Alaska's Fund Diversifies -- So Should You

Do-it-yourself investors can't mimic large endowments or sovereign wealth funds, but they can learn about asset allocation from them.

Today's example is the Alaska Permanent Fund, which was established in 1976 to pay a royalty (or dividend) to the residents of Alaska out of the tax collected from the movement of oil. It's the closest the U.S. comes to having a sovereign wealth fund. The fund is managed like an endowment with various investments.

The fund's Web site provides transparency in terms of asset allocation and performance, and offers investors the chance to see what went right and to benefit from its mistakes.

Each segment of the equity allocation is a combination of active and passive management, each with its own benchmark. To clear up one item of confusion, the global equity allocation is benchmarked against the MSCI World Index, which includes the U.S., and the non-domestic equity component is benchmarked against the MSCI EAFE Index, which only contains foreign stocks.

Like most diversified investors, the Permanent Fund has had a very rough year. According to the Anchorage Daily News, the fund has lost 25% of its value over the past year, including 10% in October alone.

While 25% sounds like a big number, it would have been worse if the fund had only invested in equities. Losses on stocks exceeded 20% in the nine months through September, the absolute return category was down 10.2% and fixed income was essentially flat. The results for its private equity and infrastructure investments aren't included in the report, but it is possible those results are down as well because those classes rely on complex financing.

The goal of the fund is to achieve a 5% real return. That is, 5% plus the rate of inflation. As depicted in the chart, the fund uses nine asset classes to pursue that goal and maintains a schedule of how much it can deviate from those targets.

For example, the target for the total equity allocation is 53%, plus or minus 10%. As of Sept. 30, equities had fallen to 38.8% of the fund. (The equity weighting was 52% on June 30.)