The coronavirus outbreak has yet to reach Alaska, but its impacts are already being felt.
The Alaska Permanent Fund saw nearly $3 billion—or 4.1 percent of its total value—erased last week as the market plunged amid fears of the novel coronavirus, but the funds managers say it could have been far worse.
The fund started last week with a value of about $67.9 billion and by Friday it had fallen to $65.1 billion, according to a statement released by the Alaska Permanent Fund Corporation Monday afternoon. The point, though, wasn’t to raise alarm bells but to highlight the strength of the fund.
“We have been in the longest bull run in US history over the last 12 years. During this period, APFC has continued to build a diversified portfolio that is designed to weather many different storms. We are now in one of those forecasted storms,” said APFC CEO Angela Rodell in a prepared statement. “The events of the last few weeks emphasize how interdependent markets have become. Rather than being wholly deployed in the US stock market, the fund has a significant allocation to fixed income and cash. These are assets that are working now to limit the losses on the portfolio.”
February ended on a sour note, but the month also saw earlier gains that softened the blow. The Alaska Permanent Fund started last week up about $1 billion compared to the beginning of the month.
That means for the entire month of February, the fund lost about 2.4 percent of its value or $1.6 billion. Managers said the fund’s investment strategies softened the blow compared to the fund’s passive benchmark, which fell about 5.5 percent during February. The passive benchmark is a collection of traditional stocks and bonds outside the permanent fund used to judge the performance of the fund.
The takeaway is that it could have been a lot worse.
The fund’s resiliency looks like it will continue to be put to the test.
The stock market rallied on Monday on news that The Fed would be slashing interest rates to insulate the market from coronavirus, but Tuesday was a mixed bag as the market once again saw losses. APFC Chief Investment Officer Marcus Frampton noted that the fund went into February in a conservative position and said he hopes it will help in the coming months.
“Given elevated valuations prevalent in public stock markets and the team’s assessment of the risk/return tradeoff in markets, the Fund has been positioned more conservatively than normal going into February,” he said in the prepared statement. “While a drop-in value is always very difficult, I’m gratified that the team’s positioning of the portfolio served us well last week in a tough market. In this challenging market environment, the Fund has performed well, and we are positioned to weather any future volatility.”
Rodell also noted that the fund is positioned for the long-term. The losses and gains in the fund’s value are also unrealized, meaning they don’t translate into spendable dollars until they’re sold.
“This market will recover. It may not be in the timeframe we all would like, but history tells us these events do not last indefinitely. We have seen tough losses before and have been able to recoup and actually build an even stronger base,” she said. “Our team at APFC is working hard to find the new opportunities this market provides while limiting the downside of the Fund.”
Why it matters
The health of the Alaska Permanent Fund is increasingly important to the overall state government operations as the Legislature has begun to turn to the fund’s earnings to fund the budget in the wake of the collapse of oil revenues.
It’s facing additional political pressures as Gov. Mike Dunleavy pushes to spend beyond that spending limit in order to pay out a large dividend according to the statutory formula that has been ignored for several years by the Legislature.
On the flip side, the Legislature not only has refused to consider big withdrawals past the spending limit but it’s seeking to protect more of the fund from political pressures by transferring money from the unprotected earnings reserve account to the constitutionally protected corpus of the fund.
The Alaska Permanent Fund Corporation has opposed this idea, warning that market crashes—like the coronavirus-induced drop—could take the earnings reserve account to zero very quickly.
Much of the talk about the outlook of the fund has focused on long-term outlooks and probabilities, but the coronavirus could put that planning to the test.