YWR:Alaska Permanent Notes
Disclosure: These are personal views and market commentary only. These are not investment recommendations or advice. For that seek professional advice.
From: Chris Magdalino <c.magdalino@montgomerycounty.gov.com >
Date: 26 October 2023 at 09:26:44 BST
To: Erik @ YWR <erik@ywr.world>
Subject: Alaska Permanent Notes
Erik!
Dude…….
Thanks for the notes from your call with the CIO of Alaska Permanent Fund, but oooof…
It makes me sick to my stomach.
I’m worried what Marcus is saying is true.
The part about the internal PE investment teams and how they all hang out with the PE fund sales guys is so true.
The part of about the marks on the venture capital portfolio down 90% and the marks on commercial real estate… I worry it’s all true.
But can I ask you something?
What am I supposed to do?
I’m guilty.
I did what Marcus was talking about.
I came in as the new CIO for the county and was trying to modernise everything. I said we should be like Yale and got us to increase our alternatives allocation over the last 5 years. It wasn’t just me though, the consultants were pushing it too.
We’re in everything.
2021 was good, but now I worry we’re going give it all back, and more, over the next 3 years.
What if the county pension fund starts reporting -10% returns?
And what if this goes on for 2-3 years?
The Trustees will freak!
I might lose my job over this.
Do I bite the bullet, make calls to all the funds specialising in secondaries and blast half the PE/VC/Infrastructure/’Real Asset’ stuff down 25%?
Is it one of those things where it’s painful and shocking, but the best move is to just take the hit and move on, like in ‘Margin Call’? Get it over with, get the capital back, and then go on offence? Rather than bleed out for 5 years?
Or, do I sit tight, pretend I don’t know what’s going on and pray that maybe it’s like 2008, the Fed cuts, and the marks are minimal?
Love to hear your take.
Thanks, Chris
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From: Erik @ YWR <erik@ywr.world >
Date: 26 October 2023 at 14:15:30 BST
To: Chris Magdalino <c.magdalino@montgomerycounty.gov.com >
Subject: Alaska Permanent Notes
Chris,
Hey bud. I know what you mean about the Alaska call notes.
On the one hand it’s nice to hear honest views from a guy running $75bn, but on the other, what are you supposed to do about it?
He’s basically telling you you’re locked into a 7 year train smash.
A fire sale at down 25% might be the best move from an investing standpoint, but I worry you won’t survive that internally. As you suspect the trustees will freak and say you ‘panicked’ or were ‘impulsive’ even if with hindsight you are right and 2 years from now we find out it all goes down 50%.
The good news, like Marcus said, is that the PE Team, the consultants, your peers, and the whole industry is in the same boat. There’s that saying where it’s safer to fail doing consensus things. This is like that.
I was just reading the Yale 2023 newsletter where the new CIO says he has given the whole issue of investing in alternatives a lot of deep thought, and is certain the next 40 years will be different than the last 40, but then decides the future of the Yale endowment is to keep doing the same thing.
So Yale, which everyone loves, will keep ploughing money into VC/PE and renewables. This gives you some political cover even if returns are terrible.
But you still need to start making some moves to get out ahead of this. Here are 3 suggestions.
See if you can make some special deals on your incremental PE investments. Take advantage of the problems PE fund managers are getting themselves into, like the deal the University of California did with Blackstone on their BREIT Fund.
Get new consultants. The guys you are using sound like consensus morons. The future is going to be tough. Get some real thinkers on your team.
Over time maybe make the whole investment strategy less complicated and just have a bigger passive public equity and fixed income allocation. All these alternative asset classes are designed so you don’t know what’s going on and the funds and consultants can charge lots of money.
Do you know what the richest sovereign wealth fund in the world does with its money? They manage $1.4 trillion…. and do you know their complicated allocation?
Those wise, salty Norwegians are invested 70% in public equities and 30% in bonds (Govt & Corp).
It works for the Norwegians are they’re richest guys on the planet.
So maybe sit tight on the PE/VC/Infra, do a special opportunity deal if you can to be a bit offensive, but gradually steer the ship to the Norges model. Sounds like Marcus in Alaska is saying the same thing.
Hang in there and happy to chat anytime.
Erik
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