Exclusive: North Dakota CIO Outlines Key Considerations When Revising Equity Portfolio

David Hunter discusses the principles he and his staff will adhere to when moving forward with their upcoming equity portfolio revision.

David Hunter

The chief investment officer of the $14.5 billion North Dakota State Investment Board is gearing up for a timely review of the institution’s equity portfolio with its consultant Callan that could see a few things shifted around as he and his team adhere to a few key principles, he told CIO.

One  is to reduce the complexity of the portfolio, with ambitions to streamline portfolio construction through the identification and subsequent elimination of “unintended risks and redundancies.”

“We’ve historically had a slight tilt to small cap values,” CIO David Hunter told CIO, “they’ve done very well for us on a long-term basis. But the No. 1 driver when reviewing our portfolios is how we can improve risk-adjusted returns while remaining disciplined with our fee structures. Over the past five to six years, the State Investment Board managed to reduce fees from about 65 bps down to 45 bps, which has contributed to significant alpha generation for all of our clients.

“It allows us to pay our managers as much as they’ve made in the past, but they’re managing far more money for us thereby improving our return on investment fees,” Hunter added.

“We’ve been blessed with great asset growth,” he continued, referencing the tremendous increase in recent years in the board’s total assets under management, which grew from $7.5 billion in 2013 to approximately $14 billion today. “It allows us to still pay our managers as much as they’ve made before, but they’re managing more money for us.”

He also added that he and his team are keeping an eye out for “closet indexers,” or managers who essentially stray from any risk from the benchmark, maintaining significant beta, but at the same time charging a significant management fee. “It’ll become very apparent” after taking a close look at a manager’s activity, he said.

“The ideal situation would be to add as few managers as possible to our roster—in the ballpark of one or two after the upcoming revisions would likely be best. If it’s possible to add a new strategy with an existing manager, it would be ideal, but we’ll likely want to diversify our manager structure a little bit more. The fewest amount of managers we can add is the goal.”

The board’s largest equity holdings are in Microsoft, Apple, Amazon, UnitedHealth, Visa, JP Morgan, Alphabet, Home Depot, Dow DuPont, and Facebook. Its total global equity portfolio exceeds $6.5 billion.

The board recently conducted a thorough review of its target asset allocation, prompted by “change and uncertainty in the capital markets.”

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