The most fascinating thing about the investment business today is that people will agree on the micro facts, but they hesitate to add it all up, Mohamed El-Erian recently told a rapt audience of sovereign wealth fund officials. As CEO and co-CIO of $1 trillion asset management giant Pacific Investment Management Co., El-Erian urged the group to embrace new ways of approaching the markets. Once people acknowledge that the facts are changing, then they have to be open to the notion that when it is all brought together, the world is going to look different, the former International Monetary Fund deputy director and Harvard University endowment chief explained. When markets are faced with all these new facts, it takes time and takes overwhelming evidence. That is why there is this amazing volatility in markets, not just weekly, but dailybecause people are flip-flopping between old normal, new normal. The inclination as a market is to go back to the old normal, but the reality is leading people to the new normal.
El-Erian wasnt speaking at the World Bank in Washington. Nor was he at the World Economic Forum in Davos. He was in Juneau, Alaska population 31,000 on an unseasonably warm morning in late May, delivering a two-hour presentation on the state of the world economy to officials of the Alaska Permanent Fund Corp., which oversees the Alaska Permanent Fund, a $33.3 billion sovereign wealth fund set up more than 30 years ago to ensure the financial security of future generations of Alaskans against the time when the oil fields on the North Slope run dry. The APFC hired Pimco early this year to advise it on protecting those assets from the markets unforgiving ways, but El-Erian wasnt the only big-name money manager traveling to Alaska. Robert Prince, co-CIO of Bridgewater Associates, also was on hand to give his own three-hour presentation. Last year, APFC chief investment officer Jeffrey Scott persuaded the funds trustees to hire five of the highest-profile U.S. asset management firms to function as what he dubs external CIOs, giving them $500 million each to manage as they see fit, as part of a mandate that includes teaching and consulting. The others are AQR Capital Management, GMO and Goldman Sachs Asset Management.
Ive recruited a team, says Scott, 45. Theres not one voice anymore. Theres six of us now.
Scott arrived in Alaskas state capital in 2008, in the midst of the biggest economic downturn in 70 years, with a fierce determination to apply the latest and best thinking on investment management to the Permanent Fund. That would mean changing the way the funds assets had been allocated, invested and monitored for nearly three decades. Scott would have to create an industrial-strength risk management tool and redesign staff assignments. Most challenging of all, he would have to convince fund and state officials that this new path would lead the APF to a more secure future.
Scott is going to need all the help he can get. Selling the board, the state legislature and the Alaskan people on even the slightest change to the Permanent Fund portfolio will be a daunting challenge. Unlike other state funds, the Permanent Fund, because of its dividend and history, is a much bigger part of the state identity, explains Robert Maynard, CIO of the $10.5 billion Public Employee Retirement System of Idaho. What you do is under a bigger microscope. Maynard should know. A former deputy director of the APFC and Alaskan attorney, he lived in the state for 18 years.
Neither a pension fund nor an endowment, the Alaska Permanent Fund is one of the worlds oldest sovereign wealth funds, established in 1976 following a statewide vote. The idea was simple: Take the millions of dollars in royalties and revenue-sharing payments that Alaska receives from oil companies that had purchased land along Prudhoe Bay, and put it in a permanent fund that could be used to generate future income even after the oil revenue is gone. The fund, whose annual dividend payout is a key source of income for the poorest Alaskans and a bolster to the state economy, has been the subject of debate among its constituents for most of its existence. From the taxi driver who will use the fund for his child support payment to the pregnant mother of five who will soon be adding another beneficiary to her household to the indigenous people of the vast interior who depend on the fund for up to a quarter of their annual income, all Alaskans have a stake in its performance.