CIO of the North Dakota State Investment Board on why he chose 130/30
Feb 27th, 2008 | Filed under: 130/30, Guest PostsWe talk a lot about the theory behind 1X0/X0 strategies. But given the nascence of this sub-sector, it has been difficult to come up with any real-life examples about which to write. Today, however, we welcome guest contributor and 130/30 investor, Steve Cochrane, the Chief Investment Officer of the North Dakota State Investment Board (NDSIB). With over 26 years of institutional investment experience Steve is responsible for the administration of the agency as well as overseeing a $5.4 billion diversified investment portfolio. The NDSIB was selected as a nominee for Money Management Letter’s 2007 Savviest Public Plan of the Year and is a speaker at Terrapinn’s upcoming 130/30 conference in Santa Monica.
130/30: How it works for North Dakota State Retirement Scheme
Special to AllAboutAlpha.com by: Steve Cochrane, Chief Investment Officer, North Dakota State Investment Board
After twenty years in the institutional investment management business, I came to a monumental realization that what I had learned in business school is true: large cap securities that are actively traded in major financial markets are most likely efficiently priced. It has now been eight years since that awakening.
The efficient markets hypothesis (EMH) was originally developed in the late 1960’s. It states that market prices should reflect all information known about a security. After forty-five years of research and testing, most agree that this hypothesis is increasingly correct as capitalization and liquidity increase. When it comes to the Large Cap Domestic Equity asset class in the United States, theory converges with reality.
I arrived in North Dakota to assume the CIO role in January of 1997. Awaiting me was a US$2 billion pension fund with an array of active managers who were benchmarked against the S&P500 index of large cap stocks, as well as S&P500 style benchmarks. While some were growth oriented and others pursued value and yield investing, they all had one thing in common: underperformance relative to benchmark.
The pension fund in North Dakota is set up with a long-term strategic allocation based on actuarial asset / liability studies. The studies contain a long term projection of expected return and risk based on benchmark inputs. It is the job of the State Investment Board to implement the investment of these asset classes. Each of the ten asset classes has a standard benchmark. So if we can outperform the benchmark of each asset class, we can exceed the policy mix for the fund and thereby generate total plan “alpha”.
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Interesting process to determine 130/30
I have a question for the author of this article. I have read and heard it said that 130/30 funds are like “leveraging” the active management capabilities of the manager. Why then, would you use an index manager to implement a 130/30 strategy? Why wouldn’t you look for a manager that has proven active management capabilities?