Global Ideas From Alaska's Sovereign Wealth Fund

by: Michael L. Boyer

Tony Gray's book 1,000 miles From Wall Street extolled the clarity investors can find far from the noise and haste of financial centers. In the wake of recent volatility, perhaps an idea from 3,000 miles away could be even better.

Juneau, Alaska is home to the Alaska Permanent Fund Corporation, the locus of a roughly $40 billion state fund. While small by the standards of Middle East sovereign wealth funds, the Alaska Permanent Fund is unique among states. The fund found its genesis in the state's oil wealth and it has paid a dividend to every resident since 1982. The amount is based on a five-year average of the fund. Founded in 1980, the APFC is frequently cited as among the most transparent sovereign wealth funds in the world, and its history, investments and historical performance can be viewed at its website.

While the Alaska Permanent Fund is not located near a financial Mecca, it attracts the attention of top financial managers. Much of the stock selection and other investments are farmed out to a number of firms listed on the website. A sizable portion of the bond investing is done in downtown Juneau, wedged right between the mountains and the sea.

The quarterly stock ownership of the fund is listed in detail and includes every stock owned collectively by Alaskans. The top stocks have often mirrored those in the S&P 500 and global large cap indexes over the years, a reason perhaps the fund is considering more passive and quasi-passive investing (to reduce fees and transaction costs). But an occasional outlier stock or position catches my eye in the fund's portfolio, such as GMO Emerging Markets Mutual Fund did. This mutual fund is ranked as the second-largest holding among the fund's top 50 stocks.

The top three stock holdings of the Alaska Permanent Fund (shares and market value as of June 30; figures are updated quarterly):

  • Apple (NASDAQ:AAPL): 617,154; $207,160,083.
  • GMO Emerging Markets Fund (GMOEX): 14,787,417; $206,875,961.
  • Exxon Mobil (NYSE:XOM):1,999,354; $162,707,429.

There among the usual suspects was the GMO Emerging Markets Fund, so I took another look at this holding (NAV: 12.63; expenses 1.02%, as of this writing). The Alaska Permanent Fund has placed a sizable bet on the emerging market fund run by a team overseen by Arjun Divecha based in Berkeley, California.

GMO handles about 96 billion in equities (63 billion non-US) from offices around the globe according to its website -- so no, it's probably not going to cold call you about handling your Roth IRA. The investment minimum required for GMOEX, for example, is a hefty 50 million, putting it well out of reach for most individual investors.

However, many of us learned to play the copy cat game in the days before Berkshire Hathaway (NYSE:BRK.B) had an affordable class of stock; we could simply look at the publicly traded firms held by Berkshire Hathaway and stand on the shoulders of an investment giant.

Similarly, the top 10 holdings of GMOEX are:

  • OAO Gazprom ADR 4.42% (OTCPK:OGZPY)
  • Samsung Electronics 2.40% (OTC:SSNLF)
  • Lukoil Company ADR 2.30% (OTCPK:LUKOY)
  • Industrial and Commercial Bank of China 1.78% (OTCPK:IDCBY)
  • China Mobile Ltd. 1.72% (NYSE:CHL)
  • Vale S.A. ADR 1.48% (NYSE:VALE)
  • Banco de Brasil SA BB Brasil 1.44% (OTCPK:BDORY)
  • KGHM Polska Miedz 1.33% (KGH PW)
  • China Petroleum and Chemical Corporation 1.29% (NYSE:SNP)
  • Astra International Tbk 1.27% (tie) (OTCPK:PTAIF)
  • Taiwan Semiconductor Manufacturing 1.27% (tie) (NYSE:TSM)

A few other themes emerge in looking at the GMOEX portfolio, a fund that is based 72% in emerging markets stocks. Primarily, it is focused on large cap stocks in three main sectors and it bends heavily towards Asia. According to Morningstar, GMOEX is 50% in giant cap and 28% in large caps. Energy (21%), basic materials (14%) and financials (20%) make up well over half the holdings. Most telling is that 58% of the fund is bet on Asia (31% in emerging Asia and 27% in developed Asia).

The GMOEX fund has beaten its benchmark (MSCI EAFE Index) on a 10-year basis, making a plausible case for adding value through active investing in emerging markets. The Alaska Permanent Fund CEO has expressed an interest in continuing with active management for emerging markets and small cap stocks, areas where there may be less public information and less efficient markets.

While investors may not be able to buy into GMOEX, they can study its holdings and strategy to take advantage of this investment idea 3,000 miles from Wall Street.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.