North Dakota Public Employees Retirement System, at a Sept. 10 meeting, reported an 8.9% investment gain for its fiscal year ended June 30, lifting the value of the state’s defined benefit plan to $4.3 billion.
The latest returns topped North Dakota’s annual actuarial target of 6.5% but trailed its policy benchmark return of 9.4%.
Scott M. Anderson, chief investment officer of the North Dakota Retirement and Investment Office, which overseas the state defined benefit plan as well a number of other public funds, attributed the shortfall for the 12-month period to weak results for the fund’s allocations to real estate.
The entire 50 basis points of underperformance for the latest year “comes from real estate,” Anderson told the board, with investment losses of more than 15% for the fund’s managers well below their benchmark return of minus 5.53%.
The reason? The fund’s “very well respected” real estate managers have been a bit over-allocated to the office space, which has taken the biggest hit from changes in real estate usage in the wake of the COVID pandemic, and under-allocated to an industrial real estate sector that has held up relatively well.
For the five years through June 30, the fund’s annualized net returns of 7.6% exceeded its policy benchmark return of 7.2%, suggesting its diversified asset allocation mix remained healthy, Anderson said.
Anderson noted, however, that the State Investment Board is “about to hire an asset allocation consultant” to facilitate an ongoing effort to achieve greater uniformity, where possible, across the more than 25 funds overseen by the SIB. Those funds, which previously had more than 25 distinct equity asset allocations, now have 11, and further progress on that score should lead to cost savings and leave the broader system less prone to error.
On the private markets side, meanwhile, Anderson said his team is pursuing plans that could prove “fairly innovative,” creating “a master trust that’s going to allow us to unitize private equity and real estate and infrastructure,” dramatically reducing the number of levers the investment team has to pull while allowing the SIB to bring a lot more scale to its talks with private markets managers. That, in turn, should provide big opportunities for cost savings, he said.
North Dakota’s state government voted last year to close the defined benefit plan to new public employees, who will have access to a newly launched defined contribution plan in its stead.
