North Dakota revisits overlay option to weather coronavirus volatility

North Dakota State Investment Board, Bismarck, which provides investment oversight for $16.3 billion in pension, insurance and legacy trust fund assets, has tapped one of its external money managers, Parametric Portfolio Associates, to establish a synthetic rebalancing overlay program due to market volatility caused by the coronavirus pandemic.

At this time, the equity overlay program accounts for $450 million in assets.

Similar action was taken by the board during the 2008-2009 global financial crisis, according to David J. Hunter, executive director and CIO of the North Dakota Retirement and Investment Office, which administers and implements actions of the State Investment Board.

Parametric was previously used to implement an overlay program for the investment board in 2008, which remained in place for a little over a year at the time, Mr. Hunter added.

"We just reinstated our prior equity overlay program (with Parametric)," he said.

Through the strategy, the SIB is essentially "shorting Treasuries to buy into equities," which is "a little bit easier to do with the overlay," Mr. Hunter said.

"You short Treasuries and you go long in the S&P 500, and by doing (the overlay) you don't have to sell securities," he added.

Parametric currently manages about $500 million in U.S. small-cap and large-cap strategies for North Dakota.

On March 27, the investment board approved the decision to use Parametric to assist with "synthetically rebalancing fund exposures in an efficient and cost-effective manner," said board meeting minutes, published on North Dakota's RIO website.

"The overlay program is similar to board action undertaken during the depths of the global financial crisis in 2008 and generated $100 million of net investment gains for the SIB's clients when used to synthetically rebalance exposures," the minutes said.

North Dakota does not plan to change its target asset allocation at this time, Mr. Hunter said.

Separately, North Dakota has reduced the number of staff in office and remains "fully functional" through the transition, he said.

"Less than half of our staff are working in the office. We have 18 total (RIO) employees — six are in the office and 12 working from home," Mr. Hunter said.