The key to consistent returns is diversification, says Alaska’s sovereign wealth fund

In the nearly 50 years since Alaskans overwhelmingly voted to create the Alaska Permanent Fund, it has become a globally recognized sovereign wealth fund and a household name for every Alaskan. It symbolizes the conservative nature and strength of character of our forebearers, who saved a portion of their generation’s money earned from Alaska’s natural resources to provide financial benefits for all generations to come. The Alaska Permanent Fund Corporation and our dedicated team are tasked with and committed to protecting and growing the Permanent Fund for the benefit of every Alaskan.

Alaska’s Permanent Fund has been an incredible success in achieving the shift from one-time resource revenue to a source of investment-driven renewable revenue. The first annual deposit of oil royalty revenue into the Permanent Fund was $734,000 in 1977. In the years since then,nearly $20 billion of state resource revenues have been saved and are part of the constitutionally protected Principal of the Permanent Fund. An impressive achievement for our State, but dwarfed when compared to the investment performance during the same time frame that generated earnings totaling over $105 billion from our resource revenue savings.

Fund earnings have been appropriated to pay the Alaska Permanent Fund Dividend, grow and inflation proof the Permanent Fund’s Principal, and provide for state services. The permanently protected Principal has grown to $58.8 billion through royalty deposits, inflation proofing, and special appropriations. $47.5 billion has been paid out to support dividends and funding for state services, and the balance of earnings has yet to be used.

The Alaska Permanent Fund Corporation’s investment strategies and tactics are designed to make sure that Alaskans consistently benefit from their Fund in as broad a swath of economic times as possible. At the heart of APFC’s strategy is an investment tactic referred to as diversification, or the practice of having a variety of investments that react differently from one another.

Diversification is a means of stabilizing returns and mitigating risk. Many aspects of Alaskan life are great examples of this strategy. Take fishing, for example. If your goal today is to catch enough salmon to feed your family through winter, you will better your chances by going after more than one species to reduce the potential risks of poor returns for any one species. If you only fish for King salmon, you have a higher probability of a bad run and doing without than if you also target Sockeye, Coho, Dog, and Pink salmon. The diversification of the salmon species, habitat, foods, and run seasons creates greater assurance of catching than any single species can. Diversification in investing is achieved by spreading investments across different types of assets, such as stocks, bonds, real estate, infrastructure, and private companies. As a result, if one part of the market hits a rough patch, the entire Fund isn’t dragged down with it.

The Board of Trustees reviewed the Fund’s overall investment mix at their most recent quarterly meeting. After thoughtful discussion and input from APFC staff and external advisors, the Board maintained the current targets across the Fund’s eight asset classes. This decision reflects our commitment to managing the Fund for long-term performance to generate risk-aware returns while recognizing the importance of the annual 5% draw supporting state services and dividends. While the Board sets the allowed investments, it is the APFC team that brings the strategy to life. Our staff works every day to navigate changing markets and make careful decisions within theguardrails set by policy. This flexibility allows us to respond to economic shifts while staying focused on the long-term goal: protecting and growing the Fund for generations of Alaskans.

Since the creation of the Alaska Permanent Fund, Alaskans have demanded a conservative approach to investing that provides long-term security and the ability to better withstand inflationary and global economic swings. This approach means we aren’t putting all our assets in one type of investment but rather a diversified group of investments designed to have the highest chance of providing regular recurring funding for all of us today and for future generations of Alaskans

Deven Mitchell is the Executive Director and CEO of the Alaska Permanent Fund Corp., manager of one of the world’s first sovereign wealth funds.