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Your Vested Interest

View pdf version of the March 2011 Your Vested Interest

North Dakota State Investment Board
March 2011

From the Director's Chair

John Geissinger - Executive Director/CIO

John Geissinger -
Executive Director/CIO

It was one of those March days when the sun shines hot and the wind blows cold: when it is summer in the light, and winter in the shade.
~~ Charles Dickens

Springtime in North Dakota

The calendar on my desk is telling me it is the end of March. Technically, my first North Dakota winter is a thing of the past. But where is spring? My backyard is still white, as is the Missouri River. As I clear my driveway from yet another "dusting," I wonder if Global Warming is just an expensive PR campaign conjured up by the folks inside the DC Beltway, and that trips to Riverwood Golf Course will only be for cross country skiing.

As I look at the global economy, I see several parallels with my yearning for spring and the promise of summer. Indeed, the days are getting longer. Warmer weather must be around the corner, right? Just as we wait for the spring thaw, heartened by the ever warmer sun, the global economy is showing signs the "vicious winter" from 2008-2009 is also a thing of the past.

On October 9, 2007, the Dow Jones Industrial Index closed at an all-time high of 14,164. After the bankruptcy filing for Lehman Brothers in the fall of 2008, the Dow reached a cycle low of 7062, a decline of just over 50%. Since then, the Dow has increased approximately 70%, leaving the index 17% below the all-time high. Is winter over? Let's dig a little deeper. The broader equity market, as measured by the S&P 500, has had a similar recovery, with a 15.1% return for 2010. However, the market was up 23.3% for the last 6 months of the year and it was down -6.7% for the first 6 months! Is it just a coincidence the stock market turned in this stellar performance when the Federal Reserve announced their second round of "Quantitative Easing"?

The Federal Reserve has been, and will continue to be, in a tenuous position as long as its objective is "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." During the 2008-09 recession, the US economy lost approximately 8.6 million jobs as measured by the non-farm payroll survey. The recession of 2001-02 saw a reduction of 2.3 million jobs, and the recession of 1990-91 saw a reduction of only 1.6 million jobs. It is no wonder the Federal Reserve is focusing on policies to reduce the unemployment rate. If the stock market is the warm March sun, the unemployment rate is the cold wind of the winter.

Employment growth during the recovery from the NASDAQ Collapse averaged approximately 185,000 per month. After the '90-91 expansion the average monthly job growth was over 250,000. If the US economy adds 200,000 jobs per month, it will take about 3½ years to recover the jobs lost in the latest recession. The Fed has the ability to fight monetary phenomenon, that is, inflation and deflation, but it is unclear whether easy monetary policy can stimulate job growth of this magnitude. The risk, of course, is in their attempt to stimulate job growth through ease monetary policies, the Fed may be planting the seeds for future inflation.

We live in an era that seems to be influenced more and more by unintended consequences. This graph shows the growth of the Adjusted Monetary Base calculated by the Federal Reserve Bank of St. Louis. One can think of this measure of money as the amount of currency in circulation plus the amount of deposits in checking accounts. As you can see, the growth of this measure has skyrocketed. Milton Friedman, the Nobel Laureate economist from the University of Chicago wrote, "Inflation is always and everywhere a monetary phenomenon." The broader measures of money followed by the Federal Reserve, which include savings accounts, money market accounts, etc., show much more modest growth rates, so what is going on? Do we need to be concerned about excessive money growth or not?

I am personally concerned the broader money aggregates are distorted due to the low interest rates the Fed is targeting. If there is little to be gained by placing funds in a money market account versus a checking account, a lot of people will just hold cash in the form of checking account balances. This action alone can cause a divergence between changes in the Monetary Base and broader measures of money. Since last spring, commodities, valued in US dollars, have increased approximately 45% and the value of the dollar versus our major trading partners has declined almost 10%. Inflation has not increased in the US, and many pundits state inflation cannot be a problem without wage inflation. Tell that to the folks in Britain, where inflation is picking up without any growth in wages. Inflation is also picking up in those countries where food consumption is a larger percentage of their GDP. Is it possible the catalyst for the political unrest in the Middle Ease was higher prices for necessities such as bread and milk?

No doubt, more questions than answers which is always frustrating. I am only mildly comforted by a saying I once heard, "The economy depends about as much on economists as the weather does on weather forecasters." In the meantime, we must prepare for the unexpected and unintended outcomes that surely will come our way. The portfolios continue to be diversified across many different asset classes, each of which will have their own "season in the sun." I wait with anticipation the wild flowers of summer, and am also thankful for the evergreens that break up the white winter landscape.

Investment Performance (Gross)
Period Ending December 31, 2010

Link to an image of the Net Investment Performance graph and/or read the data below.

Investment Performance Periods Ending 12/31/2010
  Fiscal YTD (6 months) One Year 10 Years 25 Years
17.72% 14.24% 5.04% 8.66%
15.82% 12.94% 5.55% 8.98%
Median Fund
15.38% 13.07% 4.96% 8.79%
Actuarial Assumed Return
8.00% 8.00% 8.00% 8.00%

The investment performance chart shows the actual returns of the pension funds over various time periods compared to the median public fund in the Callan Associates database of approximately 125 public funds across the country. All returns are shown before the effect of investment manager fees to provide an apples-to-apples comparison with the median returns. As you can see, for the first six months of the current fiscal year, both funds are seeing returns above median and above the 8% actuarial assumed return. For the calendar year ended December 31, 2010, the PERS fund returned just under median, while the TFFR fund returned above median. Both funds were above the actuarial assumed rate for the last calendar year. For the ten years ended December 31, 2010, which included the severe market downturn of 2008-09, both funds performed above median. However, during the next period, not even the median return in the Callan database achieved the 8% actuarial assumed return. For the longer term period of 25 years, all three bars are above the actuarial assumed rate with PERS returns slightly above median and TFFR just slightly below median for that time period.


Target Asset Allocation
December 31, 2010
Investment Type TFFR PERS
Domestic Large Cap Equity
Domestic Small Cap Equity
International Equity
Emerging Markets Equity
Alternative Investments
Domestic Fixed Income
High Yield Fixed Income
International Fixed Income
Real Estate
Cash Equivalents


In Appreciation

Special thanks to Governor Jack Dalrymple and Jeff Engleson for their years of dedicated service and leadership on the State Investment Board.

Governor Jack Dalrymple

Governor Jack Dalrymple







Jeff Engleson

Jeff Engleson








SIB Elects Chairman

Drew Wrigley
Drew Wrigley



The State Investment Board recently elected Lt. Governor Drew Wrigley to serve as the Chairman of the SIB.






New SIB Member

Lance Gaebe
Lance Gaebe



The SIB would like to welcome Lance Gaebe to the Board. Mr. Gaebe is an ex officio member of the SIB as the Commissioner of University and School Lands.






SIB Audit Committee

The Audit Committee is authorized to develop and direct the internal audit program for the Retirement and Investment Office (RIO), as well as oversee the annual external audit function. The Audit Committee also played a large role in the recent performance audit conducted by Clifton Gunderson. RIO employs a Supervisor of Internal Audit and one internal auditor.

The Audit Committee meets regularly to conduct essential business and contributes to the overall sense of fiscal security that RIO strives to maintain in its role as administrator of the State Investment Board and Teachers' Fund for Retirement programs.

The SIB Audit Committee consists of five members - Three from the SIB and two independent participants. Current members include Mike Gessner, representing the Teachers' Fund for Retirement; Mike Sandal, representing the Public Employees Retirement System; and Cindy Ternes, designee of the Executive Director of Workforce Safety & Insurance, representing elected and appointed officials. Lonny Mertz, CPA, CIA, CFE employed by the ND Department of Health and Rebecca Dorwart, CPA, CIA with MDU Resources Group, Inc. serve as independent participants on the committee.

2010 Annual Financial Report Available

The North Dakota Retirement and Investment Office Comprehensive Annual Financial Report (CAFR) has been published and may be viewed from our website, www.nd.gov/rio. This report is a complete review of the financial, investment, and actuarial conditions of the State Investment Board and the Teachers' Fund for Retirement.

State Investment Board
Lt. Governor Drew Wrigley, Chair
Mike Sandal , PERS Trustee, Vice Chair
Clarence Corneil, TFFR Trustee
Levi Erdmann , PERS Trustee
Lance Gaebe , Land Commissioner
Mike Gessner, TFFR Trustee

Adam Hamm, State Insurance Commissioner
Howard Sage, PERS Trustee
Kelly Schmidt, State Treasurer
Cindy Ternes, CPA, Designee WSI

Bob Toso, TFFR Trustee

RIO Administrative Office
John Geissinger, Executive Director / CIO
Fay Kopp, Deputy Executive Director / Retirement Officer
Shelly Schumacher, Editor

ND Retirement and Investment Office
1930 Burnt Boat Drive, P.O. Box 7100
Bismarck, ND 58507-7100
701-328-9885, Toll free: 1-800-952-2970

Articles are for general information only and are not intended to provide specific advice or recommendation. Any views, opinions or conclusions expressed herein are those of the author(s) and do not necessarily reflect the position or policy of the SIB or North Dakota Government. Other forms of this newsletter are available upon request.


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