CIO Marcus Frampton discussed APFC results for the period ending September 30.

The Alaska Permanent Fund filed its report for the first fiscal quarter of 2020.

The largest U.S. state sovereign wealth fund reported earning returns of 1.24%. That exceeded its benchmark (60% Stocks|30% Bonds|10% RE & TIPS) return for the quarter.

The fund has topped the benchmark in three- and five-year periods as well.

Alaska Permanent Fund CIO Marcus Frampton was pleased with the results.

“APFC navigated this period well, and our growing private markets and absolute return strategies are increasingly providing insulation from shorter-term public market fluctuations,” he said. “For example, APFC’s Private Equity & Special Opportunities portfolio posted a 4.2% return for the quarter, outpacing both domestic and international public equity market returns by a wide margin.”

The Alaska Permanent Fund Performance

Since 2012, the fund has upped its allocation to private equity firms by 3% to the current 13%.

Frampton is looking to boost that figure to as much as 19% to 20% in the next few years. He intends to be cautious about deploying the capital as he sees a lot of red flags in the markets and economy right now.

“If you look at credit spreads, valuations on public equities or private equities and then where we are in the cycle, late in a 10 or 11-year expansion, it is concerning,” he told Bloomberg this week. “I’m not calling for the cycle to turn but there’s certainly a lot of red flags out there, so we want to be ready. At some point, the cycle will turn.”

The Alaska Permanent Fund tends to favor smaller private equity firms in its portfolio.

Frampton thinks these smaller firms are able to be more value-conscious and can exert greater control over the companies in which they invest. They are also building cash so that when the cycle does turn, they will have dry powder to deploy in private equity strategies.

For the past five years private equity, REITs and infrastructure projects ranked among the fund’s best performers. Interestingly REITs outperformed nontraded REIT fund and direct REIT investment. This is a trend I have noticed in several large fund reports recently with the public REIT markets offering higher returns that the private side of the marketplace.

Other Ways the Fund is Driving Returns

The fund is also stepping up its direct and co-investment strategies to raise returns. In the last year, they have invested in a number of direct deals. They include California REIT, American Homes 4 Rent, Juno Therapeutics, Indigo Agriculture, and infrastructure firm Generate Capital and Sana Biotechnology.

Now, these strategies are a small piece of the pie at the $66 billion state fund.

However, they seem to be working well. Through December of 2018, annualized returns are reported to be in excess of 60%.

Related from Tim Melvin: What’s Inside The California State Teachers’ Retirement System Portfolio?