Lessons From the One Sovereign Wealth Fund in the United States

0:01Bloomberg Audio Studios Podcast Radio News.

0:17Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. Tracy, we're back here in New York City where it's warm and the sun sets at a normal hour of the day and I don't need to have blackout curtains. But I had a really good time on our recent voyage to Alaska. Alaska was great. I don't know why the overall state population has been declining. Yeah, it's great. You move there. There's nice weather, at least in the summer. In the summer. Beautiful scenery. Yes. As much salmon as you can fish out of the rivers. And every year you get paid some money by the state.

0:55Yeah, that's exactly right. No, there is a lot to like about it. I think it's for a type of person. It certainly has a lot going for it. But it was really nice. You know, I didn't really know much about Alaska. I didn't have much feel for its layout. I didn't have much feel for its geography. I truly did feel like I was sort of at the far western edge of the empire out there, very, very distant. It has a very frontier feel. I mean, that's why they call it the last frontier. Extremely frontier feel. And of course, we talked to people in all kinds of industry there, et cetera. But as you mentioned, one thing that people know about Alaska, I mean, people know there's oil.

1:27And also people know that there is something that kind of resembles perhaps a sovereign wealth fund, and also that every citizen over, I think, the age of like 18 months or whatever, 10 months or something, gets a check from the state, which sounds pretty nice. It sounds nice. It also sounds like a loaded political and financial hot potato, right? And I can imagine every year there is probably lots and lots of debate about exactly how much is going to be dispersed, what it means for the future of the fund, how it interacts with state and federal funding. I'm excited to talk about all of that. But I think we should also add that this has new relevance, right, to the wider United States of America, because there is talk about starting a U.S.

2:09sovereign wealth fund. And there is also the payments for kids, for infants from the Trump administration. That's right. That's right. Whether anything at the federal level that resembles a sovereign wealth fund or any sort of fund would actually happen, who knows. But we have certain models of all this stuff, and it's worth learning a little bit more how they work. And I do think to sort of conclude our intellectual journey and our literal journey to Alaska, we sort of have to touch on this element. Absolutely. Let's do it. Okay. Well, I'm really excited to say we literally have the two perfect guests to talk about the Alaska Permanent Fund and what it is.

2:41We're going to be speaking with Marcus Frampton. He is the CIO of the Alaska Permanent Fund and Devin Mitchell, CEO of the Alaska Permanent Fund. So Marcus and Devin, thank you so much both for coming on the Odd Loss podcast. Yeah, thank you. We're happy to be here. Why don't we start with maybe one of you could just give us the very quick, like, what is the size of the fund and how, when and why was it started? So this is Devin Mitchell, and I'll take that question. When you think about Alaska, and you guys have just a small sample of Alaska, of course, when you think about it, you went to the largest city in Alaska.

3:19But if you superimposed Alaska over the continental US, you would have each of the coasts touched by Alaska, as well as the southern and northern borders. So it's a huge state. Let's say you went to Nebraska. So you didn't really experience all that Alaska has to offer, but certainly it sounds like you got a good sample. The state's a young state. We became a state in 1959. And when Alaska became a state, there was a lot of concern about the ability of Alaska to support itself economically because of a relatively small population, remote location, lack of understanding about the state. And so the state was created as a resource state, meaning that the state retained the right, the subservice mineral rights of the land in Alaska that it selected at statehood.

4:05And so in 1968, Prudhoe Bay was discovered, the largest oil field in North America. And the next year in 1969, there was a lease sale that generated$900 million of revenue for the state. And this is at a time when the state's budget was$150 million. And so an incredible amount of money for the day for the state. People thought it was so much money they couldn't possibly spend it all. It initiated a process that resulted in the Trans-Alaska Pipeline being constructed. But by the mid-1970s, that money was clearly going to be finally expended before the Trans-Alaska Pipeline was completed. And that set the stage for people to recognize that oil was a one-time finite resource and a revenue generator.

4:54And there were forward-thinking people of that generation that were willing to set aside a portion of their current year revenue for the benefit of future generations of Alaskans. And that culminated with a constitutional amendment in 1976 that dedicated 25 % of royalty revenues to the state of Alaska. It required that that revenue, once saved, be invested, and it required that the earnings of the fund be made available to the state. And so we've subsequently initiated the Permanent Fund Dividend Program to allow residents to have a stake in the program. And it's evolved today to where it's our largest single revenue source at approximately 60 percent of the state's revenue.

5:43Yeah, that's a hefty chunk. Marcus, why don't you give us, from the sort of portfolio standpoint, talk to us about how the fund has evolved over time. So 1976, you know, it gets set up. what do the initial investments look like and what do they look like today? Yeah, sure. So this is Marcus Frampton. I'm the chief investment officer. Initially, when the fund was set up, we were in a very high interest rate environment. At the end of the 70s, equities had kind of fallen out of favor. And so it was very much a fixed income fund up until the mid-1980s. Real estate was introduced at that point as the second asset class in the early 90s, first domestic stocks, and then later in the mid-90s, international stocks were added.

6:28In the early 2000s, we added hedge funds and private credit and private equity and have grown those alternative asset classes like many of our peers, the university endowments and pensions have grown. So today, the fund itself is around$85 billion. Our largest asset class is public equities, that money is managed against the all-country world index, a very global index. We trade bonds internally, high yield through investment grade, and then have alternatives and privates that are kind of 40 % of the fund today. So our asset allocation is not unlike many university endowments or pension funds today.

7:10And we managed to an inflation plus 5 % return with the aim of dispersing roughly 5 % of the fund to the state, both for state spending and the dividend program, and then having the remainder maintain its value with inflation is why we target that inflation plus 5%. I'm curious, markets are markets and sometimes asset valuations go down in a year. What happens then for either the fund or Alaska when there's a bad year? Maybe it's like 2022 and stocks have a pretty rough year or 2008 and 2009 and stocks have a rough year. What happens when you can't satisfy the demand for state revenue or, I guess, partly those dividends?

7:57What happens both with the fund in terms of how and how the state budget works? Yeah, well, at a high level, we've got a very complicated system with a constitutionally protected principle and then an earnings reserve that accumulates realized earnings. And so at the investment level, we're rebalancing, we're buying stocks and doing all the things all investors do. But I'll hand it to Devin on how we think about the pressure on the earnings reserve in those situations. Sure. So as I said earlier, the constitution was pretty broad in how it established the fund. And then there's a statutory overlay on top of that.

8:34And the statutory overlay defines earnings or revenue that's available to appropriate as realized income. And so when we have unrealized income, we hold it in either principal or what we call the earnings reserve account. That's where we hold the realized earnings of the fund and a pro rata allocation of unrealized earnings. So when you break down that$85 billion that Marcus referred to earlier, you have about$59 billion that's actually protected principal of the permanent fund. Then you have about$13 billion of unrealized gains allocated to principal. And then you have the earnings reserve account, which is the portion that the legislature can appropriate out of.

9:20It has about$6.4 billion that's available for appropriation at this point, has about$2.3 billion of unrealized gains that are allocated towards it. And then that combined is around$9 billion. And then we have the current year's POMV. And our POMV structure has only been in place since 2019. It's a historical five-year average, 5 % draw structure, and has, like I said, been providing the majority of state revenue since. But prior to that, the only thing funded out of the permanent fund were permanent fund dividends. So that was a big shift timeframe that we've gone through in the last six or seven years.

9:58As far as what we would do in a negative earnings year, if we had unrealized losses, it would just diminish that war chest of unrealized gains we currently have. If it were to erode beyond that level, then you would be in a situation at some point where the earnings reserve account would be deficient and there wouldn't be an ability to provide for a transfer to the state of Alaska. And that in part is why we've been advocating at the fund based on our trustees' direction to evolve the fund from this historical model created 50 years ago to something that's a little more modern and a little more in line with a true endowment or sovereign wealth fund and recognize the importance to the state's annual revenue stream that it now represents.

10:53So in a year like 2025, if Joe and I were flies in the room when you were maybe actually mosquitoes in the room, given that it's Alaska. If we were in the room when you were making the decision about what this year's dividend payout is actually going to be, what would the conversations actually sound like? What are the considerations that you are thinking about as you announce this number? So first of all, we are not those flies. We don't decide how big the permanent fund dividend is going to be. We just earn and provide the annual transfer to the state. The policymakers that decide how much the dividend is going to be are the legislature and the governor.

11:35So in 2019, when they created the percent of market value statutory structure, they left in place the historical or legacy permanent fund dividend statute, which was an earnings model. It was 21 % of the last five completed fiscal year's earnings. You take that, you split it in half. Half goes to the permanent fund dividend. Half goes theoretically to the state, although the state always just put their half back into the fund. And so our governor has proposed each year of his administration that that formula be followed for purposes of establishing the permanent fund dividend. The difficulty has been that oil revenues have diminished for the state of Alaska.

12:19They're no longer robust enough to provide for the services that residents expect. And so the legislature has gone through a process of determining how much can they provide for a permanent fund dividend. At the same time, they provide some level of services that the residents expect. And as you might be able to predict during an election year, miraculously, they find ways to have a little bit larger permanent fund. And during non-election years, maybe they're a little more austere. But it's been a struggle and more of a debate these last six years. Yeah. And actually, can you talk about that a little bit more from your perspective of thinking about the long-term health of the state of Alaska, the long-term health of the fund, and so forth?

13:01How can either political elected leaders or people such as yourself, whose job is to safeguard the fund for the long-term for the benefit of the state of Alaska, you know, avoid essentially people eating the seed corn, right? Because that's what we're talking about, right? Of course, in an election year, everyone, Democrat or Republican, is going to be about protecting or expanding the dividend, regardless of the performance, regardless of how big oil royalties are. How do you sort of keep, you know, I think there's versions of this debate that happened in D.C. What is the discussions like to keep those choices essentially fiscally responsible for the long term?

13:39I think the discipline that's required in any financial system is something that we circle around to continually, that in the event that you exceed what we've determined to the best degree possible is a reasonable draw, the 5 % historical draw is a reasonable draw. if you want to ensure that you have an inflation-proof fund into the future, that to the extent you deviate from that because there's available money in the earnings reserve account, that's just the first time that you're going to overspend. And next year, there's going to be another reason that you overspend. And you're almost ensuring that the system's going to fail.

14:20And I circle around to why does this money even exist? It exists because there were 50 generations of Alaskans before this generation that didn't spend all of the current year revenue that came in. They put some of that revenue aside, and they didn't do that for the benefit of any individual that was going to live in the state of Alaska in 2025 or 2026. They did it for the state of Alaska, so the state of Alaska would have the resources to survive into the future. And so that sacrifice of the past generations of Alaskans to ensure that we have this incredible resource and revenue source for the state to provide for not just services.

15:01Remember, we're not just arguing about school funding and public safety and roads and the normal things. We're arguing about how much money to give away to our residents. That's such an incredible gift that the past generations have given to this generation. And that same gift needs to be enshrined for the future of the state.

15:38Your best restaurant location gets five-star reviews. How do you make every location like your best location? Your best paper mill has been operating at peak productivity. How do you make every mill like your best mill? Your best data center has optimized every drop of water. How do you make every data center like your best data center? The answer is Ecolab. Better performance, better outcomes, better impact. Ecolab. Now every location is your best location. How many vendors does it take to meet all your organization's food needs? Just one. Easy Cater, the workplace food platform that lets teams order from a huge variety of restaurants, over 100 ,000 nationwide, all through a single vendor.

16:24In addition to all that variety, Easy Cater also gives you full visibility of your organization's food spend with invoicing, centralized reporting, and seamless integration with expense management systems, all on one platform. Easy Cater, your business tool for food. To learn more, visit easycater.com slash podcast. You're thoughtful about where your money goes. You've got your core holdings, some recurring crypto buys, maybe even a few strategic options plays on the side. The point is, you're engaged with your investments, and Public gets that. That's why they built an investing platform for those who take it seriously.

17:03On Public, you can put together a multi-asset portfolio for the long haul. Stocks, bonds, options, crypto, it's all there. plus an industry-leading 3.8 % APY high-yield cash account. Switch to the platform built for those who take investing seriously. Go to public.com and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com. Paid for by Public Investing. All investing involves the risk of loss, including loss of principal. Brokerage services for U.S.-listed registered securities, options and bonds, and a self-directed account are offered by Public Investing, Inc., member FINRA and SIPC.

17:39Crypto trading provided by Backed Crypto Solutions, LLC. Complete disclosures available at public.com slash disclosure. Marcus, how does declining oil revenue or just the cyclicality of the oil business feed into your actual investment decisions? You know, if the price of crude goes down, is that a year where maybe you invest in riskier, higher-yielding things? Do you calibrate it in that way? Yeah, sure. So today, the royalty income to the fund is less than a billion a year, and we're dispersing over$3 billion a year to the state through the 5 % draw. So movements in oil do impact our inflows, but very marginally relative to the size of the fund.

18:20And there have been arguments at times of whether we should invest in oil and gas given the state's exposure. And we've ended up deciding that we do want exposure to oil and gas investments. And so in periods like 2020 and 2021, I've leaned into energy private equity and things like that. So we like investing in energy, but it doesn't have an outsized impact on the cash flows of the fund, given the size of the royalties. I'm actually really intrigued by that. Can you talk more about that? Because I remember sometimes you hear about these questions. Should people in finance have exposure to banks, right, in their portfolio?

18:56There's a good reason to say no, because their career is going to be levered to the cycle of the financial cycle. And if they get laid off, it's probably going to be at a time when bank stocks are low and so forth. So that's actually a very interesting dimension. Can you talk a little bit more about the reasoning for this sort of, in a way, double exposure to energy that the fund has? Yeah, I mean, we feel like energy is an attractive area. So many investors don't want to be in fossil fuels that even today. I mean, in 2021, there was a clear scarcity of capital and there were comments being made that people weren't going to be using fossil fuels in 10 years, which clearly, in our opinion, contradicted the data.

19:36So we just liked it from an opportunistic standpoint. I mean, I think that it's a small enough portion of the S &P 500 and our private equity benchmark that, you know, if the index is at 4 % and we're at 5%, it's not like an outsized impact. I mean, you see tech people that work at Google and their whole portfolios in tech, and I would advise against that. But I think our sizing is reasonable, and we like the outlook for oil and gas, so we're active there. Just to give you an idea of the magnitude of the royalties that are coming to the fund at this point, the high and the low over the last 10 years are only$200 million apart,$315-ish for the low and$540-ish for the high.

20:23And so in comparison to revenues and investments of the fund, fairly inconsequential. Hmm. Other than generating a return and being able to fund the state and pay out a nice bonus to citizens, which, you know, in itself are two big things to be doing. Are there any other goals that you have in terms of investment? Are you trying to build out more infrastructure in Alaska? Are you conscious of the specific projects that you're funding? We invest entirely with a financial lens. And that was, with the exception of one, There's one state law that says if or in our regs that say that if there's an investment of equivalent risk and return, we should prefer the Alaskan investment.

21:06It's very difficult to measure that. Like if you look at the stock market, I think there's one stock, North Rim Bank, that's an Alaskan based stock on an exchange. So a strict interpretation would be that we have to like compare North Rim Bank to every community bank. And I like North Rim Bank and like we own stock at North Rim Bank. But there's a limit to how much you can have in a$300 million market cap community bank. It's done pretty well. I just pulled up the chart. It's a small little bank, but it looks like it's a nice chart. Yeah, and I have an account there. I like North Rim Bank. So none of this is meant to denigrate North Rim Bank.

21:42We love North Rim Bank. So when there are opportunities in Alaska, we will take a look probably more frequently than we would if it was a random opportunity in another state. But our mandate is very much highest and best return financially. And some of our private equity managers have done deals in the state. And we have some minor investment activity in the state. But that's the overall look that we take. And again, it goes back to the development fund model versus a public trust model. And that was the debate that happened in the 1970s from 76 to 1980. and public trust model one, rather than we're going to try to invest this money in Alaska and develop Alaska.

22:27Alberta Heritage Fund is actually a good proxy for how you might expect a fund to have performed if it were a development model. And when you compare the performance of their fund relative to ours, it certainly financially has worked out to Alaska's benefit to have the public trust and just looking for the best investment, as Marcus described. Marcus, while we have you here, can you tell us a little bit about your sense of the state of private assets? Because two things, A, you always hear it's the golden age of private credit. I don't really know what that means. You just hear about private credit all the time.

23:06But also, with private assets in general, you hear it, particularly on the private equity side, and maybe you hear it on the VC side too, the sort of paucity of distributions and so forth, and this idea that they haven't been coming and questions about returns. Like you sitting here on August 13th, 2025, how are you thinking about the past results, but also opportunities set right now that exists in privates? Yeah, sure. I would say generally I'm quite cautious on privates. I mean, I started my career at Lehman Brothers in 01, and I remember going through LBO training and, you know, you sketch out your typical LBOs, maybe five, six times EBITDA with three, four times leverage and the debt pays down.

23:47And by the end of the 2000s, buyouts were eight, nine times EBITDA. And now on average, U.S. mid-market buyouts are mid-teens EBITDA multiples. And a lot of money has gone into private. So we benefited from leaning into privates from, call it 2010 to 2020. And we just felt kind of in 2021 that it's unlikely that investors are going to get the return premium. And I'm talking about private equity now. So we cut our commitment pace to private equity about in half in end of 2021. And we've kept it around there and ticked it up a little bit, but we're still well below where we were deploying five years ago.

24:29We have an allocation to private credit. I think that's something we debate regularly. And it's maybe 4 % of our fund. I think if you look at the unlevered yield on middle market direct lending versus high yield or levered loans versus where it was five years ago, I think maybe you're getting 100 basis point spread today versus several hundred a few years ago. I mean, it's just not even debatable that it's less attractive than it was. And then if you go through a recession cycle, default cycle, I think it'll really get tested. So we're kind of been tapping the brakes on privates the last few years and are pretty cautious on the outlook right now.

25:09What have you been doing this year in terms of allocation? Because the word uncertainty seems to come up a lot in conversations nowadays. There's uncertainty over policy and, of course, uncertainty over the direction of the economy. Are you more cautious or are you, I guess, changing any of your traditional allocations? I think right now is a really tough time to make macro calls. I mean, you've got big budget deficits that aren't going to come down anytime soon, and you probably have Fed funds coming down rapidly in the next year with a new Fed share. So to want to be like underweight equities right now.

25:49So like, we're kind of like hugging benchmarks on not wanting going to be under or overweight equities, but it's just an expensive market. So if you didn't have that dynamic of rates coming down, I think you'd want to be really cautious right now. But then given that backdrop, you kind of just have to take the long view, allocate in line with benchmarks. And like I said, on privates, we're definitely tapping the brakes. We deploy every year. And because we cut our pacing, we're still deploying, but just much less. And we're getting more in distributions and contributions on our private equity portfolio, which is unique and kind of a luxury.

26:31So even though we're kind of in line with our benchmarks, I sort of root for a dislocation because we're very well positioned from a liquidity standpoint with the reduced private pacing. Devin, can you talk more about the sort of the legal status of the fund? There was an amendment to the Alaska state constitution that established it. I have to imagine that an amendment is like a very difficult, is a very legally secure backing for you. I don't know the Alaska constitutional process, but constitutions are hard to change. But when you think about past your tenure, past all of our tenure, it's like how legally durable is the fund and how hard would it be?