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House Money

Alaska Permanent Fund Corporation investments grow more and more diverse

Photo courtesy of the Alaska Permanent Fund Corporation

This summer saw an exciting development for the Alaska Permanent Fund Corporation (APFC).

On August 1, a California-based company, American Homes 4 Rent, opened for trading on the New York Stock Exchange following a lucrative initial public offering.

The listing crowned the company’s rapid growth, with APFC coming along for the ride as an early investor. American Homes 4 Rent now ranks as APFC’s top stock holding, larger even than its positions in Microsoft, Pfizer, Exxon Mobil, and other corporate giants.

Not so many years ago, betting on a relatively obscure venture such as American Homes 4 Rent would not have been a consideration for APFC.

Through most of its history, the state’s oil wealth savings account had managed its assets conservatively, plowing money into straight-forward bond, stock, and real estate investments.

In recent years, however, this approach has changed dramatically, with APFC leadership venturing increasingly into more creative investments. Now, an IPO is just one of many sorts of sophisticated deals for APFC.

The watchword for APFC managers is diversification. They are continually looking to spread APFC’s assets across a wide range of investments so that if any one bet loses big, the others hopefully won’t. The goal is nice, steady growth, without too much boom or bust.

It’s hard to argue with the APFC’s formula thus far. In February, the fund value closed above $45 billion for the first time. For FY 2013, the fund returned nearly 11 percent.

 

The London City Airport in England is an example of the Alaska Permanent Fund Corporation’s investment in infrastructure, and real estate such as the Parc Huron apartment building in Chicago shown on page 88.

Photo courtesy of Alaska Permanent Fund Corporation

Rainforest Finance

APFC, based in rain-sodden Juneau, is four times zones and seemingly a world apart from Wall Street.

A six-member board of trustees, appointed by the governor, sets fund policy. APFC’s executive director, Michael Burns, is former president of KeyBank of Alaska.

The Prudhoe Bay discovery in the 1960s inspired creation of a fund to save some of the state’s extraordinary oil wealth. In 1976, Alaska voters overwhelmingly approved a constitutional amendment establishing the Alaska Permanent Fund.

It’s not unique. Many so-called sovereign wealth funds exist around in the world, some holding considerably more assets than Alaska’s fund. Examples of other sovereign wealth funds include Norway’s petroleum fund, Alberta’s Heritage Fund, and Wyoming’s Permanent Mineral Trust.

Part of the Permanent Fund’s investment earnings are used to pay qualified Alaska residents a dividend each year. Last year’s dividend was $878.

While the dividends are popular, the rationale behind the Permanent Fund is bigger. The expectation is that Alaska’s oil will run out someday, and savings could be vital for sustaining the state.

The important thing, APFC board chairman Bill Moran said in February, is turning “a nonrenewable natural resource into a renewable financial resource.”

And so, decisions on how to manage the fund are a heavy responsibility.

The board’s overriding investment objective is to protect the principal while maximizing total return. Its primary tool to limit risk and enhance returns is diversification.

APFC’s long-term investment goal is to achieve a 5 percent real rate of return annually.

“We’re not in the home run business,” says Burns. “We’re fairly risk-averse.”

Loosening the Reins

That’s not to say, however, that APFC isn’t interested in big scores, so long as the bets are prudent.

Over the past decade, the APFC’s investment menu has expanded tremendously. To some degree, this reflects the fund’s growing maturity and the investment diversification of other sovereign wealth funds. Also, the Alaska Legislature gradually has given managers a freer hand in how to invest the fund.

In 1977, when the Permanent Fund received its first deposit of oil revenue, the money was invested entirely in bonds, a conservative approach.

In 1983, following changes to the “statutory investment list,” the APFC made its first investment in the stock market, and later that year, in real estate.

In 1990, the APFC began to invest in foreign stock and bond markets.

In 1999, the Legislature gave managers the flexibility to invest up to 5 percent of the fund’s value in “alternative investments.”

And in 2005, in a landmark action, the Legislature removed the allowed investment list from state law.

Today, the APFC is involved with a wide array of investments such as hedge funds, private equity, and mezzanine debt. APFC even invests in infrastructure, such as airports and power plants.

To help maintain focus, the board of trustees each year sets a target allocation for Permanent Fund investments. Under the latest allocation, stocks comprise the largest slice of the investment pie at 36 percent, with smaller slices committed to bonds, real estate, private equity, and other types of investments.

The drive to diversify Permanent Fund investments is likely to continue.

For the most part, APFC hires outside firms to manage huge chunks of money. Often, these firms are among the top names in the money management business.

In July, for example, the trustees committed large sums to Blackstone and The Carlyle Group for investment in “special opportunities,” such as hedge fund general partnerships and global natural resource strategies.

 

Rent or Own?

Buying a bunch of foreclosed houses probably wasn’t the kind of investment originally envisioned for the Permanent Fund.

But that was the chance that presented itself in 2012, when the trustees approved allocations totaling $600 million to American Homes 4 Rent to purchase foreclosures.

It was a “special opportunity” investment arising out of the nation’s terrible housing crash. The idea behind American Homes 4 Rent was to grab thousands of homes across the Lower 48, renovate them, and then rent them out.

Originally, the thought was that it would be a fleeting investment, with the company existing only temporarily.

But the venture has evolved rapidly, and APFC has gotten in deeper.

B. Wayne Hughes, the chairman of American Homes 4 Rent, is a billionaire with a penchant for thoroughbred race horses and conservative politics.

Hughes made his fortune building up Public Storage, a mini-warehouse chain also listed on the New York Stock Exchange.

Other top executives with American Homes 4 Rent came out of Public Storage, and that kind of experience is great for the young company, says Burns.

American Homes 4 Rent is what’s known as a REIT, or real estate investment trust.

When APFC made its initial investment, the company owned about 1,000 single-family homes. As of July 31, the number of properties stood at 19,825. The homes are in metro areas across the country, such as Phoenix, Houston, Atlanta, Chicago, and Indianapolis.

According to a company prospectus, the country’s housing market is undergoing a fundamental change.

“Many people, who in the past might have become homeowners, are instead becoming long-term renters of single-family homes,” the prospectus says.

American Homes 4 Rent says its houses are “located in neighborhoods of cities that we believe remain desirable places to live, despite significantly impacted home prices.” The company says it targets houses with certain key characteristics: built after 1990, three or more bedrooms, worth $70,000 to $400,000, and in good school districts.

Ultimately, the management aims to build American Homes 4 Rent into “a nationally recognized brand that is well-known for quality, value, and tenant satisfaction.”

Company shares were priced at $16 for the initial public offering.

Unlike with some IPOs, the share price for American Homes 4 Rent didn’t immediately skyrocket. But it didn’t tank, either. It closed August 30 at $15.88. With nearly 20 percent of the stock, the Permanent Fund’s stake was worth more than $700 million on that date.

So, will this “special opportunity” investment turn out to be something special for the Permanent Fund in the long run?

Who knows?

What’s almost certain, however, is that APFC probably will work more deals like this in the future, with an eye toward profit and even greater diversification.

Wesley Loy is a journalist living in Anchorage.

This first appeared in the October 2013 print edition of Alaska Business Monthly magazine.

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