Should the Haines Borough invest more of its $8 million permanent fund in the stock market?

The borough assembly’s finance committee agreed March 10 that a provision in code that caps the fund’s investment in stocks at 25 percent should be raised to 50 percent of total assets, with a target of 30 percent in stocks.

Currently, 80 percent of the fund is invested in government bonds, 15 percent is in the stocks of large companies (like Microsoft, Wal-Mart and GE, called “large cap equity”) and 5 percent is invested in stocks of companies not based in the United States.

The change follows a recent meeting with officials of Alaska Permanent Capital Management, the firm that manages the money for the borough. It comes against a backdrop of a five-year-old bull market that has rewarded stockholders but has wavered in recent months and weeks.

Under the committee’s proposed change, the borough’s investment portfolio would switch to a target of 70 percent government bonds, 17 percent stocks in large companies, 2 percent in mid-range companies, 6 percent in non-U.S. firms, 2 percent in firms in “emerging markets,” (including Brazil, India, Russia and China) and 3 percent in real estate investment trusts.

The assembly can set its target for investment through resolution, but upping the 25 percent cap on stock investment requires a code change. Chief fiscal officer Jila Stuart said to hit a target range of 30 percent of the value of the fund in stocks, the cap in code should be changed to 35 to 40 percent to accommodate fluctuations in stock values.

Committee member Debra Schnabel led the push for increasing the cap on stocks. “If it was my money alone, I’d go with 40 percent equity, but it’s not my money, so I need to be a little more conservative.”

Member Diana Lapham said it would behoove the borough to “go with 30 percent (stocks) and see how that goes.”

“You can change that anytime you want. Right now the market’s volatile. We’re losing 200 points at a whack and gaining 180,” Lapham said.

Member Jerry Lapp supported the change to a target of 30 percent of investments in stocks. “I trust (Alaska Permanent Capital Management). They’re on top of it. They watch this every day. They watch the trends and if they see something happening, they’ll jump right out of it.”

Schnabel questioned why the borough should have a cap. “Why should we have a cap on equity? It’s what built America.”

Lapp replied: “Because we’re using public money and we’d hate to lose it.”

Under the existing investment strategy, the APMC is projecting a 3.5 percent return with a 5.8 percentage of risk. That compares to a projected 4.3 percent return and 7.1 percent risk at 30 percent equity, according to fund managers APCM. The borough’s annualized historical returns from 1997-2012 show a return of 6.6 percent and 4.4 percent risk.

The decision to invest in real estate was endorsed by fiscal officer Stuart, who said diversifying investments would have a steadying effect on the borough’s investments. “Risks fluctuate, so they tend to balance out. If (stocks) are dropping, real estate isn’t necessarily dropping.”

Schnabel said the 3 percent in real estate would be investing in condominiums in Arizona or office parks in Illinois. “It’s not Main Street, Haines, real estate. That would be something, wouldn’t it? I just want to say, we could think of investing in our own town, somehow.”

The borough permanent fund, created in 1984, holds and invests income generated by borough land sales. Code prohibits the borough from spending the fund’s principal without voter approval, but interest generated by investments may be spent. In fiscal year 2013, the fund made $382,000.

After covering the cost of fund management and inflation-proofing, fund earnings go into the borough budget.

The Alaska Permanent Fund reached a record value of $50 billion in March, with gains attributed to a strong stock market. About $23 billion of the fund is invested in stocks, according to the fund’s website. The fund’s value reached $40 billion before the global financial crisis of 2008, its value dropping to $26 billion in early 2009, according to the site.