Executive Summary - Informational TO: State Investment Board FROM: Dave Hunter DATE: September 18, 2020 SUBJECT: SIB Meeting Materials – September 25, 2020 Our September board meeting will focus on Callan’s annual investment performance review of SIB client returns as of June 30, 2020. RIO will also share board education and manager research on in-state investment programs administered by other state plans, invite BND to provide an investment update & highlight recent legislative committee presentations. 1. Asset and Performance Overview – RIO will refresh the Asset and Performance Overview shared with the Board last month noting that 94% of our SIB clients generated net returns which exceeded their approved policy benchmarks for the 5 years ended June 30, 2020. All SIB Pension Pool clients generated net returns which exceeded their respective policy benchmarks for the 1, 3 and 5 year periods ended June 30, 2020. The Pension Pool, which includes PERS and TFFR, generated a net return of 8.4% for the 10 years ended June 30, 2020, exceeding its Policy Benchmark of 7.94% and their actuarial long-term return assumptions (of 7.00% to 7.25%). The NDSIB Pension Pool was also ranked in the top 25% of Callan’s Public Fund Sponsor Database for the 10-years ended June 30, 2020. 2. Callan Annual Investment Review – The SIB engages Callan to provide quarterly and annual investment performance reviews which include a reconciliation of RIO’s reported investment returns and asset valuations with those reported by Northern Trust, noting that Northern Trust serves as our primary custodian and record keeper for SIB client investments. RIO ties out investment returns and asset valuations with our investment managers and Northern Trust after each month-end in addition to assisting Callan in reconciling reported returns and investment valuations directly with Northern Trust after every quarter-end. The State also obtains an outside independent audit of our RIO financial statements and disclosures as of June 30th after every fiscal year-end. Our Audit Committee and RIO’s Internal Audit team is also responsible for reviewing RIO’s internal accounting controls, policies, practices, reporting and documentation on behalf of the SIB throughout the year. 3. Public Equity Update – RIO’s Deputy Chief Investment Officer Darren Schulz will provide a status update of our global public equity manager search and restructuring. 4. Employee Benefits Program and Legacy Fund Earnings Committee – RIO provided an investment update of the SIB’s five largest clients to the Employee Benefits Program Committee as of June 30, 2020. RIO also intends to provide and a similar investment update to the Legacy Fund Earnings Committee on September 22nd. The latter will highlight the benefits of using the Percent of Market Value (POMV) approach in establishing a sustainable spending policy for the Legacy Fund. Based on Legacy Fund balances for the 5 fiscal years ended June 30, 2020 exceeding $5.5 billion, a 4% annual spending rate would translate into over $440 million of POMV based earnings for the next biennium (e.g. $5.5 billion x 4% = $220 million x 2 years = $440 million per biennium). 5. BND Match Loan CD Program – In response to BND requesting a $100 million increase in the existing $300 million Match Loan CD program, RIO respectfully requests the SIB to consider increasing the program size by up to $100 million to $400 million with indicative pricing terms in compliance with the prudent investor rule. RIO obtained indicative pricing spreads from our largest fixed income managers to obtain evidence the spread being charged to like term U.S. Treasury’s was sufficient to compensate for the incremental liquidity risk. RIO notes “economically targeted investing” is prohibited unless the investment meets the “exclusive benefit rule” whereby: a) the cost does not exceed the fair market value at time of investment; b) the investment offers an equivalent or superior rate of return for a similar investment with a similar time horizon and similar risk; c) sufficient liquidity is maintained in the fund to permit distributions in accordance with plan terms; and d) the safeguards that a prudent investor would adhere to our present. 6. Agency Update – RIO will provide Quarterly Monitoring Reports on Staff Relations, Budget/Financial Conditions, our Investment and Retirement Programs (including the TFFR Pension Administration System enhancement project) and our Watch List. 7. Annual Governance Manual Review – If the SIB concurs, RIO intends to conduct our annual Governance Manual Review over the next three months to facilitate a more meaningful review. Under this proposal, the SIB and RIO would review Section A on Executive Limitations and Section B on Governance Process next month. At the conclusion of our monthly board discussions, the SIB may make a motion to accept recommended changes, if any, to our Governance Manual. ND STATE INVESTMENT BOARD MEETING Friday, September 25, 2020, 8:30 a.m. State Capitol, Pioneer Room (Virtual) 600 E Boulevard Ave, Bismarck, ND Teleconference 701-328-0950, Conference ID: 566 449 715# Revised Agenda I. APPROVAL OF AGENDA II. APPROVAL OF MINUTES (August 28, 2020) III. INVESTMENTS A. Asset and Performance Overview - Mr. Hunter (10 minutes) Board Acceptance B. Callan Annual Review - Mr. Paul Erlendson and Mr. Alex Browning (1 hour) 1. Market Update and Investment Review - Pension, Insurance, Legacy Board Acceptance C. Global Equity Manager Search Update - Mr. Darren Schulz (10 minutes) Informational IV. BOARD EDUCATION AND GOVERNANCE A. Callan Board Education Options - Mr. Hunter (5 minutes) B. Overview of In-State Investment Programs - Mr. Hunter (10 minutes) 1. GCM Grosvenor, Adams Street, Barings - Informational C. BND Match Loan CD Program - Mr. Hunter (10 minutes) 1. Bank of North Dakota - Mr. Eric Hardmeyer and Mr. Kelvin Hullet Informational 2. Staff Recommendation - Mr. Hunter Board Action D. Legacy Investment Plan - Commissioner Jon Godfread and Mr. James Leiman Informational (10 minutes) V. QUARTERLY MONITORING (enclosed) (10 minutes) Board Acceptance A. Executive Limitations / Staff Relations - Mr. Hunter B. Budget / Financial Conditions - Ms. Connie Flanagan C. Investment Program (with Enhanced Quarterly Monitoring Report) - Mr. Eric Chin D. Retirement Program (with TFFR PAS Update) - Ms. Jan Murtha E. Watch List - Mr. Matt Posch F. Governance Manual Review - Mr. Hunter VI. OTHER Next Meetings: SIB - October 23, 2020, 8:30 a.m. SIB Securities Litigation - November 5, 2020, 1:00 p.m. SIB Audit Committee - November 12, 2020, 2:30 p.m. VII. ADJOURNMENT Any individual requiring an auxiliary aid or service, please contact the Retirement and Investment Office (RIO) (701) 328-9885 at least three (3) days prior to the scheduled meeting. 1722 NORTH DAKOTA STATE INVESTMENT BOARD MINUTES OF THE AUGUST 28, 2020, BOARD MEETING MEMBERS PRESENT: Brent Sanford, Lt. Governor, Chair Rob Lech, TFFR Board, Vice Chair Troy Seibel, PERS Board, Parliamentarian Jon Godfread, Insurance Commissioner Toni Gumeringer, TFFR Board Keith Kempenich, Legacy/Budget Stab. Adv. Board Bryan Klipfel, Director of WSI Adam Miller, PERS Board Mel Olson, TFFR Board Kelly Schmidt, State Treasurer Jodi Smith, Commissioner of Trust Lands Yvonne Smith, PERS Board STAFF PRESENT: Eric Chin, Chief Risk Officer/Senior CIO Connie Flanagan, Chief Financial Officer Ann Griffin, Investment Accountant Bonnie Heit, Admin Svs Suprv David Hunter, Exec Dir/CIO Jan Murtha, Dep Exec Dir/CRO Matt Posch, Investment/Compliance Officer Sara Sauter, Suprv of Internal Audit Darren Schulz, Dep CIO Dottie Thorsen, Internal Auditor Susan Walcker, Senior Financial Accountant Len Wall, Information Security GUESTS: Lynn Baranski, BlackRock Dave Brett, Public Citizen Aimee Copas, Council of Educational Leaders Dean DePountis, Attorney General’s Office Simon Dwyer, BlackRock Miguel Gonzalo, Adams Street Jordan Hutzenbuhler, Public Citizen Kelly Meldrum, Adams Street Ross Ramatici, Public Citizen Bryan Reinhardt, PERS Alex Storer, Adams Street CALL TO ORDER: Lt. Governor Sanford, called the State Investment Board (SIB) regular meeting to order at 8:30 a.m. on Friday, August 28, 2020. The virtual meeting was held at the Retirement and Investment Office (RIO), 3442 East Century Avenue, Bismarck, ND. Attendance was taken: PRESENT: MR. KLIPFEL, COMMISSIONER GODFREAD, TREASURER SCHMIDT, COMMISSIONER SMITH, MR. SEIBEL, DR. LECH, MR. MILLER, MS. SMITH, MS. GUMERINGER, LT. GOVERNOR SANFORD ABSENT: MR. OLSON 1 8/28/20 1723 AGENDA: The Board considered the agenda for the August 28, 2020, meeting, IT WAS MOVED BY DR. LECH AND SECONDED BY MS. GUMERINGER AND CARRIED BY A VOICE VOTE TO ACCEPT THE AGENDA FOR THE AUGUST 28, 2020, MEETING. AYES: MR. KLIPFEL, COMMISSIONER GODFREAD, MR. MILLER, TREASURER SCHMIDT, MS. GUMERINGER, MS. SMITH, COMMISSIONER SMITH, DR. LECH, MR. SEIBEL, AND LT. GOVERNOR SANFORD MOTION CARRIED ABSENT: MR. OLSON MINUTES: IT WAS MOVED BY TREASURER SCHMIDT AND SECONDED BY COMMISSIONER GODFREAD AND CARRIED BY A VOICE VOTE TO APPROVE THE JULY 24, 2020, MINUTES AS DISTRIBUTED. AYES: DR. LECH, TREASURER SCHMIDT, COMMISSIONER SMITH, MR. SEIBEL, MR. MILLER, COMMISSIONER GODFREAD, MS. GUMERINGER, MS. SMITH, MR. KLIPFEL, AND LT. GOVERNOR SANFORD NAYS: NONE MOTION CARRIED ABSENT: MR. OLSON INVESTMENTS: Mr. Hunter reviewed preliminary fiscal year end results for June 30, 2020. A strong equity market recovery during the second quarter drove Teachers’ Fund for Retirement (TFFR) and Public Employees Retirement System (PERS) returns up 10.8% and the Legacy Fund up 12.3%, while Workforce Safety & Insurance (WSI) and Budget Stabilization Fund posted net gains of 8.1% and 4.3%, respectively. Budget TFFR PERS Legacy WSI Stabilization Net Returns for 1-Year Ended 12/31/2019 18.0% 18.0% 18.1% 13.6% 4.7% Net Returns for Quarter Ended 9/30/2019 0.4% 0.4% 1.0% 1.7% 0.9% Net Returns for Quarter Ended 12/31/2019 5.6% 5.7% 5.2% 2.6% 0.8% Net Returns for Quarter Ended 3/31/2020 -12.0% -12.1% -12.7% -6.1% -3.6% Net Return for Quarter Ended 6/30/2020 10.8% 10.8% 12.3% 8.1% 4.3% Preliminary Net Return FYE 6/30/2020 3.4% 3.4% 4.2% 6.0% 2.3% Note: Net returns are based on preliminary data which is unaudited and subject to change.