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

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.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

“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.”

The 5 Best and 5 Worst States, Financially Speaking

Tags: David Hunter, North Dakota, North Dakota State Investment Board, Pension

Wells Fargo, America’s fourth-largest bank, is encountering difficulty recruiting a new chief executive officer following Tim Sloan’s March resignation after failing to get the company’s problems under control.

Since Sloan’s departure, General Counsel C. Allen Parker has been serving in the interim, but Wells Fargo wants to hire a permanent chief from outside the company.

The bank is hoping a fresh face will help turn around the bank’s badly damaged image, as Sloan and John Stumpf, the CEO he succeeded, were both longtime employees during a series of scandals dating back to 2016. Parker joined Wells Fargo in 2017 to pick up the post-scandal pieces.

CEO successors are typically chosen months, if not years, in advance. This path unfortunately isn’t available to Wells Fargo. It has approached several big bankers, such as JP Morgan Chase’s co-chief operating officer, Gordan Smith, PNC Financial Services Group’s CEO William Demchak, and US Bancorp’s former CEO Richard Davis, but it has not been able to settle on its next boss, according to The Wall Street Journal.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

Demchak and Davis have reportedly turned the offer down, and Smith, who the Journal said has told confidants he’d rather stay put, is considered a frontrunner for his boss Jamie Dimon’s CEO job. Dimon, 63, has said he’d stay in charge for four more years, but there’s no telling if that will slip. If Chase’s chief sticks around, it’s less likely the 60-year-old Smith would become JP Morgan’s next leader.

So why the reluctance to have “CEO, Wells Fargo” on a resume in 2019?

What Happened

The problems began two and a half years ago when 1.5 million fake accounts and more than 500,000 fake credit cards—all in existing customers’ names without their knowledge or permission—were created by Wells Fargo workers in response to extreme sales pressure. That led to the firing of not just 5,000-plus low-level employees, but then-CEO Stumpf as well. This also cost the bank more than $300 million in fines and payments to customers who filed a class action lawsuit. It was revealed several months later that there may have been as many as 3.5 million fake accounts created.

Other issues include additional lawsuits ranging from overcharging small business retailers in 2017 to the city of Sacramento suing the bank for discrimination against black and Latino customers in 2018. Billions in fines were paid to the SEC and other government organization also were levied for Wells Fargo’s role in the housing bubble, and altering business information without client knowledge. Even the Federal Reserve expressed dismay over Wells Fargo, as it announced restrictions to the bank’s growth last year in response to “widespread consumer abuses and compliance breakdowns.”

This came to a head for Sloan, as the then-CEO continued to face mounting pressure from regulators and lawmakers to hit the reset button on the bank’s strategy. At one point, officials at the Office of the Comptroller of the Currency debated forcing board or senior management changes.

Sloan decided to retire in March after 31 years with Wells Fargo. He told investors on a call shortly after that he could not keep himself in a position where he was “becoming a distraction.”

Ironically, Wells Fargo’s pre-scandal reputation was platinum, being lauded as one of the few institutions to come out of the financial crisis with minor damage.

A Tall Task and Then Some

So what’s needed from this new CEO if Wells Fargo wants a full recovery? The next chief will need to rebuild relationships in Washington as well as earn back the trust of Wells Fargo’s jaded clients, both of which will take years.

In an April interview with the Financial Times, storied investor Warren Buffett, who happens to be the bank’s largest shareholder, said the new head “shouldn’t come from Wall Street,” JP Morgan, or Goldman Sachs. His best buddy Charlie Munger agreed, telling the Journal the two Berkshire Hathaway execs “don’t like the Wall Street crowd that is making the damn decisions.”

Wells Fargo representatives declined comment.

Tags: CEOs, Jamie Dimon, JPMorgan Chase & Co., Lawsuits, Scandal, Tim Sloan, Warren Buffett, Wells Fargo