The combination of collapsing crude oil
prices, wild currency swings and heightened governance scrutiny
has created a challenging environment for many of the
world’s largest sovereign wealth
From the Mendenhall Glacier in Juneau to Prudhoe Bay above
the Arctic Circle, Alaskans by the thousands will soon tear
open crisp white envelopes containing the dividend checks they
receive each year from the Alaska Department of Revenue
Permanent Fund Dividend Division, which doles out money from
the state’s $52.8 billion sovereign wealth
They may be happily surprised. Despite the 60 percent drop
in crude prices since June 2014, each oil-fueled check should
top $2,000, by our estimates. That’s up from the
$1,884 each of Alaska’s approved recipients got
last year and just may be the highest total since the fund
began paying such dividends in 1982.
With oil near its lowest price since the
2008–’09 financial crisis, the payout is
testimony to discipline — and to the power of
diversification. To tame the roller-coaster effects of
hydrocarbon prices on its portfolio, the Alaska Permanent Fund Corp. (APFC), like
the managers of many sovereign wealth funds, spreads its
money across myriad asset classes. Today the fund is invested
in areas as varied as infrastructure, private equity and plain old U.S. Treasury
bonds, using strategies that range from so-called smart beta to
Alaskans’ annual payout is based on the average
earnings the fund generated over the previous five years. The
key determinant is not the price of crude but profits.
"Realized earnings are tied to activity in the portfolio
— not the price of oil," says Valerie Mertz, the
APFC’s acting executive director and its chief
financial officer. The fund, which has saved more than half its
earnings for future generations and dispensed the rest to
citizens, has generated impressive returns given its
conservative guidelines, gaining some 10 percent annualized,
for the five years through June 2015. For the fiscal year ended
June 30, 2015, the fund posted a preliminary 4.9 percent
return, following a 15.5 percent return for fiscal 2014.
Sifting through minutes of APFC board meetings, which are
posted online, one can see that the subject of oil prices
barely arises. Alaskans have not voiced concerns to
management. "We have had no communication from the citizens of
Alaska regarding the decline in oil prices," Mertz says.
Armageddon is not upon the Alaska Permanent Fund or the
world’s sovereign wealth funds — at
least, not yet. Still, the oil sell-off is putting
hydrocarbon-based pools of capital through a grueling test.
Many, like Alaska’s fund, are notching passing
grades, particularly those with longer histories, big
portfolios and well-executed diversification strategies.
Undoubtedly, the situation will change for the worse if
today’s low oil prices continue for several more
years. But there is little or no panic selling of illiquid
assets and, with a couple of notable exceptions, like
Russia’s pension fund, few blatant violations of
the rules on disbursements of funds to governments, even as
jurisdictions like Alaska and Norway are depleting their oil
The meltdown in oil prices isn’t the only
challenge facing sovereign wealth funds. In a corner of the
financial world known for gradual, almost glacier-like change,
the state-owned investors are suddenly being forced to grapple
with a host of what may prove to be transformational
developments. These include a spell of wild currency swings,
including a 13 percent drop in the euro vis-à-vis the
dollar over the 12 months through late August. The Norwegian
krone is down 25 percent and the Russian ruble 48 percent.
"Sovereign wealth funds are increasingly focused on the impact
that currency moves can have on their investment portfolios,"
says Joseph Konzelmann, senior sovereign strategist at Goldman
Sachs Asset Management in New York. "As long-term investors,
sovereign funds have taken these moves in stride." A June
survey by Invesco found that 57 percent of sovereign funds now
use foreign exchange hedges to either safeguard their
portfolios or try to turn a profit.