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The Skorina Report: Russell Read and the Alaska Permanent Fund

April 27, 2016

By Charles Skorina

Russell Read has just been appointed chief investment officer of the $52 billion Alaska Permanent Fund Corporation (APFC), and he's headed for a state in crisis.

The collapse of global oil prices has put a big squeeze on all of the world's oil producers; and in Alaska, where oil funds 90 percent of the state budget, Governor Bill Walker has nothing but bad news for his constituents. He may even have to reinstate the income tax after 25 years of living on the oil boom.

And he's proposed to cut the cherished annual cash dividend the APFC pays to each resident: from $2,072 last year to just $1,000 in 2016.

Mr. Read arrives in Juneau on May 1, and he'll have to hit the tundra running.

His appointment is part of a general recent shake-up at APFC.

Angela Rodell was appointed CEO six months ago, succeeding Mike Burns, who retired last summer. Ms. Rodell is a familiar face in the state capital and at APFC, having served as revenue commissioner under former Governor Sean Parnell and as an ex officio member of the APFC board.

Our friend Tim Walsh will also be a frequent visitor. He just inked a two-year contract as a part-time advisor to the fund. Tim is the former CIO of New Jersey’s $72 billion pension fund and will add considerable heft to APFC's strategic deliberations.

Recently I congratulated Russell on his appointment and we had a chance to catch up with a wide-ranging conversation about where he's been and what lies ahead.

Skorina: Russell, where to start? You pack one of the best resumes in the business, including a BA and MBA from University of Chicago and a PhD from Stanford. Then you had sell-side experience at Scudder and Oppenheimer, two years as CIO at CalPERS, and four years with the Gulf Investment Council in Kuwait. And now, you get to be CIO at APFC just when the state budget is melting down. Terrific timing!

Read: It's going to be interesting, Charles. APFC is the biggest sovereign wealth fund in the U.S. and one of the biggest in the world. It would be a challenge at any time, but especially now. We're going to be playing a key role in the economic future of every Alaskan, through this bad patch and for decades to come.

Skorina: You're just getting acquainted with your new board. What are your impressions of the APFC board so far, compared to the boards and governance at CalPERS and the Gulf Investment Corporation?

Read: I hope you're not looking for invidious comparisons, Charles!

Well, let me put it this way. The APFC board focuses very pragmatically on generating revenue for the present and future citizens of Alaska. It's a very business-like, P & L-oriented organization. They need to send a check to each resident every year, while also providing a rainy-day fund for the state. And, as you've noticed, it's raining pretty hard up there right now.

I report to the executive director, Angela Rodell, a former muni finance executive and deputy commissioner of revenue for Alaska. And the chairman, Bill Moran, is president and director of First Bancorp. Everyone's clear on the mission and they can all read a balance sheet and income statement.

At CalPERS, there were too many objectives. It wasn't just how best to manage pension and health benefits: it was...can we unionize the employees in the portfolio companies of private equity firms that we do business with? Or, should we tilt toward investments in politically desirable local and state projects? Each board member had their own constituency and agenda. Some of these may have been worthy objectives, but they vastly complicated the ostensible top-line objective: maximizing returns for state employees and retirees.

My time in the Gulf was focused more on funding projects which created long-term benefits for the seven Arab states which border the Persian Gulf: Kuwait, Bahrain, Iraq, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE). My objective was to diversify and create new revenue streams; basically, diversify away from their dependence on oil. We had $30 billion in projects on the books when I left. It was a thoroughly fascinating four years.

Skorina: So what opportunities do you see for a big fund like APFC? I've been talking to people at OMERS and OTPP lately, both big funds. Ontario Teachers just hit a home run: a 13 percent return on $154.5 billion in 2015 (with AUM finishing at $171.4 billion). Not bad. They got a huge 32 percent return in private capital; 16 percent in real estate and infrastructure; 18 in equities; and 6 percent in fixed income. Their only negative number was in natural resources, which were down 1.3 percent.

Read: Yes, it's an impressive performance at a very big fund. But, as we know, the Canadian model is hard to replicate in the U.S. for political and legal reasons. I know there are people at CalPERS who would love to set up an infrastructure subsidiary like OMERS did with Borealis. But it's not going to happen. U.S. pension funds can't seem to get there from here.

Now, there is one possible model I've been thinking about Charles, which might allow a group of US public pension plans to pool assets to invest in real estate and infrastructure. It's called a mutual investment company. They are not common, but there are two prominent examples in the US: Vanguard and TIAA-CREF. Maybe that's the way to create joint direct investment vehicles for public plans.

Skorina: APFC earned 4.9 percent in FY 2015; maybe not as strong a performance as they would have wished?

Read: Real estate did well, 9.8 percent on about 10 percent of the portfolio. And private equity was up 16.5 percent. U.S. equities were up 7.2 percent. But the more pertinent question is: where are the income and growth opportunities to come from in the years ahead, given this strange bond environment.

For a century, bonds were the bedrock of investments and retirement income. Since 2008 that has been turned on its head. Now, bonds are low-yield and high-risk. So, at a fund like APFC, we need to look for opportunities where size matters and we have an edge, things like real estate, infrastructure, or geographic opportunities.

Skorina: What do you mean by geographic opportunities?

Read: Well, let's look out over the next twenty to thirty years. We're long-term money, so where are long-term opportunities? Where is the growth to come from? Sixty 60 percent of the population growth over the next 35 years—to 2050—will come in Africa and south Asia, mostly in cities.

My job in Kuwait kept me hopping around Africa and Asia looking at infrastructure projects, and I've been able to see a lot of this growth first hand. There are all kinds of frustrations and obstacles you can't imagine compared to the developed world, but the cities are still going up.

So what sectors and companies will benefit if you're going to build new cities? It will be technology, communications, and infrastructure.

Skorina: I seem to recall that you're an ardent musician. Do you still play the trumpet and sax? I imagine those long, cold winters in Juneau should give you plenty of time to keep your lip in shape.

Read: Funny you should mention that Charles. I've been looking into it and, as it turns out, Juneau has an active and sophisticated music community. I'm looking forward to my new home as well as my new job.