FUND NEWS                               Feb 18, 2005

Board pursues investment legislation, approves small-cap program

FEBRUARY 18 – The Permanent Fund may be taking on greater risk without the promise of commensurate returns due to investment restrictions in state statutes, according to two separate consultants retained by the Board of Trustees. The Board learned this information at a meeting held in Juneau on February 16 and 17. The agenda included discussion of the status of a percent of market value payout (POMV) and approval of a new small capitalization stock program.

FEBRUARY 18 – The Permanent Fund may be taking on greater risk without the promise of commensurate returns due to investment restrictions in state statutes, according to two separate consultants retained by the Board of Trustees.

The Board met in Juneau on February 16 and 17. In addition to presentations on the Fund’s investment restrictions, the agenda included discussion of the status of a POMV (percent of market value) payout and approval of a new small capitalization stock program. The Trustees were also briefed on the five-year capital market projections and the merits of active versus passive stock management.

Callan Associates and RV Kuhns were the two consulting firms asked to conduct reviews of the Fund’s current investments under the allowed list in state statute in comparison to how the Fund could be optimally structured without any restrictions. Michael O’Leary of Callan Associates and Russell Kuhns of RV Kuhns made presentations to the Board on Thursday, explaining how the Fund would benefit from greater diversification of its assets than is currently allowed in statute.

“Modern investment theory focuses on the combined risk of a total portfolio, rather than the risk of each asset type,” said Michael Burns, CEO. “In our current environment, it is important to diversify a portfolio among assets that do not respond in the same way to similar market conditions, assets which aren’t correlated in their performance. This better ensures a positive return for the Fund, lowering overall risk.”

Following the presentation, the Board directed APFC staff to pursue legislation that would allow greater investment flexibility for the Trustees. Under the current investment list, the Legislature must change the statutes to allow for new investment types. A small “basket clause” does allow up to 10% of the Fund to be invested in items not included in the legislative list, but with part of the basket already allocated, little room is available for new asset types or growth in existing assets beyond current limits.

Wednesday afternoon the Board of Trustees discussed the status of the percent of market value (POMV) payout method, and the recent discussion among business leaders and Legislators to place the payout limit in statute rather than in the Constitution.

“We still believe that a constitutional POMV would provide the best protection for the Fund, but we appreciate the Legislature’s willingness to discuss POMV in any form,” said Carl Brady, Board Chair. “A statutory POMV could be a good interim step, providing protection to the Fund while allowing the Legislature and the public to become comfortable with this kind of payout method.”

On Thursday the Board approved a new small cap manager program. Due to the nature of the small cap market, having a stable of managers with smaller allocations increases the likelihood of achieving index-beating results according to the Board’s consultant, Callan Associates. As a result, staff recommended a change from previous practice when one manager would have been selected to oversee a larger mandate. The source of funding will be the $545 million portfolio presently managed by Capital Guardian.

The nine mangers approved under the program are:
· DuPont Capital Management
· Jennison Associates LLC
· Luther King Capital Management
· Penn Capital Management
· Kalmar Investments Inc.
· Voyageur Asset Management
· Washington Capital Management
· Forstmann-Leff
· Peregrine Capital Management

In addition to the new managers, RCM, T. Rowe Price, Martingale Asset Management, Turner Asset Management and Cordillera Asset Management also manage active small cap portfolios for the Permanent Fund.

The meeting was the first attended by new Trustee, Scott Nordstrand.
“We are pleased that Mr. Nordstrand will be joining us on the Board in his capacity as Acting Attorney General,” said Carl Brady. “I hope that he will enjoy serving on the Board as much as the rest of us do.”

The next meeting will be on April 28 and 29 in Juneau.