Legacy Fund Investment Income

So suddenly there are all kinds of public concerns regarding the Legacy Fund. Anybody asking me about it since its inception knows I hate these types of vehicles. They sound good in theory and tend to fail to reach anything close to the theoretical benefits in practice. I voted against it, and I would again. So I am going to break down some of the data about the fund over a series of posts this week.

What is the biggest issue at this point? While the legacy fund represents a significant accumulation of dollar there is absolutely no plan in place, nor has there ever been, for the disposition of those dollars. Some key questions to consider:

  • Is there a maximum amount for the fund?
  • Are there uses for the funds that are preferred or completely ruled out?
  • Should the state actually rethink the overall taxation scheme based on the success of the fund (e.g. should we get rid of the income tax)?
  • Are the funds managed effectively, that is, are we getting the appropriate return for the risk, or are we accepting the right amount of risk given the return?

So I am driven by data. With the fund there are some interesting avenues to take. I am mostly interested in the returns and accumulations of funds. This gets at the returns to the investment of the funds. However there are many different dimensions to this and interesting attributes. For this post let’s start with the monthly investment income.

I plot the amount out below in a polar coordinate fashion. I really like the way this looks in terms of highlighting seasonal fluctuations. I am not concerned so much that the amount increases (that is the line moves out from the center over time) since at some level that should happen naturally. As the fund gets larger the investment income better increase! Whether it does in a return sense is one thing, the current graph is in millions of dollars, so the level of the investment income.

Take a look at July. The returns to July uniformly take a big decline. I am going to assume that this is in part due to the end of the state fiscal year, but beyond that I need to think some more about that pattern. June seems to be a month with large increases compared to earlier months pretty consistently as well.

So right now we learned something. There is significant seasonality in the investment income for the legacy fund. To talk about the returns and the outlook for the fund then likely requires a seasonal adjustment to the data. To my knowledge these types of adjustment are not currently being done, but I think probably should be. That is all for tonight, but there is more to come tomorrow.

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