September 3, 2025 • 42 mins
In this episode of How I Invest, I speak with Frank Mihail, CIO of the North Dakota Department of Trust Lands, which manages an $8B sovereign wealth endowment built to fund public schools.
Frank shares how his three-person team runs a highly concentrated portfolio with 75% in alternatives, why they prefer evergreen fund structures for liquidity, and how they think about portable alpha, co-investments, and core-satellite strategies.
We also discuss the trust’s broader mission: having already distributed $2B to North Dakota schools, with the long-term goal of covering the entire cost of public education.
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Transcript
Episode Transcript
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(00:00):
We're a three person team all in, includingoperations.
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So keeping a tight book, we have our entire$8,000,000,000 portfolio is 40 line items, not
overdiversified yet, and we run a concentratedbook.
So we can still generate significant alpha justfrom picking a manager because our total
portfolio isn't over diversified yet.
So sometimes in our industry, beta is, like, abad word.
(00:24):
You know, the whole goal is to beat the index,but look beta.
Just take the approach of, like, put the wholeportfolio in opportunistic risk.
And what'll happen is, like so those willdeliver outsized returns, and some of them will
deliver negative alpha, and then you end up,like, into the beta because some outperform and
some underperform.
Plus, what we're trying to do is be moresurgical in our approach to alpha.
(00:50):
Give me a sense for where North Dakota LandTrust stands from an asset level and from
maturity of portfolio?
So we're actually still in the, I guess, growthphase, as you would call it, in terms of
there's still a lot of resources in the groundthat we project we would be able to extract for
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the next thirty years.
So I think a good analogy is any four zero oneks, you know, when you're 20 years old, you're
contributing to your four zero one ks, and thenwhen you retire and you don't have that income,
you start taking from the four zero one ks.
Same thing for us.
So right now we're still contributing to theendowment, and then eventually we're going to
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deplete those resources, and we'll hope to havebuilt a large enough endowment that once we
start taking principal, we can still sustain inperpetuity.
Total assets, including the land that we own,is about $12,000,000,000 The investable assets
are about $8,000,000,000
Double click a bit on your portfolioconstruction.
(01:59):
How do you go about investing those assets?
So we target our strategic asset allocation hasa 45% target to private markets.
That includes private equity, venture capital,private credit, real estate and infrastructure.
And then we have another 30% to long shortstrategies, and that's divided into zero beta
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and beta-one hedge funds.
So if you combine that 45 private markets and30 long short strategies, that's about 75 in
alternatives.
The remaining 25% of the portfolio is passivelyindexed.
45% is a pretty typical target for aninstitution, but I think where we're
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differentiated is even with the 75% to alts,90% of our book still provides a liquidity
option, and another way to say that is it justmeans that we're not doing as much in closed
end vehicles.
So double click on that.
How does 95% of your book provide liquidity?
So we use a lot of open end or evergreenstructures that gives us liquidity optionality.
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So typically, these are roughly you could getliquidity in about five years over 20 quarters?
Every asset class is different.
In private credit, typically, my estimate isabout a four year roll off to get full
redemption.
In real estate, you know, right now real estateopen end funds have been in a stress period
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where redemption cues are high, so fundshaven't been paying out distributions.
But it can vary, really vary depending on whenyou request it.
If it's, you know, good liquidity times, youcould get your request out in less than a year,
but right now it's, know, multiple years to getliquidity in real estate open end funds.
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And why do you like these type of evergreenfund structures?
We're a three person team all in, includingoperations, and so keeping a tight book, we
have our entire $8,000,000,000 portfolio is 40line items.
If you look across the institutional platform,you know, there's a lot of institutions that
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have like 200 plus line item books, and itbecomes really operationally intensive to open
new accounts, go through legal and side letter,and, you know, send capital calls, and we don't
really have as much resources in terms of staffto do all of that, so we try to keep a
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concentrated book to help with the operationalbottleneck.
Some institutional investors have told meprivately that they're also transitioning from
closed end funds to evergreen funds in order tosave on fees for essentially the same exact
product.
Do you find any economic benefits to investinginto Evergreen Funds or is it just for the
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liquidity and for the operational ease?
I will say, yes, I do see lower fees, but Ithink it's more of what I've noticed is more of
a function of what asset types make sense in anevergreen structure versus closed end, where
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and I think real assets, real estate andinfrastructure is a good example.
Evergreen structures make sense when you'replaying in that lower risk core space, and once
you move into the more opportunistic space, itdoesn't make as much sense.
And I think fees are structured around thosecore versus opportunistic type of risk assets.
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One of the most innovative pension funds in thecountry is really also leaning into these
evergreen funds, and their rationale is that onaverage only 67% of funds are invested in
private equity funds into actual companies andthe rest is not yet called, so on average over
the length of a ten year fund.
So you have this 33% cash drag.
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Said another way, 33% of your money is earningtreasuries and only two thirds of it is having
its intended purpose, which is investing intohighly liquid, you know, higher up the risk
curve assets like private equity.
How much does that factor into you wanting tobe in these evergreen funds?
It certainly helps build the case.
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I don't know if it was the driving decisionmaker for us, but and yeah, I agree, and I can
sort of point to some numbers here to helpflush that out.
So if you use the rule of 72, you'd need togenerate 9% in an evergreen vehicle to hit a 2x
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multiple in eight years.
But if you're parked in cash waiting forcapital calls, then you need to generate closer
to like a 15% IRR to hit that same 2x multiplein eight years.
And so what this does is it forces allocatorsin closed end funds up the risk curve into that
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opportunistic risk to hit that same multiple,whereas we can stay invested in that lower core
risk spectrum and still hit that same multipleover time.
I've been going down this rabbit hole of whatbenefits do larger LPs actually have over
smaller LPs.
So smaller, obviously, could be nimble.
You don't wanna be too small because then youdon't have access, but let's say you're a
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$510,000,000,000 LP, you could be more nimble.
But also there's benefits that accrue to largerfunds.
And one of these benefits that accrue to largerLPs, not funds, is the co invest.
So you could actually you could actuallycalculate what the advantage is.
So roughly on a 25% IRR, it's a 19% net offees.
In other words, that 6% alpha is something thatyou gain by investing in the co invest.
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So said another way, if you were to invest halfof the assets into co invest, you would get 3%
of alpha.
So some of these advantages of investing intospecific structures or having specific rights
get accrued to the large investor.
And then some of these advantages of being asmall investors of being able to go lower
middle market, being able to have kind of moreearlier assets accrue to the smaller investors,
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but there are significant benefits that alsoaccrue to larger investors as well.
I've been thinking about it a lot and havingdiscussions with our consultant around, you
know, because I am in I'm at conferences andconference calls with a lot of the CIOs for
these largest pensions in the world and they'retalking a lot about co invest and we're not
really doing any co invest.
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So part of me thinks like, should we be doingco invest like them?
But I think I've got to stay true to who we areand where we are in our life cycle.
The reason co invest makes sense for some ofthose largest pensions and institutions is
they're so broadly diversified, again, usingthat like 200 line item plus portfolio.
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They can take a concentrated risk in a singlebusiness to drive alpha, and it's not going to
really impact their total portfolio performancethat much if it goes, let's say, if it goes
south.
We're not over diversified yet, and we run aconcentrated book, we can still generate
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significant alpha just from picking a managerbecause our total portfolio isn't over
diversified yet.
So we've talked about the trade off of coinvest and for us it's, you're trading a fee
reduction for a concentrated bet and we're notready to go down the co invest route because
we're not ready to make that concentrated beton a single company.
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You're trading off fee reduction forconcentration.
I think a lot of it is also, if you look atwhat's a predictor of the best co invest
program, it's the institutions that have reallythought about it and have thought about it from
first principles.
Scott Wilson at, WashU St.
Louis, he'll have his team not only meet withthe managers and look for their most
concentrated positions, they'll also do theirunderlying diligence on the end asset as well.
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And then other LPs, you'll see they'll they'llthink about the incentives behind co invest
programs, how they could become reallyimportant partners to their GPs so that they do
a lot of upfront work so that when a co investcomes to them, a, they're prepared and they're
ready to process it, b, they understand theincentives that's driving that managers as well
as that managers kind of zone of excellencewhere they're the best at.
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So a lot of these best in class co investprograms are very much thought out and a lot of
them are very active.
So it's not something you want to do with onefoot.
You'd probably have to be staffed up as well.
Again, it's pretty tough with a three personteam.
So when we were talking about evergreen funds,you alluded that it works for some asset
classes and not other asset classes.
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Maybe you could double click what asset classesdo you think evergreen funds work for and what
asset classes they do not work for and maybesome asset classes then in future you could see
evergreen funds going into as well.
Evergreen funds, they work well where returnsare more income driven and less growth driven.
So I'll give you an example.
They work well in private credit and core realestate, but don't work well in venture capital
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or distressed credit.
So let's start with the private credit example.
In direct lending and asset backed credit, theunderlying securities would have like a
weighted average life of about four years.
So if an investor raises their hand and wantsto redeem, the fund manager can set aside some
assets, let them self amortize and fulfill thatredemption request without putting stress on
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the fund.
And then think about in core real estate,usually what defines core real estate is that
the assets are stabilized, so, you know, thinkabout a sort of Class A piece of real estate
that's fully rented, kicking off income, and soyou have that income generation plus if an
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investor raises their hand and needs liquidity,the manager could list a building for sale, and
if it's stabilized to Class A, they know theyshould be able to get full market price for it
without, again, putting stress on the fund.
So those are examples where the underlyingassets make sense in an evergreen structure.
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Going back to where they don't make sense in VCor distressed credit, usually it takes a decade
for that investment to reach its fullpotential, and you don't want to disrupt that
value accretion process by cutting the timeperiod short.
And so I think, yeah, those are good examplesof where it works and where it doesn't.
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What about private equity?
What needs to happen for private equity fundsto be able to really proliferate in the
evergreen funds?
Private equity may almost be there, and we areseeing some evergreen funds come out.
Right now, what we're seeing in private equityis there are mature assets that are being
rolled into continuation vehicles through GPled transactions, and these continuation
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vehicles, the managers will cherry pick whatthey consider to be the trophy assets that
generate predictable cash flows.
And so going back to that analogy, if, youknow, if they are mature assets that are sort
of kicking off more income and have less growthpotential, then maybe those underlying assets
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could work in an evergreen vehicle.
The other version of the evergreen fund thatwe're seeing is the interval fund, and those
are becoming popularized.
They operate a little bit differently wherethey're buying closed end funds, and if
liquidity needs to be provided, then they wouldsell those closed end funds on the secondary
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market.
You know, the tradeoff is if you need togenerate liquidity during a period of stress,
you may have to sell at a discount to providethat liquidity.
And I think that's probably one of the biggestsort of risks or fears that investors have
going into those types of vehicles.
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Speaking of liquidity, you have $8,000,000,000.
You have a very specific kind of mandate.
You're you're still not you still have moreresources on the ground over the next thirty
years.
Are you not trying to be a net liquidityprovider to other people?
In other words, solving their liquidityproblems in order to get that illiquidity
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discount from those investors?
We are trying to ramp up our private equitybook and we think now is a great time to do it
and secondaries is a great way to access it.
We're not going out and bidding on singledeals.
We're hiring managers that'll do that for us ina secondary fund structure.
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Because you guys have so much AUM and a verysmall staff, you're not necessarily picking
deals, but you're still able to directionallybet on a secular trend.
Let's say, a bunch of endowments are sellingsecondary assets.
You see that as a theme and you're able toaccess that through managers.
So you're still able to be proactive with yourmoney even if you're not making specific
investments.
That's right.
And and we are actively looking at that spaceright now.
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So I wanna double click on what you saidearlier, which you have 30% of exposure to long
short hedge funds as a very large exposure.
Why are you so bullish on the hedge fund assetclass and structure?
I'll break it down.
We have a 15% target to zero beta hedge funds.
Those are your sort of multi strat vehicles,which is our sort of preferred vehicle.
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We have a 30% target to public equities.
Half of that is passive and then the other halfis long short beta one, or they're also called
100 thirty-thirty strategies or activeextension strategies.
The way I look at it is you want to give yourmanager the tools to outperform in all markets,
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and if you're in long only and you go into abear market like 2022, a lot of the mandates
are that they have to stay, like they can't goto cash to move out of the way, they have to
stay invested, and so they might move fromhigher vol to lower vol equities, but they're
still long.
And when you have long short managers, itactually gives them the tools to make money on
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that other side in a bear market.
And so the goal is that they'll be able tooutperform that downside in a year like 2022,
and most of the managers were able to do wellin that type of environment.
So that's the Beta one book.
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On the zero Beta book, the way we view that orthe goal is it should be an anchor to the
portfolio.
So again, 2022 was a great example whenequities were down 20%.
Multistrat hedge funds were delivering positivereturns, like even, you know, 10% return,
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positive returns when stocks were down 20%.
So we feel like it's a ballast to theportfolio, a diversifier.
And then the other 15% is just focused on lowcost indexing?
That's right.
Mike Ma, who I chatted to on Thursday, he usedto work for Vanguard's investment team and
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marketing team.
And I'm not being paid by Vanguard,unfortunately.
But one of the things I learned from him thatreally blew my mind is that in 1981, Bogle, who
who founded Vanguard, got a special exemptionfrom the SEC in order to advertise and
structure their funds such a way.
But the key caveat in that exemption has stillheld to this day is that every time they get
more funds, all of their fees for their fundshave to go down.
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So they have this negative pressure on indexingfrom the SEC, which I thought was really
unique, and I think it's an untold story,frankly.
Yeah.
That that is pretty interesting, and,impressive if they've stayed true to that all
these years.
So a big part of your strategy is based on thisconcept of portable alpha.
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First of all, how would you define portablealpha?
Portable alpha is where you separate alpha andbeta.
In a traditional form of investing, you go out,you hire an active manager, and you task them
with beating a benchmark.
When you break up the return components, thebenchmark is the beta, and then anything above
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that is the alpha component, and you're hiringone manager to do that.
But with Portable Alpha, you're separating theAlpha and Beta where you hire or allocate
capital to hedge funds to isolate just theAlpha component, and then you use derivatives
to synthetically replicate the stock or bondBeta.
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To be honest, this is still a concept I'mreally trying to grasp.
I I discussed this with Cliff Asness, and whatI understand is that the alpha is essentially
these modules that you could build a portfolioout of.
So for example, a famous module back in the daythat I'm sure is no longer there.
You know, you could sell the Santa Claus, youyou could sell in December and buy in January.
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You could somehow isolate that one factor andbuild it into other types of portfolios.
Maybe you could help clarify exactly how youwould go practically porting this alpha into a
portfolio.
When you're picking hedge funds in a portablealpha program, you really want to make sure
they're doing a great job isolating that alpha,because there's a lot of hedge fund strategies
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out there where you have this sort of betacreep.
There's a lot of hedge fund strategies likeequity long short where they might be running
at like point five beta.
So that wouldn't work well if you're thenporting on an additional beta one on top of
that, then you're just running at 1.5 beta.
So you really want to make sure you're pickingstrategies that are shorting out the market and
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just isolating that alpha component.
And there's a lot of different strategies thatcan do that, whether it's event driven, market
neutral, RV.
And So I think, you know, those are thedifferent ways to do it.
There's tools out there that help LPs dissectthat factor exposure and make sure their
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managers are sort of staying true to that zerobeta target.
We use a lot of multi strats because we thinkthey do a great job at targeting zero beta.
One of the things I'll say about our portfoliois, even though I like the philosophy of
Portable Alpha, we're actually not running atrue Portable Alpha program.
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In a proper Portable Alpha program, hedge fundsare not part of the strategic asset allocation.
They, and in our program they are part of ourstrategic asset allocation, And so I think what
we're doing, if you entertain the nomenclature,I like to call what we're doing portable beta
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light, and the reason is the light is becausewe're also not using as much leverage in a true
Portable Alpha program.
You want to be levered one to one, so what Imean by that is, let's say you've got 15% of
your capital in hedge funds, you'd also want15% levered beta.
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We allocate 15% to hedge funds, but we onlyhave about 2% levered bond beta on.
So in a true portable alpha program, you pullout the hedge funds from the strategic asset
allocation, you benchmark them to cash, andthen you lever up that same amount stock or
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bond beta.
And the end goal there is that you still wantyour money working for you in kind of a one
beta environment.
You want the alpha around it, but you also wantthat money working for you and earning the
market.
That's right, yeah.
And I guess the best way to put it is, youknow, if you do get a drawdown in equity or
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bond markets, if the absolute return managersare staying true to absolute return, they
should still be generating positive returns andthey should also be beating their benchmark of
cash.
And to double click on that, the reason whycash is cash is your cost to synthetically
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finance the beta.
So the beta part of it is you're going out andyou're buying futures or swaps on the equity or
bond market, and that costs you Fed funds rateplus a spread.
And so in order to make up that cost, that'syour benchmark for your hedge fund managers.
Talk to me about fund of funds.
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Where do fund of funds fit into your portfolio?
So there's a couple of reasons we use fund offunds.
The first is to help us limit line item sprawlin areas where you do find a lot of traditional
closed end vehicles like private equity andventure capital.
And the benefit is we get diversified exposuresin one line item and that reduces our
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operational burden for our small team.
The other reason that we use fund of funds isas a portfolio construction tool.
So for example, in real estate we use theNacreif ODCE, Nacreif ODCE Index as our
benchmark, and we hired a fund of funds managerthat can track that index, and then we can
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build a core satellite approach around thatusing the investable index.
Then we pick satellite strategies that webelieve can deliver alpha.
So the benefits is it gives us this liquiditysort of home base to rebalance to our strategic
asset allocation targets, but then it alsogives us control over how much tracking error
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we want to take in the real estate portfolio.
So if we want, we can go out and hire a hightracking error, opportunistic manager, but if
they're taking more tracking error than we wantin the total portfolio, then we can just size
it appropriately to make sure we're honing inon the tracking error we want.
What areas are you looking at to potentiallyinvest into fund of funds that you're not
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investing into today?
Actually, we're in talks right now with aprivate infrastructure manager who can help us
replicate what we did in the real estate book,which is build that CoreSatellite portfolio
using an investable index.
And actually, now, an investable index did notexist in private infrastructure, but Wilshire
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just announced the launch of the Feet, WilshirePrivate Markets Infrastructure Index, just last
month, and it's the first and only investableprivate infrastructure index.
And so, yeah, we're looking to build that samecore satellite approach around that index.
And why would you look to replicate that indexversus investing in that index?
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What are you trying to achieve with yourexposure?
Yeah, the goal would be that sort of same idea,which is with this core satellite approach, you
basically buy the beta, buy the index as yourhome base, can, and so it can help provide
liquidity.
And then you can go out and invest in, takemore risk and invest in, you know, whether
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that's closed end funds, data centers,secondaries, co invest and have those
satellites built around that core beta, andthen you can always use that core beta as your
liquidity home base.
So maybe double click on an example, so let'ssay you were to put in $500,000,000 in the
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strategy.
Are you saying that half of that would go intoan index that has liquidity and half of it
would be trying to beat that index?
That's right.
Exactly.
And then you start by investing in the index.
It's almost like you're trying to find alpha inthe public markets.
You invest your money in the S and P 500, soit's not just sitting around.
And then over time, you try to find the alphain the companies.
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You try to find the stock that will outperformthe rest of the market.
Yeah, that's right.
And actually, going back to how I wasexplaining the structure of our public equity
book, we're doing the same thing there wherewe've got 50% of it is just passively indexed
with daily liquidity, and then the other halfis in these long short active extension
strategies, so we've sort of built that samemodel there as well.
(27:16):
So for investors that would want to replicatethis, did I phrase it the right way that you
have your money in default as an index and youstart to basically sell as you invest into non
index assets?
Is that kind of how you operationalize that?
Yes, that's right.
And then if you're investing in closed endvehicles for your Alpha satellites, as they
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wind down and pay distributions, what wouldhappen is your, let's say, real estate or
infrastructure allocation, if that money isgoing into your cash bucket, your allocation is
coming down and you'll be underweight relativeto your target, and so you can take those
distributions and put it back into that betahome base to make sure you're sort of getting
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balanced to your targets.
I love it.
It sounds complex, it's incredibly simple andintuitive.
And what I love about it is, to quote WarrenBuffett, the best the number one most important
factor on investment is the opportunity cost.
So by putting in an index, you don't feel thisneed to distribute and you don't feel this
compulsion to invest in closed end funds, soyou could sit around and wait for your shots
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while you're still earning the beta in thatexposure.
Also, you're never underweight or overweight inasset class, which allows you to have an all
weather approach whether the market is going upor down, so it's an anti fragile portfolio
construction.
Yeah, that's right.
And you know, sometimes in our industry beta islike a bad word, because the whole goal is to
beat the index, but I look at beta as ourfriend and a tool.
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There's a behavioral finance aspect to this inthat investing is not something that should
ever be done under duress, especially intohighly illiquid investments, And you should
always feel like, at a minimum, I'm getting thebeta, and you should almost invest from a form
of abundance versus scarcity.
I know those are really, like, woo woo terms,but you should never be pressured to invest.
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I think that leads to a lot more errors,especially in illiquid instruments than most
people would probably admit.
Some allocators take the approach of like, youknow, let's put the whole portfolio in
opportunistic risk and what will happen is likesome of those will deliver outsized returns and
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some of them will deliver negative alpha andthen you end up averaging to the beta because
some outperform and some underperform.
For us, what we're trying to do is be moresurgical in our approach to alpha where, you
know, if I'm trying to target like 50 basispoints of alpha at the total portfolio level,
(29:56):
by investing in the beta, I can really liketighten that tracking error and then just pick
the managers who I think, my alpha managers whoI think can like really just consistently
outperform, like not trying to swing for thefences, but if you can consistently just put up
like 5,100 bps over the benchmark, then thatwill roll up to our top line total portfolio
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alpha.
There's this anti fragility to this model whichis probably underappreciated in that it just
goes back to behavioral finance.
If you have these huge fluctuations in yourportfolio, in theory an AI might generate an
extra 100 basis points of alpha.
But behaviorally, if you sell at such a strongtime and you can't keep this portfolio for ten
(30:42):
years, the real loss is the compounding of thebeta with maybe a little alpha.
It's not that marginal alpha that you couldhave theoretically gotten that you never would
have actually gotten in the market.
I think people fall for this kind of like idealportfolio fallacy.
Same thing with crypto.
That's why a lot of crypto investors, you know,I had this a CIO of Bitwise and he's they found
(31:03):
behaviorally that if you have more than 5% ofyour portfolio in Bitcoin, you sell at just the
wrong time.
So there's a behavioral aspect whether or notyou believe in Bitcoin or not.
There's a behavioral aspect to diversificationthat's underappreciated unless you have those
battle scars from kind of selling at the wrongtime and unless unless you have really high
self awareness about yourself and your yourtrue risk tolerance.
(31:25):
One selling at the wrong time.
Point I wanted to make going back to the hedgefund conversation is I feel like a lot of ICs
out there sell hedge funds at the wrong timebecause usually hedge funds will get a bad rap
in times like today where, you know, you've gottwo years of a bull market where equities are
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putting up double digit returns and then, youknow, boards are looking at their hedge fund
book and they're like, either, you know, ifyou're looking at directional strategies like
CTAs that are down double digits, they're like,Well, why are we paying all these fees and they
can't even keep up, you know, they're losingmoney in a bull market, let's get rid of them.
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Or even in the sort of non directionalstrategies, which, you know, are usually
putting lower volatility, modest, you know, 5%returns and can't keep up with the double digit
returns of equities, they're saying, Hey, we'repaying all these fees and they're
underperforming.
You know, but if you think about what was thereason you hired the hedge funds in the first
(32:33):
place, it was not to ever keep up with stockmarket, it was to mitigate during the crisis
periods, and a lot of boards will fire thehedge funds right after like a two year bull
run, which is precisely the time you want tokeep them because usually, you know, after a
two year bull rung is when the crisis periodfollows, and that's when you wanna have hedge
funds in your book.
(32:54):
There's this highly underappreciated part ofinvesting, which is rooting your thesis.
So the way that I think about it is the morerooted your thesis, the more it will weather
the storm of volatility.
So the joke is, like, fifth only 50% of tradeis what stock should I buy.
It's really when when should I sell it becauseyou have to have a fundamental thesis.
(33:16):
And someone might say, well, just tell me whatto buy.
Who cares about the reason?
The reason you care about the reason is there'sa lot of noise in the market.
If you don't have a fundamental thesis, yes,you might buy Bitcoin at a $100, but you're
gonna sell it at a 140 when it goes down from$1.60 because you don't understand the
fundamental thesis.
And it's one of these things that if peoplespend more time on the front end, they may
(33:38):
still make the same decision, but theirconviction will be more rooted and they'll
avoid these behavioral finance traps of howpeople lose lose their returns over over
decades.
That's the reason the whole strategic assetallocation model has been built around
institutions is to avoid the tactical decisionmaking on the part of investment staff.
(34:00):
As long as you're sticking to your job is juststick to your targets and rebalance to your
targets and never you know, you're not makingcalls on when to buy and when to sell.
On a previous podcast, a top investor told methat the number one thing you could do in a
crisis is to cancel your next IC.
The number the number one or the number onething you could do in down market is just to
(34:23):
cancel your IC.
That's the number that's the degree of freedomyou have in order to preserve preserve your
returns because as soon as you get to the IC,the game is over and you sell your losing
position at the wrong time.
So it's obviously a bit facetious, but therethere's granular truth there where sometimes
the best thing to do is to do nothing, andthat's extremely difficult, especially when you
(34:47):
have to build consensus around a dozen people.
You tend to revert to this kind of least commondenominator.
Yeah.
That's right.
And and I guess another way to put it is, like,sometimes, like, doing nothing sometimes means
sitting in cash, and cash is also a choice.
I don't wanna get you in trouble, but one ofthe things that I'm really trying to talk
(35:07):
about, is this golden calf of liquidity, and Icall it the virtue of illiquidity.
My friend just reminded me of my bachelor trip,he's like, you know, that was a great idea.
About a decade ago, I wanted to create aBitcoin fund that would, no matter what, would
be illiquid, a ten and twenty year fund.
It was more like a thought experiment.
But the one benefit would be that if you ownthe Bitcoin yourself, you're able to sell it.
(35:32):
But if somebody else owns it, the feature isactually the illiquidity of the asset.
And, obviously, controversial for many reasons,but there is this value in private equity and
venture capital in some of these class assetclasses where the illiquidity is not the only
feature, but is a feature of the asset class.
One way to to think about it is which isinteresting is, like, if you're willing to
(35:56):
stomach the volatility, you could get access tocrypto beta for free.
Right?
Like if you if an institution is sophisticatedenough to understand how to invest in native
tokens directly, I mean, that's it's prettymuch free, or, you know, you would probably
hire a custody bank and whatever they charge.
(36:20):
But if you can't stomach the volatility and youprefer the private markets approach, you pay 2
and 20 for it.
And sometimes that is the best approach, and Iwould argue for a lot of institutional
investors that is the right thing.
There's a philosophical question which is if afund's in an illiquid vehicle and it goes up
and down value, did it actually go up and downvalue if it hasn't been a quarter?
(36:42):
In other words, there's this willful ignorancethat I would argue is as much of an asset and
not seeing your your assets marked up on adaily basis.
Yeah.
That's right.
What's that other quote?
Like, if a tree falls and nobody hears it, didit did it make some noise?
Yeah.
Did it actually fall?
Yeah.
So going from trees falling, you like to seedfunds, which is unusual for an asset allocator
(37:04):
of your size.
Why do you like to seed funds?
Well, usually there's a trade off where you canget some economic benefits, whether that's a
revenue share or a fee reduction.
And yeah, we've seeded a couple products.
(37:24):
Usually we're doing it with blue chip firmsthat we already know that are expanding their
product lineup and offering favorable economicsin return.
It's a little easier for us to underwrite thosefirms if we've already done like firm ODD with
(37:44):
them.
We haven't yet seeded like emerging managersthat are starting a new firm from scratch,
that's a little bit harder for us tounderwrite.
I know there's a lot of allocators that do thatand have programs around that, but we haven't
really entered that space yet.
I was just sitting with a 10,000,000,000 pluskind of public fund, and one of the things that
(38:09):
they do is they pilot some of their strategieswithin their core fund, and then once they
build a track record, they spin it out into itsown strategy.
Is that what you're talking about?
We haven't done it in that method yet.
These are usually like big platform firms wherewe might have a private credit relationship
with them and they're expanding to privateequity or vice versa.
(38:34):
And so that's, I think, a little bit differentfrom what you described.
So as you mentioned earlier, you have a staffof three and you really rely on your
partnership with RVK, which is a consultant.
Tell me about your relationship with RVK andhow do they practically help you on a day to
day basis?
Yeah, we see RVK as an extension of our team.
(38:56):
They help us with capital market assumptionsthat are an input to our strategic asset
allocation modeling.
They help us with manager monitoring, managerdue diligence.
When we make a new fund investmentrecommendation to our board, they're helping
(39:17):
out with all of that on-site due diligence andwriting up investment memos.
So we have a really close and collaborativerelationship with RVK.
And is it bidirectional in that you go to themand you say, We're looking for this type of
manager, they give you some managers, but alsosomebody might come to and you send them over
to them.
Talk to about of the sourcing component.
(39:37):
Yeah, that's exactly right.
And I can sort of point to specific areas wherethere's examples.
Like my background is I came from New MexicoPERA public pension where I covered hedge
funds.
So when I came over to North Dakota, I waspretty well versed in hedge funds and I had
(39:58):
brought some ideas to RVK and sort of pickedthose managers first and asked them to
underwrite, whereas I wasn't as well versed inprivate credit, and so I was leaning more on
RVK to say, Hey, like, where do I start?
Help me filter the universe.
You know, there's so many private creditmanagers out there.
Who are your top picks?
(40:18):
And so, yeah, exactly.
It's sort of the funnel could start from themor it could start from me.
A little bit of an odd question, but how manymanagers visit you in Bismarck, North Dakota
every single year?
Yeah, we usually get like one visit a month onaverage.
As you can imagine, summer months are busier.
(40:40):
We might get like one a week in the summer, butas many managers are interested in coming out
here in January and February.
That's when you know you have a realrelationship when they're coming out in
midwinter.
What would you like our listeners to know aboutyou, about North Dakota Land Trust, or anything
(41:01):
else you'd like to share?
Just to sort of highlight North Dakota Trustlands, over the last decade we've distributed
more than $2,000,000,000 to North Dakota PublicSchools.
This year we're scheduled to distribute$290,000,000 and our fund covers about a
(41:21):
quarter of the cost of public education, whichhelps reduce the tax burden on local property
taxpayers.
And that quarter that we make up has grown overtime, and hopefully our goal in the long run is
to be able to grow that to 100% and cover theentire cost of public education.
(41:42):
I think a lot of times it's lost.
You have these large numbers.
You're lost on the impact that this moneyactually has on here, education state
residents.
So I appreciate you highlighting that, and Iappreciate you jumping on the podcast and
sharing your wisdom.
Looking forward, I don't promise January orFebruary, but looking forward to coming to
Bismarck and continuing conversation.
Yeah.
(42:02):
Likewise.
Thanks, David.
It's been great.
Thanks for having me on.
Thanks, Frank.
Thanks for listening to my conversation.
If you enjoyed this episode, please share witha friend.
This helps us grow.
Also provides the very best feedback when wereview the episode's analytics.
Thank you for your support.
We're a three person team all in, includingoperations.
(00:03):
So keeping a tight book, we have our entire$8,000,000,000 portfolio is 40 line items, not
overdiversified yet, and we run a concentratedbook.
So we can still generate significant alpha justfrom picking a manager because our total
portfolio isn't over diversified yet.
So sometimes in our industry, beta is, like, abad word.
(00:24):
You know, the whole goal is to beat the index,but look beta.
Just take the approach of, like, put the wholeportfolio in opportunistic risk.
And what'll happen is, like so those willdeliver outsized returns, and some of them will
deliver negative alpha, and then you end up,like, into the beta because some outperform and
some underperform.
Plus, what we're trying to do is be moresurgical in our approach to alpha.
(00:50):
Give me a sense for where North Dakota LandTrust stands from an asset level and from
maturity of portfolio?
So we're actually still in the, I guess, growthphase, as you would call it, in terms of
there's still a lot of resources in the groundthat we project we would be able to extract for
(01:13):
the next thirty years.
So I think a good analogy is any four zero oneks, you know, when you're 20 years old, you're
contributing to your four zero one ks, and thenwhen you retire and you don't have that income,
you start taking from the four zero one ks.
Same thing for us.
So right now we're still contributing to theendowment, and then eventually we're going to
(01:38):
deplete those resources, and we'll hope to havebuilt a large enough endowment that once we
start taking principal, we can still sustain inperpetuity.
Total assets, including the land that we own,is about $12,000,000,000 The investable assets
are about $8,000,000,000
Double click a bit on your portfolioconstruction.
(01:59):
How do you go about investing those assets?
So we target our strategic asset allocation hasa 45% target to private markets.
That includes private equity, venture capital,private credit, real estate and infrastructure.
And then we have another 30% to long shortstrategies, and that's divided into zero beta
(02:24):
and beta-one hedge funds.
So if you combine that 45 private markets and30 long short strategies, that's about 75 in
alternatives.
The remaining 25% of the portfolio is passivelyindexed.
45% is a pretty typical target for aninstitution, but I think where we're
(02:46):
differentiated is even with the 75% to alts,90% of our book still provides a liquidity
option, and another way to say that is it justmeans that we're not doing as much in closed
end vehicles.
So double click on that.
How does 95% of your book provide liquidity?
So we use a lot of open end or evergreenstructures that gives us liquidity optionality.
(03:13):
So typically, these are roughly you could getliquidity in about five years over 20 quarters?
Every asset class is different.
In private credit, typically, my estimate isabout a four year roll off to get full
redemption.
In real estate, you know, right now real estateopen end funds have been in a stress period
(03:35):
where redemption cues are high, so fundshaven't been paying out distributions.
But it can vary, really vary depending on whenyou request it.
If it's, you know, good liquidity times, youcould get your request out in less than a year,
but right now it's, know, multiple years to getliquidity in real estate open end funds.
(03:57):
And why do you like these type of evergreenfund structures?
We're a three person team all in, includingoperations, and so keeping a tight book, we
have our entire $8,000,000,000 portfolio is 40line items.
If you look across the institutional platform,you know, there's a lot of institutions that
(04:18):
have like 200 plus line item books, and itbecomes really operationally intensive to open
new accounts, go through legal and side letter,and, you know, send capital calls, and we don't
really have as much resources in terms of staffto do all of that, so we try to keep a
(04:41):
concentrated book to help with the operationalbottleneck.
Some institutional investors have told meprivately that they're also transitioning from
closed end funds to evergreen funds in order tosave on fees for essentially the same exact
product.
Do you find any economic benefits to investinginto Evergreen Funds or is it just for the
(05:01):
liquidity and for the operational ease?
I will say, yes, I do see lower fees, but Ithink it's more of what I've noticed is more of
a function of what asset types make sense in anevergreen structure versus closed end, where
(05:22):
and I think real assets, real estate andinfrastructure is a good example.
Evergreen structures make sense when you'replaying in that lower risk core space, and once
you move into the more opportunistic space, itdoesn't make as much sense.
And I think fees are structured around thosecore versus opportunistic type of risk assets.
(05:52):
One of the most innovative pension funds in thecountry is really also leaning into these
evergreen funds, and their rationale is that onaverage only 67% of funds are invested in
private equity funds into actual companies andthe rest is not yet called, so on average over
the length of a ten year fund.
So you have this 33% cash drag.
(06:12):
Said another way, 33% of your money is earningtreasuries and only two thirds of it is having
its intended purpose, which is investing intohighly liquid, you know, higher up the risk
curve assets like private equity.
How much does that factor into you wanting tobe in these evergreen funds?
It certainly helps build the case.
(06:34):
I don't know if it was the driving decisionmaker for us, but and yeah, I agree, and I can
sort of point to some numbers here to helpflush that out.
So if you use the rule of 72, you'd need togenerate 9% in an evergreen vehicle to hit a 2x
(06:55):
multiple in eight years.
But if you're parked in cash waiting forcapital calls, then you need to generate closer
to like a 15% IRR to hit that same 2x multiplein eight years.
And so what this does is it forces allocatorsin closed end funds up the risk curve into that
(07:15):
opportunistic risk to hit that same multiple,whereas we can stay invested in that lower core
risk spectrum and still hit that same multipleover time.
I've been going down this rabbit hole of whatbenefits do larger LPs actually have over
smaller LPs.
So smaller, obviously, could be nimble.
You don't wanna be too small because then youdon't have access, but let's say you're a
(07:38):
$510,000,000,000 LP, you could be more nimble.
But also there's benefits that accrue to largerfunds.
And one of these benefits that accrue to largerLPs, not funds, is the co invest.
So you could actually you could actuallycalculate what the advantage is.
So roughly on a 25% IRR, it's a 19% net offees.
In other words, that 6% alpha is something thatyou gain by investing in the co invest.
(08:03):
So said another way, if you were to invest halfof the assets into co invest, you would get 3%
of alpha.
So some of these advantages of investing intospecific structures or having specific rights
get accrued to the large investor.
And then some of these advantages of being asmall investors of being able to go lower
middle market, being able to have kind of moreearlier assets accrue to the smaller investors,
(08:27):
but there are significant benefits that alsoaccrue to larger investors as well.
I've been thinking about it a lot and havingdiscussions with our consultant around, you
know, because I am in I'm at conferences andconference calls with a lot of the CIOs for
these largest pensions in the world and they'retalking a lot about co invest and we're not
really doing any co invest.
(08:48):
So part of me thinks like, should we be doingco invest like them?
But I think I've got to stay true to who we areand where we are in our life cycle.
The reason co invest makes sense for some ofthose largest pensions and institutions is
they're so broadly diversified, again, usingthat like 200 line item plus portfolio.
(09:11):
They can take a concentrated risk in a singlebusiness to drive alpha, and it's not going to
really impact their total portfolio performancethat much if it goes, let's say, if it goes
south.
We're not over diversified yet, and we run aconcentrated book, we can still generate
(09:32):
significant alpha just from picking a managerbecause our total portfolio isn't over
diversified yet.
So we've talked about the trade off of coinvest and for us it's, you're trading a fee
reduction for a concentrated bet and we're notready to go down the co invest route because
we're not ready to make that concentrated beton a single company.
(09:53):
You're trading off fee reduction forconcentration.
I think a lot of it is also, if you look atwhat's a predictor of the best co invest
program, it's the institutions that have reallythought about it and have thought about it from
first principles.
Scott Wilson at, WashU St.
Louis, he'll have his team not only meet withthe managers and look for their most
concentrated positions, they'll also do theirunderlying diligence on the end asset as well.
(10:17):
And then other LPs, you'll see they'll they'llthink about the incentives behind co invest
programs, how they could become reallyimportant partners to their GPs so that they do
a lot of upfront work so that when a co investcomes to them, a, they're prepared and they're
ready to process it, b, they understand theincentives that's driving that managers as well
as that managers kind of zone of excellencewhere they're the best at.
(10:40):
So a lot of these best in class co investprograms are very much thought out and a lot of
them are very active.
So it's not something you want to do with onefoot.
You'd probably have to be staffed up as well.
Again, it's pretty tough with a three personteam.
So when we were talking about evergreen funds,you alluded that it works for some asset
classes and not other asset classes.
(11:02):
Maybe you could double click what asset classesdo you think evergreen funds work for and what
asset classes they do not work for and maybesome asset classes then in future you could see
evergreen funds going into as well.
Evergreen funds, they work well where returnsare more income driven and less growth driven.
So I'll give you an example.
They work well in private credit and core realestate, but don't work well in venture capital
(11:27):
or distressed credit.
So let's start with the private credit example.
In direct lending and asset backed credit, theunderlying securities would have like a
weighted average life of about four years.
So if an investor raises their hand and wantsto redeem, the fund manager can set aside some
assets, let them self amortize and fulfill thatredemption request without putting stress on
(11:53):
the fund.
And then think about in core real estate,usually what defines core real estate is that
the assets are stabilized, so, you know, thinkabout a sort of Class A piece of real estate
that's fully rented, kicking off income, and soyou have that income generation plus if an
(12:17):
investor raises their hand and needs liquidity,the manager could list a building for sale, and
if it's stabilized to Class A, they know theyshould be able to get full market price for it
without, again, putting stress on the fund.
So those are examples where the underlyingassets make sense in an evergreen structure.
(12:37):
Going back to where they don't make sense in VCor distressed credit, usually it takes a decade
for that investment to reach its fullpotential, and you don't want to disrupt that
value accretion process by cutting the timeperiod short.
And so I think, yeah, those are good examplesof where it works and where it doesn't.
(12:58):
What about private equity?
What needs to happen for private equity fundsto be able to really proliferate in the
evergreen funds?
Private equity may almost be there, and we areseeing some evergreen funds come out.
Right now, what we're seeing in private equityis there are mature assets that are being
rolled into continuation vehicles through GPled transactions, and these continuation
(13:23):
vehicles, the managers will cherry pick whatthey consider to be the trophy assets that
generate predictable cash flows.
And so going back to that analogy, if, youknow, if they are mature assets that are sort
of kicking off more income and have less growthpotential, then maybe those underlying assets
(13:45):
could work in an evergreen vehicle.
The other version of the evergreen fund thatwe're seeing is the interval fund, and those
are becoming popularized.
They operate a little bit differently wherethey're buying closed end funds, and if
liquidity needs to be provided, then they wouldsell those closed end funds on the secondary
(14:08):
market.
You know, the tradeoff is if you need togenerate liquidity during a period of stress,
you may have to sell at a discount to providethat liquidity.
And I think that's probably one of the biggestsort of risks or fears that investors have
going into those types of vehicles.
(14:28):
Speaking of liquidity, you have $8,000,000,000.
You have a very specific kind of mandate.
You're you're still not you still have moreresources on the ground over the next thirty
years.
Are you not trying to be a net liquidityprovider to other people?
In other words, solving their liquidityproblems in order to get that illiquidity
(14:49):
discount from those investors?
We are trying to ramp up our private equitybook and we think now is a great time to do it
and secondaries is a great way to access it.
We're not going out and bidding on singledeals.
We're hiring managers that'll do that for us ina secondary fund structure.
(15:09):
Because you guys have so much AUM and a verysmall staff, you're not necessarily picking
deals, but you're still able to directionallybet on a secular trend.
Let's say, a bunch of endowments are sellingsecondary assets.
You see that as a theme and you're able toaccess that through managers.
So you're still able to be proactive with yourmoney even if you're not making specific
investments.
That's right.
And and we are actively looking at that spaceright now.
(15:31):
So I wanna double click on what you saidearlier, which you have 30% of exposure to long
short hedge funds as a very large exposure.
Why are you so bullish on the hedge fund assetclass and structure?
I'll break it down.
We have a 15% target to zero beta hedge funds.
Those are your sort of multi strat vehicles,which is our sort of preferred vehicle.
(15:57):
We have a 30% target to public equities.
Half of that is passive and then the other halfis long short beta one, or they're also called
100 thirty-thirty strategies or activeextension strategies.
The way I look at it is you want to give yourmanager the tools to outperform in all markets,
(16:20):
and if you're in long only and you go into abear market like 2022, a lot of the mandates
are that they have to stay, like they can't goto cash to move out of the way, they have to
stay invested, and so they might move fromhigher vol to lower vol equities, but they're
still long.
And when you have long short managers, itactually gives them the tools to make money on
(16:48):
that other side in a bear market.
And so the goal is that they'll be able tooutperform that downside in a year like 2022,
and most of the managers were able to do wellin that type of environment.
So that's the Beta one book.
(17:09):
On the zero Beta book, the way we view that orthe goal is it should be an anchor to the
portfolio.
So again, 2022 was a great example whenequities were down 20%.
Multistrat hedge funds were delivering positivereturns, like even, you know, 10% return,
(17:30):
positive returns when stocks were down 20%.
So we feel like it's a ballast to theportfolio, a diversifier.
And then the other 15% is just focused on lowcost indexing?
That's right.
Mike Ma, who I chatted to on Thursday, he usedto work for Vanguard's investment team and
(17:50):
marketing team.
And I'm not being paid by Vanguard,unfortunately.
But one of the things I learned from him thatreally blew my mind is that in 1981, Bogle, who
who founded Vanguard, got a special exemptionfrom the SEC in order to advertise and
structure their funds such a way.
But the key caveat in that exemption has stillheld to this day is that every time they get
more funds, all of their fees for their fundshave to go down.
(18:13):
So they have this negative pressure on indexingfrom the SEC, which I thought was really
unique, and I think it's an untold story,frankly.
Yeah.
That that is pretty interesting, and,impressive if they've stayed true to that all
these years.
So a big part of your strategy is based on thisconcept of portable alpha.
(18:36):
First of all, how would you define portablealpha?
Portable alpha is where you separate alpha andbeta.
In a traditional form of investing, you go out,you hire an active manager, and you task them
with beating a benchmark.
When you break up the return components, thebenchmark is the beta, and then anything above
(18:57):
that is the alpha component, and you're hiringone manager to do that.
But with Portable Alpha, you're separating theAlpha and Beta where you hire or allocate
capital to hedge funds to isolate just theAlpha component, and then you use derivatives
to synthetically replicate the stock or bondBeta.
(19:19):
To be honest, this is still a concept I'mreally trying to grasp.
I I discussed this with Cliff Asness, and whatI understand is that the alpha is essentially
these modules that you could build a portfolioout of.
So for example, a famous module back in the daythat I'm sure is no longer there.
You know, you could sell the Santa Claus, youyou could sell in December and buy in January.
(19:39):
You could somehow isolate that one factor andbuild it into other types of portfolios.
Maybe you could help clarify exactly how youwould go practically porting this alpha into a
portfolio.
When you're picking hedge funds in a portablealpha program, you really want to make sure
they're doing a great job isolating that alpha,because there's a lot of hedge fund strategies
(20:04):
out there where you have this sort of betacreep.
There's a lot of hedge fund strategies likeequity long short where they might be running
at like point five beta.
So that wouldn't work well if you're thenporting on an additional beta one on top of
that, then you're just running at 1.5 beta.
So you really want to make sure you're pickingstrategies that are shorting out the market and
(20:28):
just isolating that alpha component.
And there's a lot of different strategies thatcan do that, whether it's event driven, market
neutral, RV.
And So I think, you know, those are thedifferent ways to do it.
There's tools out there that help LPs dissectthat factor exposure and make sure their
(20:54):
managers are sort of staying true to that zerobeta target.
We use a lot of multi strats because we thinkthey do a great job at targeting zero beta.
One of the things I'll say about our portfoliois, even though I like the philosophy of
Portable Alpha, we're actually not running atrue Portable Alpha program.
(21:17):
In a proper Portable Alpha program, hedge fundsare not part of the strategic asset allocation.
They, and in our program they are part of ourstrategic asset allocation, And so I think what
we're doing, if you entertain the nomenclature,I like to call what we're doing portable beta
(21:38):
light, and the reason is the light is becausewe're also not using as much leverage in a true
Portable Alpha program.
You want to be levered one to one, so what Imean by that is, let's say you've got 15% of
your capital in hedge funds, you'd also want15% levered beta.
(21:59):
We allocate 15% to hedge funds, but we onlyhave about 2% levered bond beta on.
So in a true portable alpha program, you pullout the hedge funds from the strategic asset
allocation, you benchmark them to cash, andthen you lever up that same amount stock or
(22:22):
bond beta.
And the end goal there is that you still wantyour money working for you in kind of a one
beta environment.
You want the alpha around it, but you also wantthat money working for you and earning the
market.
That's right, yeah.
And I guess the best way to put it is, youknow, if you do get a drawdown in equity or
(22:48):
bond markets, if the absolute return managersare staying true to absolute return, they
should still be generating positive returns andthey should also be beating their benchmark of
cash.
And to double click on that, the reason whycash is cash is your cost to synthetically
(23:10):
finance the beta.
So the beta part of it is you're going out andyou're buying futures or swaps on the equity or
bond market, and that costs you Fed funds rateplus a spread.
And so in order to make up that cost, that'syour benchmark for your hedge fund managers.
Talk to me about fund of funds.
(23:31):
Where do fund of funds fit into your portfolio?
So there's a couple of reasons we use fund offunds.
The first is to help us limit line item sprawlin areas where you do find a lot of traditional
closed end vehicles like private equity andventure capital.
And the benefit is we get diversified exposuresin one line item and that reduces our
(23:53):
operational burden for our small team.
The other reason that we use fund of funds isas a portfolio construction tool.
So for example, in real estate we use theNacreif ODCE, Nacreif ODCE Index as our
benchmark, and we hired a fund of funds managerthat can track that index, and then we can
(24:16):
build a core satellite approach around thatusing the investable index.
Then we pick satellite strategies that webelieve can deliver alpha.
So the benefits is it gives us this liquiditysort of home base to rebalance to our strategic
asset allocation targets, but then it alsogives us control over how much tracking error
(24:40):
we want to take in the real estate portfolio.
So if we want, we can go out and hire a hightracking error, opportunistic manager, but if
they're taking more tracking error than we wantin the total portfolio, then we can just size
it appropriately to make sure we're honing inon the tracking error we want.
What areas are you looking at to potentiallyinvest into fund of funds that you're not
(25:03):
investing into today?
Actually, we're in talks right now with aprivate infrastructure manager who can help us
replicate what we did in the real estate book,which is build that CoreSatellite portfolio
using an investable index.
And actually, now, an investable index did notexist in private infrastructure, but Wilshire
(25:25):
just announced the launch of the Feet, WilshirePrivate Markets Infrastructure Index, just last
month, and it's the first and only investableprivate infrastructure index.
And so, yeah, we're looking to build that samecore satellite approach around that index.
And why would you look to replicate that indexversus investing in that index?
(25:46):
What are you trying to achieve with yourexposure?
Yeah, the goal would be that sort of same idea,which is with this core satellite approach, you
basically buy the beta, buy the index as yourhome base, can, and so it can help provide
liquidity.
And then you can go out and invest in, takemore risk and invest in, you know, whether
(26:10):
that's closed end funds, data centers,secondaries, co invest and have those
satellites built around that core beta, andthen you can always use that core beta as your
liquidity home base.
So maybe double click on an example, so let'ssay you were to put in $500,000,000 in the
(26:30):
strategy.
Are you saying that half of that would go intoan index that has liquidity and half of it
would be trying to beat that index?
That's right.
Exactly.
And then you start by investing in the index.
It's almost like you're trying to find alpha inthe public markets.
You invest your money in the S and P 500, soit's not just sitting around.
And then over time, you try to find the alphain the companies.
(26:52):
You try to find the stock that will outperformthe rest of the market.
Yeah, that's right.
And actually, going back to how I wasexplaining the structure of our public equity
book, we're doing the same thing there wherewe've got 50% of it is just passively indexed
with daily liquidity, and then the other halfis in these long short active extension
strategies, so we've sort of built that samemodel there as well.
(27:16):
So for investors that would want to replicatethis, did I phrase it the right way that you
have your money in default as an index and youstart to basically sell as you invest into non
index assets?
Is that kind of how you operationalize that?
Yes, that's right.
And then if you're investing in closed endvehicles for your Alpha satellites, as they
(27:37):
wind down and pay distributions, what wouldhappen is your, let's say, real estate or
infrastructure allocation, if that money isgoing into your cash bucket, your allocation is
coming down and you'll be underweight relativeto your target, and so you can take those
distributions and put it back into that betahome base to make sure you're sort of getting
(27:59):
balanced to your targets.
I love it.
It sounds complex, it's incredibly simple andintuitive.
And what I love about it is, to quote WarrenBuffett, the best the number one most important
factor on investment is the opportunity cost.
So by putting in an index, you don't feel thisneed to distribute and you don't feel this
compulsion to invest in closed end funds, soyou could sit around and wait for your shots
(28:24):
while you're still earning the beta in thatexposure.
Also, you're never underweight or overweight inasset class, which allows you to have an all
weather approach whether the market is going upor down, so it's an anti fragile portfolio
construction.
Yeah, that's right.
And you know, sometimes in our industry beta islike a bad word, because the whole goal is to
beat the index, but I look at beta as ourfriend and a tool.
(28:52):
There's a behavioral finance aspect to this inthat investing is not something that should
ever be done under duress, especially intohighly illiquid investments, And you should
always feel like, at a minimum, I'm getting thebeta, and you should almost invest from a form
of abundance versus scarcity.
I know those are really, like, woo woo terms,but you should never be pressured to invest.
(29:13):
I think that leads to a lot more errors,especially in illiquid instruments than most
people would probably admit.
Some allocators take the approach of like, youknow, let's put the whole portfolio in
opportunistic risk and what will happen is likesome of those will deliver outsized returns and
(29:34):
some of them will deliver negative alpha andthen you end up averaging to the beta because
some outperform and some underperform.
For us, what we're trying to do is be moresurgical in our approach to alpha where, you
know, if I'm trying to target like 50 basispoints of alpha at the total portfolio level,
(29:56):
by investing in the beta, I can really liketighten that tracking error and then just pick
the managers who I think, my alpha managers whoI think can like really just consistently
outperform, like not trying to swing for thefences, but if you can consistently just put up
like 5,100 bps over the benchmark, then thatwill roll up to our top line total portfolio
(30:22):
alpha.
There's this anti fragility to this model whichis probably underappreciated in that it just
goes back to behavioral finance.
If you have these huge fluctuations in yourportfolio, in theory an AI might generate an
extra 100 basis points of alpha.
But behaviorally, if you sell at such a strongtime and you can't keep this portfolio for ten
(30:42):
years, the real loss is the compounding of thebeta with maybe a little alpha.
It's not that marginal alpha that you couldhave theoretically gotten that you never would
have actually gotten in the market.
I think people fall for this kind of like idealportfolio fallacy.
Same thing with crypto.
That's why a lot of crypto investors, you know,I had this a CIO of Bitwise and he's they found
(31:03):
behaviorally that if you have more than 5% ofyour portfolio in Bitcoin, you sell at just the
wrong time.
So there's a behavioral aspect whether or notyou believe in Bitcoin or not.
There's a behavioral aspect to diversificationthat's underappreciated unless you have those
battle scars from kind of selling at the wrongtime and unless unless you have really high
self awareness about yourself and your yourtrue risk tolerance.
(31:25):
One selling at the wrong time.
Point I wanted to make going back to the hedgefund conversation is I feel like a lot of ICs
out there sell hedge funds at the wrong timebecause usually hedge funds will get a bad rap
in times like today where, you know, you've gottwo years of a bull market where equities are
(31:50):
putting up double digit returns and then, youknow, boards are looking at their hedge fund
book and they're like, either, you know, ifyou're looking at directional strategies like
CTAs that are down double digits, they're like,Well, why are we paying all these fees and they
can't even keep up, you know, they're losingmoney in a bull market, let's get rid of them.
(32:12):
Or even in the sort of non directionalstrategies, which, you know, are usually
putting lower volatility, modest, you know, 5%returns and can't keep up with the double digit
returns of equities, they're saying, Hey, we'repaying all these fees and they're
underperforming.
You know, but if you think about what was thereason you hired the hedge funds in the first
(32:33):
place, it was not to ever keep up with stockmarket, it was to mitigate during the crisis
periods, and a lot of boards will fire thehedge funds right after like a two year bull
run, which is precisely the time you want tokeep them because usually, you know, after a
two year bull rung is when the crisis periodfollows, and that's when you wanna have hedge
funds in your book.
(32:54):
There's this highly underappreciated part ofinvesting, which is rooting your thesis.
So the way that I think about it is the morerooted your thesis, the more it will weather
the storm of volatility.
So the joke is, like, fifth only 50% of tradeis what stock should I buy.
It's really when when should I sell it becauseyou have to have a fundamental thesis.
(33:16):
And someone might say, well, just tell me whatto buy.
Who cares about the reason?
The reason you care about the reason is there'sa lot of noise in the market.
If you don't have a fundamental thesis, yes,you might buy Bitcoin at a $100, but you're
gonna sell it at a 140 when it goes down from$1.60 because you don't understand the
fundamental thesis.
And it's one of these things that if peoplespend more time on the front end, they may
(33:38):
still make the same decision, but theirconviction will be more rooted and they'll
avoid these behavioral finance traps of howpeople lose lose their returns over over
decades.
That's the reason the whole strategic assetallocation model has been built around
institutions is to avoid the tactical decisionmaking on the part of investment staff.
(34:00):
As long as you're sticking to your job is juststick to your targets and rebalance to your
targets and never you know, you're not makingcalls on when to buy and when to sell.
On a previous podcast, a top investor told methat the number one thing you could do in a
crisis is to cancel your next IC.
The number the number one or the number onething you could do in down market is just to
(34:23):
cancel your IC.
That's the number that's the degree of freedomyou have in order to preserve preserve your
returns because as soon as you get to the IC,the game is over and you sell your losing
position at the wrong time.
So it's obviously a bit facetious, but therethere's granular truth there where sometimes
the best thing to do is to do nothing, andthat's extremely difficult, especially when you
(34:47):
have to build consensus around a dozen people.
You tend to revert to this kind of least commondenominator.
Yeah.
That's right.
And and I guess another way to put it is, like,sometimes, like, doing nothing sometimes means
sitting in cash, and cash is also a choice.
I don't wanna get you in trouble, but one ofthe things that I'm really trying to talk
(35:07):
about, is this golden calf of liquidity, and Icall it the virtue of illiquidity.
My friend just reminded me of my bachelor trip,he's like, you know, that was a great idea.
About a decade ago, I wanted to create aBitcoin fund that would, no matter what, would
be illiquid, a ten and twenty year fund.
It was more like a thought experiment.
But the one benefit would be that if you ownthe Bitcoin yourself, you're able to sell it.
(35:32):
But if somebody else owns it, the feature isactually the illiquidity of the asset.
And, obviously, controversial for many reasons,but there is this value in private equity and
venture capital in some of these class assetclasses where the illiquidity is not the only
feature, but is a feature of the asset class.
One way to to think about it is which isinteresting is, like, if you're willing to
(35:56):
stomach the volatility, you could get access tocrypto beta for free.
Right?
Like if you if an institution is sophisticatedenough to understand how to invest in native
tokens directly, I mean, that's it's prettymuch free, or, you know, you would probably
hire a custody bank and whatever they charge.
(36:20):
But if you can't stomach the volatility and youprefer the private markets approach, you pay 2
and 20 for it.
And sometimes that is the best approach, and Iwould argue for a lot of institutional
investors that is the right thing.
There's a philosophical question which is if afund's in an illiquid vehicle and it goes up
and down value, did it actually go up and downvalue if it hasn't been a quarter?
(36:42):
In other words, there's this willful ignorancethat I would argue is as much of an asset and
not seeing your your assets marked up on adaily basis.
Yeah.
That's right.
What's that other quote?
Like, if a tree falls and nobody hears it, didit did it make some noise?
Yeah.
Did it actually fall?
Yeah.
So going from trees falling, you like to seedfunds, which is unusual for an asset allocator
(37:04):
of your size.
Why do you like to seed funds?
Well, usually there's a trade off where you canget some economic benefits, whether that's a
revenue share or a fee reduction.
And yeah, we've seeded a couple products.
(37:24):
Usually we're doing it with blue chip firmsthat we already know that are expanding their
product lineup and offering favorable economicsin return.
It's a little easier for us to underwrite thosefirms if we've already done like firm ODD with
(37:44):
them.
We haven't yet seeded like emerging managersthat are starting a new firm from scratch,
that's a little bit harder for us tounderwrite.
I know there's a lot of allocators that do thatand have programs around that, but we haven't
really entered that space yet.
I was just sitting with a 10,000,000,000 pluskind of public fund, and one of the things that
(38:09):
they do is they pilot some of their strategieswithin their core fund, and then once they
build a track record, they spin it out into itsown strategy.
Is that what you're talking about?
We haven't done it in that method yet.
These are usually like big platform firms wherewe might have a private credit relationship
with them and they're expanding to privateequity or vice versa.
(38:34):
And so that's, I think, a little bit differentfrom what you described.
So as you mentioned earlier, you have a staffof three and you really rely on your
partnership with RVK, which is a consultant.
Tell me about your relationship with RVK andhow do they practically help you on a day to
day basis?
Yeah, we see RVK as an extension of our team.
(38:56):
They help us with capital market assumptionsthat are an input to our strategic asset
allocation modeling.
They help us with manager monitoring, managerdue diligence.
When we make a new fund investmentrecommendation to our board, they're helping
(39:17):
out with all of that on-site due diligence andwriting up investment memos.
So we have a really close and collaborativerelationship with RVK.
And is it bidirectional in that you go to themand you say, We're looking for this type of
manager, they give you some managers, but alsosomebody might come to and you send them over
to them.
Talk to about of the sourcing component.
(39:37):
Yeah, that's exactly right.
And I can sort of point to specific areas wherethere's examples.
Like my background is I came from New MexicoPERA public pension where I covered hedge
funds.
So when I came over to North Dakota, I waspretty well versed in hedge funds and I had
(39:58):
brought some ideas to RVK and sort of pickedthose managers first and asked them to
underwrite, whereas I wasn't as well versed inprivate credit, and so I was leaning more on
RVK to say, Hey, like, where do I start?
Help me filter the universe.
You know, there's so many private creditmanagers out there.
Who are your top picks?
(40:18):
And so, yeah, exactly.
It's sort of the funnel could start from themor it could start from me.
A little bit of an odd question, but how manymanagers visit you in Bismarck, North Dakota
every single year?
Yeah, we usually get like one visit a month onaverage.
As you can imagine, summer months are busier.
(40:40):
We might get like one a week in the summer, butas many managers are interested in coming out
here in January and February.
That's when you know you have a realrelationship when they're coming out in
midwinter.
What would you like our listeners to know aboutyou, about North Dakota Land Trust, or anything
(41:01):
else you'd like to share?
Just to sort of highlight North Dakota Trustlands, over the last decade we've distributed
more than $2,000,000,000 to North Dakota PublicSchools.
This year we're scheduled to distribute$290,000,000 and our fund covers about a
(41:21):
quarter of the cost of public education, whichhelps reduce the tax burden on local property
taxpayers.
And that quarter that we make up has grown overtime, and hopefully our goal in the long run is
to be able to grow that to 100% and cover theentire cost of public education.
(41:42):
I think a lot of times it's lost.
You have these large numbers.
You're lost on the impact that this moneyactually has on here, education state
residents.
So I appreciate you highlighting that, and Iappreciate you jumping on the podcast and
sharing your wisdom.
Looking forward, I don't promise January orFebruary, but looking forward to coming to
Bismarck and continuing conversation.
Yeah.
(42:02):
Likewise.
Thanks, David.
It's been great.
Thanks for having me on.
Thanks, Frank.
Thanks for listening to my conversation.
If you enjoyed this episode, please share witha friend.
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