Alaska’s $67 billion sovereign wealth fund has invested nearly 10% of its global portfolio in Asia and intends to further expand that allocation, with a focus on private equity.
Alaska Permanent Fund Corporation (APFC) is pursuing its Asia investment plans as part of a broader strategic push to reduce portfolio risk amid heightened geopolitical and economic uncertainty, chief investment officer Marcus Frampton told AsianInvestor.
“There are a lot of things concerning us in the world today,” said Frampton, who joined APFC in 2012 and became CIO in July last year. “[But] I’m particularly concerned about where we may be in the economic and financial cycle.”
A widespread view among investors is that economies and markets worldwide – most notably the US – are in the late part of that cycle and due a downturn.
US stocks in particular look expensive and vulnerable to negative shocks from tensions over global trade, Iran or North Korea, Frampton said during an interview in late July.
The S&P 500 index has posted a decade-long rally to rise some 300% from 735 to 2,926 between late February 2009 and August 30 this year. By comparison, the MSCI World index gained 105% in the 10 years to July 31, 2019.
“This decade has been all about US equities outperforming international markets,” said Frampton. “To me this indicates that one likely should maintain one’s international stock exposure – including [in] Asia.”
Still, the recent trade tensions between the US and China have had a dampening economic effect across much of Asia, which begs the question: why does it make sense to invest more in this region?
“It’s a tough time to invest anywhere right now,” acknowledged Frampton, “but I feel the diversification benefits and the economic growth in Asia are pretty appealing.”
PRIVATE EQUITY PUSH
Juneau-based APFC is focused on building its Asian exposure through private equity above all. This has been its fastest expanding asset class in recent years, and Asia has been a substantial part of its non-US exposure.
The fund had 3% invested into private equity assets (none of which were in Asia) when Frampton joined in 2012, he said, but the overall allocation has since swelled to 13.5%, or about $9 billion, with Asia a growing chunk. “We’re trying to grow it pretty aggressively.”
Non-US assets account for 27% of the private equity portfolio. Asia Pacific accounts for a little over 20% of that, or close to $500 million (China being the bulk, at 15%), and that proportion may well rise further, Frampton said.
Steve Moseley, APFC’s director of private equity, worked in Japan for several years and his number two, Yup Kim, is Korean and spends a lot of time in Asia, Frampton said. “They both know and like the region, and that’s showing up in our exposure.”
Frampton sees equity as the best way to get exposure to emerging market growth, which help explains why APFC has basically no exposure to private credit or real estate in Asia.
“Let’s say you believe that a given emerging or frontier economy is going to be a big force of growth in the next 100 years,” he said. “I’d rather own a grocery chain there through private equity than a loan to the grocery chain.
“A loan can be structured to participate in the upside or it can have a very high current yield – but you start facing challenges on the legal side and around collection of debt.”
EMERGING MARKET OVERWEIGHT
Moreover, private equity is often the best way to get exposure to consumer and tech companies in emerging markets, Frampton added, as the listed markets are often dominated by banks and oil companies, typically current or former state-owned enterprises.
APFC is not the only large and experienced global investor to focus heavily on private equity in Asia; Ontario Teachers’ Pension Plan is another, doing so via global and local fund managers.
For the time being, though, APFC’s biggest Asia allocation is via listed stocks. It already overweights emerging markets – above all China – relative to the MSCI All Country World Index (Acwi). The fund has 38% of its investment portfolio in public equities, and 17% of that listed equity allocation is in emerging markets, versus the Acwi benchmark’s 11% weighting, Frampton said.
While the largest portion of the EM overweight is towards China, APFC does not yet have a separate portfolio for A-shares. Some US state pension schemes are mulling such a move, such as the Alaska Retirement Management Board and Washington State Investment Board.
However, the Alaska fund does have a standalone mandate with Wells Capital that is roughly 50-50 split between A-shares and Hong Kong/offshore listed names.