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Consulting Report and Analysis

Brief Overview
As an investment consultant to the Alaska Permanent Fund (APF), Your purpose is to write a report designed to persuade your audience, the APF Board, to follow the new direction you will outline for them. You will research the APF on the web to determine the purpose and objectives of the APF and develop a long-term capital market expectation. Familiarize yourself with the APF website at On the first page of the website, click on "The APFC" in the left margin under "Sections." From "The APFC" click on "About the APFC," "Mission Statement," "Goals and Objectives," and "FAQ." Read those documents. You might also find it helpful to print and read the latest annual report.
On March 12, 2004, the Board approved an initial allocation of 1% to absolute return strategies (hedge funds) and 2% to private equity. If this is not noted in one of the documents you read, make a note to factor these allocations into your work for the current asset allocation.
Assume that the Percent of Market Value (POMV) provision was approved by voters and is the adopted policy of the Fund. Read one or more of the documents relating to the POMV and how it will work when adopted.

I. Develop the overall goals and objectives of the APF with respect to the investment management of the fund. As part of your report, conduct and document research from peer-reviewed academic journals on the Harvard, Yale, and/or other endowment investment policies and practices (two endowments should be referenced) including the most recent annual reports review of the endowments that you cite as examples.
Also, research Standard IV (B.1) of the 1999 or Standard III (A) of the 2005 CFA Institute Code of Ethics and Standards of Professional Conduct and discuss how this standard applies to the work you are to perform as the investment consultant for the plan. The ethics requirements involve more than simply describing the ethics standard; you must demonstrate how the standard applies to the work you are doing. Briefly describe the ethics principle of the Standard, then illustrate how what you have done is in compliance with the key elements of the Standard.
Please follow the MLA Style Manual and support your statements with academic research from peer-reviewed and financial industry trade publications. See the following websites for an abbreviated version of the MLA requirements that will be more than adequate for your needs:

II. (Global Economic Outlook):
Research, analyze, construct, and justify your long-term (more than just one year) global economic outlook for presentation to the APF Board.
Your global analysis should include the United States, Western Europe, Japan, Asia ex-Japan, and Latin America. At a minimum, include in the analysis views on GDP, inflation, interest rates (preferably the 10-year rate), currencies, and U.S. monetary policy. Your analysis may include other economic issues as you determine essential. Be sure to support your views with appropriate research and discussion. Your research for each global region or country should include not just historical and current facts, but also a conclusion that will guide your subsequent work on capital markets expectations, as well as your estimates of the long-term magnitude and direction of the various factors listed above. Be sure to include a table that summarizes your estimates of the long-term direction, rates, etc.
Also, research Standard II (C) (1999) or Standard I (C) (2005) of the CFA Institute Code of Ethics and Standards of Professional Conduct and discuss how this standard applies to the economic outlook you present to the APF Board, with respect to economic information presented that is factual and that which is original.

III. Global Capital Market Expectations.
You can find the capital market expectations from the current consultant on the website. However, you are the new consultant and are expected to develop and justify your own capital market expectations for the expanded list of asset classes that you will recommend in your asset allocation, based on your own research. Be sure to tie your CME into the list of asset classes that you include later in the asset allocation.
Starting point should be to research and document historical returns and standard deviations, using one of the available books/research sources that document this data. For nontraditional asset classes, you will have to search trade publications in the online library to find the data. You may use the historical standard deviations for expected standard deviations in your CME, but you cannot simply extrapolate historical returns into the future. There should be a connection between your economic research conclusions, your risk premium research conclusions, and your capital market expectations.
Relatively current peer-reviewed risk premium research is required. Document at least two different articles, by two different authors (in particular, look for Asness, Arnott, Ibbotson, Bernstein, and Siegel), with different conclusions about the future expected risk premium of large-cap stocks over the long-term risk free asset. Discuss the relative merits of opposing viewpoints, and then support your reasoning for your viewpoint.
Your expectations should cover the risk-free rate, inflation, expected returns for each of the asset classes you expect to recommend, standard deviations, and correlations for each asset class that will appear in your asset allocation. You should include a table similar to the following to show your conclusions about expectations as they relate to the asset classes you plan to recommend in your asset allocation:

Asset Class Expected Return Expected Std. Dev Correlations
1 2 3 4
1. XXXX x.x% y.y% 1.00
2. YYYY x.x% y.y% 0.aa 1.00
3. ZZZZ x.x% y.y% 0.dd 1.00
4. AAAA x.x% y.y% 0.ff 1.00
Your conclusions must be consistent to explain how and why you chose the expectations for each reported asset class based on the research.
Also, research Standard IV (A.2) (1999) or Standard V (B) (2005) of the CFA Institute Code of Ethics and Standards of Professional Conduct and discuss how this standard applies to the research conducted on capital market expectations.


Solution Preview

Brief Overview (I am including the links and other helpful information in the sections that are part of the assignment request. Asterisks (*) are next to my suggestions and the research links)

As an investment consultant to the Alaska Permanent Fund (APF),
*Investment consultant (definition)
An advisor who helps investors with their long-term investment planning. An investment consultant, unlike a broker, does more in-depth work on formulating clients' investment strategies, helping them fulfill their needs and goals.
The idea behind an investment consultant is that they be part of the client's investment strategy for a long period of time. The consultant's job is to actively monitor the client's investments and continue to work with the client as goals change over time.
"Investment consultant" (2013)

* this definition establishes the role as well as the limits of the position of investment consultant. Strategy means making long term plans for the fund, and investment refers to the ways in which the dividends of the fund can be used to make the fund grow. The role of advisor indicates that the investment consultant is authorized to propose ways in which to invest the fund's proceeds, but the Board must vote on whether or not the proposal is implemented.

Alaska Permanent Fund Board

Frequently Asked Questions:
Why did Alaskans create the Fund?
During construction of the Trans-Alaska Pipeline in the 1970's, oil companies flooded state coffers with money paid for leases to explore and secure drilling rights. The Legislature spent all $900 million of that initial lease money within a few years. Alaskans realized that they were about to receive a great deal more money from oil when the pipeline was complete. They wished to better safeguard the robust income forthcoming from the pipeline, but the state constitution did not allow for dedicated funds. So Alaskans voted in 1976 to amend the constitution to put at least 25% of the oil money into a dedicated fund: the Permanent Fund. This would save money for future generations, which would no longer have oil as a source of income. In 1976 Governor Hammond proposed a constitutional amendment to create the Fund. The 9th Alaska Legislature modified the governor's legislation and placed it as a ballot proposition in the 1976 General Election. It passed by a margin of two to one.

What is the purpose of the Permanent Fund?
The 1976 state law establishing the Permanent Fund (AS 37.13), states that the Fund was created:
To provide a means of conserving a portion of the state's revenue from mineral resources to benefit all generations of Alaskans to maintain safety of principal while maximizing total return to be a savings device managed to allow maximum use of disposable income for purposes designated by law.

How is the Fund invested?
The Board's goal is to achieve an average annual real rate of return of five percent (5%) at risk levels broadly consistent with large public and private funds. In order to meet this goal, the Board sets an asset allocation that includes holdings across a broad range of investments. Information regarding the Fund's current investments can be found in the Investments section of this site.

How big is the Permanent Fund?
The current value of the Permanent Fund can be found on this site's home page where it is updated daily. The value can fluctuate up or down with market movements, but trends upward over time. In the U.S., the Fund is larger than any endowment fund, private foundation, or union pension trust.

What happens to Fund income?
The Legislature decides how Fund income is used. To date, the Legislature has:
- inflation-proofed Fund principal
- paid dividends to qualified applicants
- made special appropriations to the principal
- paid for some Fund-related state expenses

Are some Fund investment classes too risky?
Stocks are the most volatile asset class and are high risk in the short run. But for long-run investors like the Permanent Fund, there's ...

Solution Summary

The consulting reports and analysis are given. The standards of professional conducts. How the standard applies to the research conducted on capital market expectations are given.