Alaska in a Basket: The ETF Frontier

The State Stock Ticker

The idea for AKAF as a state-based fund grew from the observation that Alaska has one of the most distinct economies in the country. For instance, when the Lower 48 suffers with high oil prices, Alaska reaps investments and tax revenue. When unemployment drops in the Lower 48, historically it would rise in Alaska, and vice versa. Thus, Alaska’s economy is a hedge bet compared to the broader market.

Prospr CEO Derek Kreifels says his company and Vident quickly realized they could build an entire fund around companies doing business within the state.

“We’re the ones that saw the gap and really brought the idea forward,” says Kreifels. “Our role was making the case for why Alaska deserves its own stock ticker, and really to connect the fund to the people and institutions who know this economy from the inside.”

ETFs can be designed around any theme imaginable, but for an Alaska-branded product, Prospr and Vident sought input from the state government. The Alaska Department of Revenue supplied granular economic data, putting corporate filings into context when defining what counts as a meaningful economic presence in Alaska. This methodology considered employment footprints, capital investment, and critical supply chain involvement.

The public-private partnership, the first of its kind for an ETF, is built with strict boundaries around government involvement. The State of Alaska did not seed AKAF with public tax dollars nor appropriate state funds to purchase AKAF shares. State personnel are not involved in fund management; Vident is the manager of record, and Prospr is a consulting partner. The state government does not, and cannot, guarantee financial returns.

However, the Department of Revenue’s involvement contributed several operational and strategic advantages that Vident and Prospr couldn’t replicate themselves. It established credibility in an ETF market that is wary of funds that contain arbitrarily chosen assets. It also creates a standard by which other institutional investors can capitalize on Alaska.

Vident uses four primary criteria to evaluate the business activities of publicly traded companies in Alaska. The first pertains to companies that contribute to economic development by generating tax revenue or strengthening other aspects of the statewide economy. The second relates to companies that use or manage Alaska’s natural resources. Third are companies making capital investments within the state, such as purchasing land or constructing buildings or infrastructure. And finally, companies with government-related initiatives through state, municipal, or tribal governments.

One additional expectation applies to all companies that meet the primary criteria. “If one of the public companies is saying anything or doing anything that works against another Alaskan interest, then we don’t include them in the fund,” says Kreifels. As the CEO of the State Financial Officers Foundation, Kreifels has criticized what he calls “political extortionists” promoting “woke capitalism.”

Notably, the AKAF portfolio currently avoids major financial stocks such as Goldman Sachs, JPMorgan Chase, Citigroup, Morgan Stanley, Bank of America, and PNC Bank, which pledged to refuse financing oil and gas development in the Arctic. Wells Fargo, despite such a policy, is a component of AKAF, however, due to its retail presence in Alaska. The fund also invests in KeyBank, which has no stated exclusion of Arctic energy financing.

Done Differently in Alaska

Why not simply choose a basket of Alaska-based companies, such as those listed in the Top 49ers, and let investors buy into them via AKAF? Not so fast; hardly any of the largest Alaska-based companies are publicly traded. Alaska Native corporation shares are restricted; many other companies are privately held. GCI and Northrim Bank are major exceptions, both traded on the NASDAQ, and a few others raise capital on the over-the-counter market, mostly through mineral ventures.

Because there are so few publicly traded companies headquartered in Alaska, Nandakumar says developing the selection criteria took some creativity.

Vident looked at the companies and industries that have a major impact on Alaska’s economy. To date, industrials, energy, and materials together account for more than 60 percent of the portfolio, with additional positions spanning transportation, mining, tourism, and consumer companies tied to the state’s economy.

An investment fund like AKAF functions as a sum of its parts, so its success depends on the performance of the fund’s holdings. The current top ten holdings include companies involved in oil, gas, and fuels; ground transportation; energy equipment and services; air freight and logistics; and hotels, restaurants, and leisure.

Every six months, a committee meets to rebalance the fund’s holdings to ensure companies still meet the criteria. Rebalancing can affect a fund’s performance, as AKAF proved after its six-month rebalance, during which its holdings grew from 136 to 147 companies, with a revised list of top ten holdings. At that point, AKAF’s performance increased significantly compared to the S&P 500.

Kreifels says some companies included in the fund are ones many Alaskans interface with regularly. For example, DoorDash, known for its food delivery service, has consistently performed well alongside more obvious heavy-hitters such as ConocoPhillips and ExxonMobil. Part of this is due to the innovative ways Alaskans use DoorDash’s services for more than food.

“Think of the mechanic fixing a truck in Soldotna who needs a part that he can’t get shipped for five days or four days, but a courier can bring it from Anchorage the next day,” says Kreifels. “Those are the fun and surprising stories that we are revealing through this fund. It sounds crazy, but it’s an important part of the Alaska experience.”

For Svorec, buying into AKAF early was an “investment from the heart,” a way of giving back to a state that has not only welcomed her family as visitors but welcomed her son as a student within the University of Alaska system.

“This is not our first investment. We’ve made many investments focused on our future,” explains Svorec.

Understanding the Market

As much as Nandakumar believes in AKAF’s growth potential, she also has a responsibility to remind potential investors to do their research before adding an asset to their portfolio.

AKAF currently has 90,000 shares outstanding for a market price of about $32 apiece. It has a thirty-day yield of 1.26 percent, and by the time of its first anniversary, AKAF generated an annualized return of 21.91 percent, outperforming the S&P 500, which generated 15.12 percent over the same period.

“Outperforming the S&P 500 not only validates the fund but also the companies that choose to do business in Alaska,” says Nandakumar. “It should encourage people to continue doing business in Alaska and increase their presence in the state. The more that any of these companies do business in Alaska, the more it will benefit the people who live there.”

Despite the risks associated with all investments, Nandakumar says AKAF is a great way for Alaskans to invest in their own success.

“If you’re an Alaska resident or you believe in Alaska’s long-term economic story and growth potential, then you should really consider investing in this fund,” says Nandakumar. “We’ve done a great job of creating a fund that ‘looks like Alaska.’”