E208: CIO Frank Mihail on Running an $8 Billion Portfolio with 3 People

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.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  We're a three-person team, all in, including operations. So keeping a tight book, we have our entire $8 billion portfolio is 40 line items. Not over diversified yet, and we've run a concentrated book. So we can still generate significant alpha just from picking a manager because our total portfolio isn't over diversified yet. So sometimes in our industry, beta is like a bad word. The whole goal is to beat the index, but look at beta. Take the approach of like, put the whole portfolio in opportunistic risk. And what will happen is like, some of those will deliver outsized returns and some of them will deliver negative alpha. And then you end up like to the beta because some outperform and some underperform.

• 0:43Speaker 00

  Us, what we're trying to do is be more surgical in our approach to alpha.

• 0:50David Weisburd?

  Give me a sense for where North Dakota Land Trust stands from an asset level and from maturity of portfolio.

• 0:58Speaker 00

  So we're actually still in the, I guess, growth phase, as you would call it, in terms of there's still a lot of resources in the ground that we project we would be able to extract for the next 30 years. So I think a good analogy is any 401k, you know, when you're 20 years old, you're contributing to your 401k. And then when you retire and you don't have that income, you start taking from the 401k. Same thing for us. So we're, right now, we're still contributing to the endowment. And then eventually, we're going to deplete those resources. And we'll hope to have built a large enough endowment

• 1:43Speaker 00

  that once we start taking principal, we can still sustain in perpetuity.

• 1:50Speaker 00

  Total assets, including the land that we own, is about $12 billion. The investable assets are about $8 billion.

• 1:57David Weisburd?

  Double click a bit on your portfolio construction. How do you go about investing those assets?

• 2:02Speaker 00

  So we target our strategic asset allocation has a 45% target to private markets. That's includes private equity, venture capital, private credit, real estate and infrastructure. And then we have another 30% to long short strategies. And that's divided into zero beta and beta one hedge funds. So if you combine that 45 private markets and 30 long short strategies, that's about 75% in alternatives. The remaining 25% of the portfolio is passively indexed. 45% is pretty typical target for for an institution.

• 2:45Speaker 00

  But I think where we're 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 just means that we're not doing as much in closed end vehicles.

• 3:01David Weisburd?

  So double click on that. How does 95% of your book provide liquidity?

• 3:06Speaker 00

  So we use a lot of open end or evergreen structures that gives us liquidity optionality.

• 3:13David Weisburd?

  So typically, these are roughly, you could get liquidity in about five years over 20 quarters.

• 3:19Speaker 00

  Every asset class is different in private credit. Typically, my estimate is about a four year roll off to get full redemption. In real estate, you know, well, right now, real estate open end funds have been in a stress period where redemption queues are high. So funds haven't been paying out distributions, but it can, so it can vary, really vary depending on when you request it. If it's, you know, good, good liquidity times, you could get your request out in less than a year and right. But right now it's, you know, you know, multiple years to get liquidity in real estate open end funds.

• 3:57David Weisburd?

  And why do you like these type of evergreen fund structures?

• 4:00Speaker 00

  We're a three-person team, all in, including operations. And so keeping a, keeping a tight book, we have, our entire eight billion dollar portfolio is, is 40 line items. If you look across the institutional platform, you know, there's a lot of institutions that have like 200 plus line item books. And it becomes really operationally intensive to open new accounts, go through legal and side, side letter and, you know, send capital calls. And we don't really have as much resources in terms of staff to, to do all of that. So we, we try to, keep a concentrated book to help with the operational bottleneck.

• 4:45David Weisburd?

  Some institutional investors have told me privately that they're also transitioning from closed-end funds to evergreen funds in order to save on fees for, essentially the same exact product. Do you find any economic benefits to investing into evergreen funds? Or is it just for the liquidity and for the operational ease?

• 5:06Speaker 00

  I will say, yes, I do see lower fees, but I, I think it's more of what, like what I've noticed is more of a function of what assets, types make sense in an evergreen structure versus closed-end where, and I think real assets, real estate and infrastructure is a good example. Evergreen structures make sense when you're, when you're playing in that lower risk core space. And once you move into the more opportunistic space, it doesn't make as much sense. And I think fees are structured around those core versus opportunistic type of risk assets.

• 5:52David Weisburd?

  One of the most innovative pension funds in the country is really also leaning into these evergreen funds and their rationale is that on average only 67% of funds are invested in private equity funds into actual companies and the rest is not yet called. So on average over the length of a 10-year fund. So you have this 33% cash drag. Said another way, 33% of your money is earning treasuries and only 2/3 of it is having its intended purpose, which is investing into highly liquid, you know, higher up the risk curve assets like private equity. How much does that factor into you wanting to be in these evergreen funds?

• 6:30Speaker 00

  It certainly helps in build the case. I don't know if it was, it was the driving decision maker for us, but and I agree and I can sort of point to some numbers here to help flush that out. So if you use the rule of 72, you'd need to generate 9% in an evergreen vehicle to hit a 2X multiple in eight years. But if you're parked in cash, waiting for capital calls, then you need to generate closer to like a 15% IRR to hit that same 2X multiple in eight years. And so what this does is it forces allocators in closed-end funds up the risk

• 7:14Speaker 00

  curve into that opportunistic risk to hit that same multiple. Whereas we can stay invested in that lower core risk spectrum and still hit that same multiple over time.

• 7:26David Weisburd?

  I've been going down this rabbit hole of what benefits do larger LPs actually have over smaller LPs? So smaller, obviously, could be nimble. You don't want to be too small because then you don't have access. But let's say you're a $5, $10 billion LP, you could be more nimble. But also, there's benefits that accrue to larger funds. And one of these benefits that accrue to larger LPs, not funds, is the co-invest. So you could actually, you could actually calculate what that advantage is. So roughly on a 25% IRR, it's a 19% net of fees. In other words, that 6% alpha is something that you gain by investing in the co-invest. So said another way, if you were to invest half of the assets into co-invest, you would get 3% of alpha. So some of these advantages

• 8:09David Weisburd?

  of investing into specific structures or having specific rights.

• 8:14David Weisburd?

  Get accrued to the large investor and then some of these advantages of being a smaller investors of being able to go lower middle market, being able to have kind of more earlier assets accrued to the smaller investors, but there are significant benefits that also accrue to larger investors as well.

• 8:30Speaker 00

  I've been thinking about it a lot and having discussions with our consultant around, you know, because I am in, I'm at conferences and conference calls with a lot of the CIOs for these largest pensions in the world. And they're talking a lot about co-invest and we're not really doing any co-invest. So part of me thinks like, oh, should we be doing co-invest like, like them, but I, I think I gotta stay true to who we are and where we are in our life cycle. The reason co-invest makes sense for some of those largest pensions and institutions is they're so broadly diversified.

• 9:08Speaker 00

  Again, using that like 200 line item plus portfolio, they can take a concentrated risk in a single business to drive alpha. And it's not going to really impact their total portfolio performance that much if it goes, let's say if it goes south. We're not over diversified yet and we've run a concentrated book, so we can still generate significant alpha just from picking a manager because our total portfolio isn't over diversified yet. So we've, we've talked about the trade off of, of co-invest and for us it's you're trading a fee reduction for a concentrated bet and we're not ready to go down the co-invest route because we're not ready to make that concentrated bet on a single company.

• 9:53David Weisburd?

  You're trading off fee reduction for concentration. I think a lot of it is also, if you look at what's a predictor of the best co-invest program, it's the institutions that have really thought about it and have thought about it from first principles. Scott Wilson at Wash U St. Louis, he'll have his team not only meet with the managers and look for their most concentrated positions. They'll also do their underlying diligence on the end asset as well. And then other LPs, you'll see they'll, they'll think about the incentives behind co-invest programs, how they could become really important partners to their GPs. So that they do a lot of upfront work so that when a co-invest comes to them, A, they're prepared and they're ready to process it. And B, they understand the incentives that's driving that managers as well as that.

• 10:36David Weisburd?

  Managers kind of zone of excellence where they're the best at. So a lot of these best in class co-invest programs are very much thought out and a lot of them are very active. So it's not something you want to do with one foot.

• 10:48Speaker 00

  You probably have to have a be staffed up as well. Again, it's pretty tough with a three person team.

• 10:55David Weisburd?

  So when we were talking about evergreen funds, you alluded that it works for some asset classes and not other asset classes. Maybe you could double click. What asset classes do you think evergreen funds work for? And what asset classes they do not work for? And maybe some asset classes that in the future you could see evergreen funds going into as well.

• 11:13Speaker 00

  Evergreen funds, they work well where returns are more income driven and less growth driven. So I'll give you an example. They work well in private credit and core real estate, but don't work well in venture capital or distressed credit. So let's start with the private private credit example in direct lending and asset backed credit. The underlying securities would have like a weighted average life of about four years. So if an investor raises their hand and wants to redeem, the fund manager can set aside some assets, let them self amortize and fulfill that redemption request without putting stress on the fund.

• 11:56Speaker 00

  And then think about in core in core real estate, usually what defines core real estate is that the assets are stabilized. So, you know, think about a sort of class A piece of real estate that's fully rented, kicking off income. And so you can, you have that income generation. Plus, if an investor raises their hand and needs liquidity, the manager could could list list a building for sale. And if it's stabilized class A, they know they they should be able to get full market price for it without again, putting stress on the fund. So those are examples where the underlying assets make sense in an evergreen structure. Going back to where they don't make sense in VC or distressed credit.

• 12:41Speaker 00

  Usually it takes a decade for that investment to reach its full potential. And you don't want to disrupt that value accretion process by cutting the time period short. And so I think, yeah, those are. Good examples of where it works and where it doesn't.

• 12:58David Weisburd?

  What about private equity? What needs to happen for private equity funds to be able to really proliferate in evergreen funds?

• 13:05Speaker 00

  Private equity may almost be there and we are seeing some evergreen funds. Come out. Right now, what we're seeing in private equity is there are mature assets that are being rolled into continuation vehicles. Through GP led transactions and these continuation vehicles, the managers will cherry pick what they consider to be the trophy assets that generate predictable cash flows. And so going back to that analogy, if you know, if they are mature assets that are sort of kicking off more income and have less growth potential, then maybe those underlying assets could work in an evergreen vehicle.

• 13:47Speaker 00

  The other version of the evergreen fund that we're seeing is the interval fund. And those are becoming popularized. They operate a little bit differently where they're buying closed end funds. And if liquidity needs to be provided, then they would sell those closed end funds on the secondary market. You know, the the trade off is if you need to generate liquidity with during a period of stress, you may have to sell at a discount to provide that liquidity. And I think that's probably one of the biggest sort of risks or fears that investor had investors have going into those types of vehicles.

• 14:28David Weisburd?

  Speaking of liquidity of eight billion dollars, you have a very specific kind of mandate, you're you're still not, you still have more resources in the ground over the next thirty years. Are you not trying to be a net liquidity provider to other people? In other, in other words, solving their liquidity problems in order to get that? Illiquidity discount from those investors?

• 14:52Speaker 00

  We are. We are trying to ramp up our private equity book 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 like bidding on single deals. We're, we're hiring managers that'll, that'll do that for us in a secondary fund structure.

• 15:09David Weisburd?

  Because you guys have so much AUM and a very small staff, you're not necessarily picking deals, but you're still able to directionally bet on a secular trend. Let's say a bunch of endowments are selling secondary assets. You see that as a theme and you're able to access that through managers. So you're still able to be proactive with your money, even if you're not making specific investments.

• 15:28Speaker 00

  That's right. And, and we are actively looking at that space right now.

• 15:32David Weisburd?

  So I want to double click on what you said earlier, which you have 30% of exposure to long short hedge funds. That's a very large exposure. Why are you so bullish on the hedge fund asset class and structure?

• 15:44Speaker 00

  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. We have a 30% target to public equities. Half of that is passive and then the other half is long, short, beta one. And, or they're also called 130 30 strategies or active extension strategies. The way I look at it is you want to give your manager the tools to outperform in all markets. And if you're in long only and you go into a bear market like 2022,

• 16:26Speaker 00

  a lot of the mandates are that they, they have to stay, like they can't go to cash to move out of the way. They have to stay invested. And so they might move from a higher vol to lower vol equities, but they're still long. And when you, when you have long, short managers, it actually gives them the tools to, to make money on that other side in a bear market. And so the goal is that they'll be able to, to outperform that downside.

• 16:58Speaker 00

  In a year like 2022 and and most of the managers were able to do well in that type of environment. So that that's the the beta one book. On the zero beta book, the way we the way we view that or the goal is is it should be it should be an anchor to the portfolio. So again, 2022 was a great example when equities were down 20%. You know, multi-strat hedge funds were delivering positive returns, like even, you know, 10% return, positive returns when stocks were down 20%. So we feel like it's a it's a ballast to the portfolio, a diversifier.

• 17:37David Weisburd?

  And then the other 15% is just focused on low-cost indexing?

• 17:41Speaker 00

  That's right.

• 17:45David Weisburd?

  Mike Ma, who I chatted to on Thursday, who used to work for Vanguard's investment team and marketing team, and I'm not being paid by Vanguard, unfortunately. But one of the things I learned from him that really blew my mind is that 1981 Vogel, who founded Vanguard, got a special exemption from the SEC in order to advertise and structure their funds such a way. But the key caveat in that exemption has still held to this day is that every time they get more funds, all of their fees for their funds have to go down. So they have this negative pressure on indexing from the SEC, which I was really unique. And I think it's an untold story, frankly.

• 18:22Speaker 00

  Yeah, that is pretty interesting and impressive if they've stayed true to that all these years.

• 18:30David Weisburd?

  So a big part of your strategy is based on this concept of portable alpha. First of all, how would you define portable alpha?

• 18:40Speaker 00

  Portable alpha is where you separate alpha and beta. 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, the benchmark is the beta, and then anything above that is the alpha component. And you you're hiring one manager to do that. But with portable alpha, you're separating the alpha and beta, where you hire or allocate capital to hedge funds to isolate just the alpha component. And then you use derivatives to synthetically replicate the stalker bond beta.

• 19:19David Weisburd?

  To be honest, this is still a concept I'm really trying to grasp. I discussed this with Cliff Asness and what I understand is that the alphas essentially these modules that you could build a portfolio out of. So for example, a famous module back in the day that I'm sure is no longer there, you know, you could sell the Santa Claus, you could sell in December and buy in January, you could somehow isolate that one factor and build it into other types of portfolios. Maybe you could help clarify exactly how you how you would go practically porting this alpha into a portfolio.

• 19:53Speaker 00

  When you're picking hedge funds in a portable alpha 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 out there. We have this sort of beta creep. There's a lot of hedge fund strategies like equity long short where they might be running at like 0.5 beta. So that wouldn't that wouldn't work well if you're then porting 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 picking strategies that that are shorting out the market and just isolating that that alpha component. And there's a lot of different strategies

• 20:34Speaker 00

  that can do that, whether it's, you know, event driven, market neutral, RV.

• 20:41Speaker 00

  And

• 20:44Speaker 00

  so I think you know, those are the different ways to do it, but you and there's tools out there that help LPs dissect that factor exposure and make sure their their managers are sort of staying true to that zero beta target. We use a lot of multi-strats because we think they they do a great job at targeting zero beta.

• 21:05Speaker 00

  One of the things I'll say about our portfolio is even though I I like the philosophy of portable alpha, we're actually not

• 21:14Speaker 00

  not running a true portable alpha program in a proper portable alpha program. Hedge funds are not part of the strategic asset allocation. They and in our program, they are part of our strategic. Asset allocation. And so I think what what we're doing, if you entertain the nomenclature, I like to call what we're doing portable out portable beta light. And and the reason is, the light is because we're also not using as much leverage in a true portable alpha program. You want to be levered one to one. So what I mean by that is, let's say you've got fifteen percent of your capital in hedge funds.

• 21:54Speaker 00

  You'd also want fifteen percent levered beta. We allocate fifteen percent to hedge funds, but we only have about two percent levered bond beta. On so in a in a true portable alpha program, you you pull out the hedge funds.

• 22:14Speaker 00

  And from the strategic asset allocation, you benchmark them to cash and then you lever up that same amount of of a stalker bond beta.

• 22:24David Weisburd?

  And the end goal there is that you still want your money working for you in kind of a one beta environment. You want the alpha around it, but you also want that money working for you and earning the market.

• 22:37Speaker 00

  That's right. Yeah. And I guess the the best way to put it is, you know, if you if you do get a drawdown in

• 22:48Speaker 00

  equity or bond markets. If the absolute return managers are staying true to absolute return, they they should still be generating positive returns. And they should also be beating their benchmark of cash. And to double click on that, the reason why cash is cash is your cost to synthetically finance the beta. So the beta part of it is you're going out and you're buying futures or swaps on the equity or bond market. And that costs you fed fed funds rate plus a spread. And so in order to make up that cost, that's your benchmark for your hedge fund managers.

• 23:29David Weisburd?

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• 24:13David Weisburd?

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• 24:20Speaker 00

  So there's a couple of reasons we use fund of funds. The first is to help us limit line item sprawl in areas where you do find a lot of traditional close end vehicles like private equity and venture capital. And the benefit is we get diversified exposures and one line item, and that reduces our operational burden for our small team. The other reason that we use fund of funds is as a portfolio construction tool. So for example, in real estate, we use the NACRIF ODCE, NACRIF Odyssey Index as our benchmark. And we hired a fund of funds manager that can track that index. And then we can build a core satellite approach around that using the investable index.

• 25:05Speaker 00

  Then we pick satellite strategies that we believe can deliver alpha. And so the benefits is it gives us this liquidity sort of home base to rebalance to our strategic asset allocation targets. But then it also gives us control over how much tracking error we want to take in the real estate portfolio. So if we want, we can go out and hire a high tracking error opportunistic manager. But if they're taking more tracking error than we want in the total portfolio, then we can just size it appropriately to make sure we're honing in on the tracking error we want.

• 25:42David Weisburd?

  What areas are you looking at to potentially invest into fund of funds that you're not investing into today?

• 25:50Speaker 00

  Actually, we're in talks right now with a private infrastructure manager who can help us replicate what we did in the real estate book, which is build that course satellite portfolio using using an investable index. And actually, until now, an investable index did not exist in private infrastructure, but Wilshire just announced the launch of the FT Wilshire Private Markets Infrastructure Index just last month, and it's the first and only investable private infrastructure index. And so, yeah, we're looking to to build that same core satellite approach around that index.

• 26:26David Weisburd?

  And why would you look to replicate that index versus investing in that index? What are you trying to achieve with your exposure?

• 26:32Speaker 00

  Yeah, the goal would be that sort of same idea, which is with this core satellite approach, you basically buy the beta by the index as your home base and and it can so it can help provide liquidity and then you can go out and invest in, take more risk and invest in. You know, whether that's closed end funds, data centers, secondaries, co-invest and have those satellites built around that core beta. And then you can always use that core beta as your liquidity home base.

• 27:09David Weisburd?

  So maybe double click on example. So let's say you were to put in $500 million in the strategy. Are you saying that half of that would go into an index that has liquidity and half of it would be trying to beat that index?

• 27:20Speaker 00

  That's right. Exactly.

• 27:23David Weisburd?

  And then you start by investing in the index. It's almost like you're trying to find alpha in the public markets. You invest your money in the S and P 500. So it's not just sitting around. And then over time, you try to find the alpha in the companies. You try to find the stock that will outperform the rest of the market.

• 27:39Speaker 00

  Yeah, that's right. And actually, going back to how I was explaining the structure of our public equity book, we're we're doing the same thing there where we've got 50% of it is just passively indexed with daily liquidity. And then the other half is in these long, short active extension strategies. So we've sort of built that same model there as well.

• 28:00David Weisburd?

  So for investor that would want to replicate this, is did I phrase it the right way that you have your money in default as an index and you start to basically sell as you invest into non-indexed assets? Is that kind of how you operationalize that?

• 28:13Speaker 00

  Yeah, that's right. And then, you know, if like if you're investing in closed end vehicles. For your alpha satellites, as they wind down and pay distributions, what would happen is your, let's say, your real estate or infrastructure allocation. If that money is going into your cash bucket, your allocation is coming down and you'll be underweight relative to your target. And so you can take those distributions and put it back into that beta home base to make sure you're sort of getting balanced to your targets.

• 28:45David Weisburd?

  I love it. It sounds complex, but it's incredibly simple and intuitive. And what I love about it is, to quote Warren Buffett, the best, the number one most important factor on investment is the opportunity cost. So by putting in an index, you don't feel this need to distribute and you don't feel this compulsion to invest in closed-end funds. So you could sit around and wait for your shots while you're still earning the beta in that exposure. Also, you're never underweight or overweight in asset class, which allows you to kind of have an all-weather approach, whether the market's going up or down. So it's an anti-fragile portfolio construction.

• 29:21Speaker 00

  Yeah, that's right. And you know, like sometimes in our industry, beta is like a bad word, you know, because the whole goal is to beat the index. But I look at beta as our friend and a tool.

• 29:36David Weisburd?

  There's a behavioral finance aspect to this in that investing is not something that should ever be done under duress, especially into highly illiquid investments. And you should always feel like, at a minimum, I'm getting the beta. 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. I think that leads to a lot more errors, especially in illiquid instruments than most people would probably admit.

• 30:06Speaker 00

  Some allocators take the approach of like, you know, let's put the whole portfolio in opportunistic risk. And what will happen is like, some of those will deliver outside, will deliver outsized returns and some of them will deliver negative alpha. And then you end up like averaging to the beta because some outperform and some underperform. For us, what we're trying to do is be more surgical in our approach to alpha, where, you know, if I'm trying to target like 50, 50 basis points of alpha at the total portfolio level.

• 30:40Speaker 00

  By investing in the beta, I can really like tighten that tracking error and then just pick, pick the managers who I think that my alpha managers who I think can like really just consistently outperform, like not trying to swing for the fences. But if you can consistently just put up like fifty, hundred bips over the benchmark, then then that will roll up to our top line total portfolio alpha.

• 31:06David Weisburd?

  There's this anti fragility to this model, which is probably underappreciated in that it just goes back to behavioral finance. If you have these huge fluctuations in your portfolio, in theory, an AI might generate an extra hundred basis points of alpha. But behaviorally, if you sell at the just a strong time and you can't keep this portfolio for 10 years, the real loss is the compounding of the beta with maybe a little alpha. It's not that marginal alpha that you could have theoretically gotten that you never would have actually gotten in the market. I think people fall for this kind of like ideal portfolio fallacy. Same thing with crypto. That's why a lot of crypto investors, you know, I had this CIO of Bitwise and he's they found behaviorally that if you have more than 5% of your portfolio in Bitcoin,

• 31:50David Weisburd?

  you sell at the just the wrong time. So there's a behavioral aspect, whether or not you believe in Bitcoin or not, there's a behavioral aspect to diversification that's underappreciated unless you have those battle scars from kind of selling at the wrong time. And unless unless you have really high self-awareness about yourself and your your true risk tolerance.

• 32:09Speaker 00

  Well, selling at the wrong time. One point I wanted to make on the going back to the hedge fund conversation is I feel like a lot of ICs out there sell hedge funds at the wrong time because usually hedge funds will get a bad rap in times like today where you know, you've got two years of a bull market where equities are putting up double digit returns and then you

• 32:38Speaker 00

  Boards are looking at their hedge fund book and they're like, either, you know, if you'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 losing money in a bull market, let's get rid of them. Or even in the sort of non-directional strategies, which, you know, are usually putting a lower volatility modest, you know, 5% returns and can't keep up with the double-digit returns of equities. They're saying, hey, we're paying all these fees and they're underperforming. You know, but, but if you think about what was the reason you hired the hedge funds in the first place? It was not to ever keep up with the stock market, it was to mitigate during the crisis periods.

• 33:23Speaker 00

  And a lot of boards will fire the hedge funds right after like a two-year bull run, which is precisely the time you want to keep them because usually, you know, after a two-year bull run is when the crisis period follows and that's when you want to have hedge funds in your book.

• 33:38David Weisburd?

  There's this highly underappreciated part of investing, which is rooting your thesis. So the way that I think about it is the more rooted your thesis, the more it will weather the storm of volatility. So the joke is like 50, only 50% of trade is what stock should I buy? It's really, when, when should I sell it? Because you have to have a fundamental thesis. And someone might say, well, just tell me what to buy. Who cares about the reason? The reason you care about the reason is there's a lot of noise in the market. If you don't have a fundamental thesis, yes, you might buy Bitcoin at a hundred dollars, but you're going to sell it at 140 when it goes down from 160 because you don't understand the fundamental thesis. And it's one of these things that if people spent more time on the front end,

• 34:21David Weisburd?

  they may still make the same decision, but their conviction will be more rooted and they'll avoid these behavioral finance traps of how people lose, lose their returns over, over decades.

• 34:32Speaker 00

  That's the reason the whole strategic asset allocation model has been built around institutions is to avoid the tactical decision-making on the part of investment staff. As long as you're sticking to, your job is just stick to your targets and rebalance to your targets and never, you know, you're not making calls on the when to buy and when to sell.

• 34:55David Weisburd?

  On a previous podcast, Top Investor told me that the number one thing you could do in a crisis is to cancel your next IC.

• 35:04David Weisburd?

  Or the number one thing you could do in down market is just to cancel your IC. That's the number, that's the degree of freedom you 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 there's a granular truth there where sometimes the best thing to do is to do nothing, and that's extremely difficult, especially when you have to build consensus around a dozen people. You tend to revert to this kind of least common denominator.

• 35:36Speaker 00

  Yeah, that's right. 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.

• 35:47David Weisburd?

  I don't want to get you in trouble, but one of the things that I'm really trying to talk about is this golden calf of liquidity, and I call it the virtue of illiquidity. My friend just reminded me of my bachelor trip and he's like, you know, that was a great idea. About a decade ago, I wanted to create a Bitcoin fund that would, no matter what, would be illiquid. A 10 and 20 year fund is more like a thought experiment, but the one benefit would be that if you own the Bitcoin yourself, you're able to sell it. But if somebody else owns it, the feature is actually 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 classes, asset classes where

• 36:29David Weisburd?

  the illiquidity is not the only feature, but is a feature of the asset class.

• 36:34Speaker 00

  One way to think about it is, which is interesting is like, if you're willing to stomach the volatility, you could get access to crypto beta for free, right? Like if you, if an institution is sophisticated enough to understand how to invest in native tokens directly. I mean, that's, it's pretty much free or you know, you would probably hire a custody bank and whatever they charge.

• 37:03Speaker 00

  But if you can't stomach the volatility and you prefer the private markets approach, you pay two and 20 for it.

• 37:11David Weisburd?

  And sometimes that is the best approach. And I would argue for a lot of institutional investors, that that is, that is the right thing. There's a philosophical question, which is if a fund's in an illiquid vehicle and it goes up and down value, did it actually go up and down value if it hasn't been a quarter? In other words, there's this willful ignorance that I would argue is as much of an asset and not seeing your, your assets marked up on a daily basis.

• 37:35Speaker 00

  Yeah, that's right. What's that other quote, like if a tree falls and nobody hears it, did it make some noise?

• 37:41David Weisburd?

  Did it actually fall?

• 37:42Speaker 00

  Yeah.

• 37:43David Weisburd?

  So going from trees falling, you like to seed funds, which is unusual for an asset allocator of your size. Why do you like to seed funds?

• 37:50Speaker 00

  Um, well, usually there's, um, there's a trade off where, you know, you, you can get some economic benefits, whether that's a revenue share or a fee reduction. Um, and yeah, we've, we've seeded a couple of products. Usually we're, we're doing it with blue chip firms that we already know, um, that are expanding their product lineup, um, and offering favorable economics in return. Um, it's a little easier for underwrite us to underwrite those firms, uh, if we've already done like firm ODD, uh, with them. We haven't yet seeded like emerging managers that are starting a new firm from scratch. That's, that's a little bit harder

• 38:35Speaker 00

  for us, uh, to underwrite. Um, I know a lot of, there's a lot of allocators that do, do that, um, and have programs around that, but we haven't really, uh, entered that space yet.

• 38:48David Weisburd?

  I was just sitting with a 10 billion plus kind of public fund. And one of the things that they do is they pilot some of their strategies within their core fund. And then once they build a tracker or they spin it out as into its own strategy. Is that what you're talking about?

• 39:02Speaker 00

  We haven't done it in, in that method yet. Um, these are usually like big, big platform firms where we might have a private credit relationship with them and they're expanding to private equity or vice, or vice versa.

• 39:18Speaker 00

  And so that's, I think, a little bit different from what you described.

• 39:24David Weisburd?

  So as you mentioned earlier, you have a staff of three and you really rely on your partnership with RVK, which is a consultant. Tell me about your relationship with RVK and how do they practically help you on day to day basis?

• 39:36Speaker 00

  Yeah, we, we see RVK as an extension of our team. They help us with capital market assumptions that are an input to our strategic asset allocation modeling. They help us with manager monitoring, manager due diligence. When we make a new fund investment recommendation to our board, they're helping out with all of that onsite due diligence and writing up investment memos. So we have a really close and collaborative relationship with RVK.

• 40:10David Weisburd?

  And is it bidirectional in that you go to them and you say, we're looking for this type of manager. They give you some managers, but also somebody might come to you and you send them over to them. And talk to about kind of the sourcing component.

• 40:21Speaker 00

  Yeah, that's exactly right. And I can sort of point to specific areas where there's examples. Like my background is I came from New Mexico para public pension where I covered hedge funds. So when I came over to North Dakota, I was pretty well versed in hedge funds. And I had brought some ideas to RVK and sort of picked those managers first and asked them to underwrite. Whereas I wasn't as well versed in private 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 credit managers out there.

• 41:01Speaker 00

  Who are your top picks? And so, yeah, exactly. It's sort of the funnel could start from them or it could start from me.

• 41:11David Weisburd?

  A little bit of an odd question, but how many managers visit you in Bismarck, North Dakota every single year?

• 41:17Speaker 00

  Uh, yeah, we get, you know, we usually get like, um, one visit a month on average. As you can imagine, summer months are busier. We might get like, uh, you know, one a week in the summer. Um, but, uh, not, not as many managers are interested in coming out here in January and February.

• 41:35David Weisburd?

  That, that's when you know you have a real relationship and they're coming out in midwinter. Uh, what would you like our listeners to know about you, about North Dakota Land Trust, or anything else you'd like to share?

• 41:46Speaker 00

  Um, just to sort of highlight, uh, North Dakota Trust Lands, uh, over the last decade, we've distributed more than 2 billion to North Dakota Public Schools. Um, this year we're, uh, scheduled to distribute 290 million. Um, and our fund covers about a quarter of the cost of public education, which helps reduce the, um, tax burden on local property taxpayers. And that quarter, uh, that we make up has grown over time. And, um, hopefully our goal in the long run is to be able to grow that to a hundred percent and cover, cover the entire cost of public education.

• 42:26David Weisburd?

  I think a lot of times it's lost. You have these large numbers, you're lost on the impact that this money actually has on here, education state residents. So I appreciate you highlighting that and appreciate you jumping on the podcast and sharing your wisdom. Uh, looking forward, I don't promise January or February, but looking forward to coming to Bismarck and continuing conversation.

• 42:45Speaker 00

  Yeah, likewise. Thanks, David. Uh, it's been great. Thanks for having me on.

• 42:49David Weisburd?

  Thanks, Frank. Thanks for listening to my conversation. If you enjoyed this episode, please share with a friend. This helps us grow. Also provides the very best feedback when we review the episode's analytics. Thank you for your support.