fund with a long term investment horizon, we're well suited to take advantage of investments that reward our ability to make longer term commitments."

Mezzanine debt provides a financing tool for private corporations to fund actions such as acquisitions or general corporate growth. Mezzanine debt has characteristics similar to both equity and debt, and falls ahead of equity but subordinate to senior debt in a company's capital structure.

The Board also approved hiring GMO as a real return manager with an initial allocation between $250 and $500 million. In May, 2009 the Board approved a search for four real return managers. At the conclusion of the manager search, APFC staff identified five managers as potential candidates, all of which were approved by the Board in December. Because the initial funding was limited to four managers, on Wednesday staff asked for additional funding for GMO, the remaining firm on the list.

In addition, the Board approved the hiring of Dimensional Fund Advisors (DFA), an international small-cap stock manager, for two small-cap mandates of $200 million each. DFA takes a quasi passive approach to stock management, systematically building portfolios that provide a broad approach to a market rather than actively picking stocks that are expected to outperform. This addition is part of a larger strategy to focus on the active managers that are providing the most benefit, while shifting more of the stock portfolio toward lower-cost passive strategies.

The two-day meeting also included the following items:

  • A review by Michael O'Leary of Callan Associates on the Fund's performance for the second quarter of FY2010.
  • A presentation by Michael O'Leary on Callan Associates capital markets outlook.
  • A presentation by one of the Fund's four current real return managers, Goldman Sachs.
  • Approval of changes to the absolute return investment policy including clarifying the types of investments that may be included in the absolute return portfolio.
  • Removal of the Barclay's Aggregate Index Corporate Bond subsector limits on the APFC internal bond portfolio.
  • Approval of changes to the stock portfolio investment policy, including delegating authority to staff to create and implement changes to the passive and quasi-passive strategies and set managers' benchmarks.

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