North Dakota officials say they do ‘heavy due diligence’ in selecting investment firms

North Dakota investment officials were asked about the state's decades-long, uninterrupted relationship with its top investment consultant, Callan. Selection of investment managers is exempt from state procurement requirements.

An exterior view of the North Dakota State Capitol building
The North Dakota State Capitol is seen Jan. 17, 2021. Michelle Griffith / The Forum
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BISMARCK — An advisory group that includes North Dakota lawmakers inquired about the decades-long tenure of the state’s top investment consultant and how it avoids conflicts of interest when recommending management firms to invest North Dakota’s $19.4 billion portfolio.

The discussion came Wednesday, June 16, in a meeting of the Legacy and Budget Stabilization Fund Advisory Board and follows questions raised earlier this year by the state treasurer and others.

Sen. Kathy Hogan, D-Fargo, asked state investment staff to explain why the state has had such a long, uninterrupted relationship with Callan, a San Francisco-based investment firm that has helped guide state investments since the late 1980s.

“It seems like the contract is kind of continuing,” she said. “Obviously it needs to be a longer-term contract, but at some time do we need to revisit that?”

Callan’s current contract, which began in 2019, expires in 2024. Callan’s yearly fee under the current contract is $430,000, which can increase 3% per year starting with the second year. The state of North Dakota has paid Callan at least $12.9 million since 2001, according to records.


Jan Murtha, deputy executive director and chief retirement officer for the Retirement and Investment Office, which advises the State Investment Board, said Callan has been hired in a series of contracts, which typically coincide with the state’s two-year budget cycles.

North Dakota’s contract with Callan is not “rolling” or “open-ended,” Murtha said. State law exempts investment management services from the formal procurement process, but that doesn’t mean Callan’s performance is not reviewed before new contracts are signed, she said.

The investment office isn’t required to follow specific steps set forth by the procurement process, but follows its own process, she said.

Murtha didn’t explain that process, however, and no members of the advisory board asked for further details.

Dave Hunter, the state’s chief investment officer, said the small staff works diligently to screen the investment firms that manage state pension funds, insurance funds and the $8.7 billion Legacy Fund, which is funded by a portion of state oil and gas revenues.


“We actually do heavy due diligence on these investment managers,” Hunter said. Staff members, working with Callan and other data providers, gather information to identify the best managers, he said.
Earlier this year, Thomas Beadle, state treasurer and a member of the State Investment Board, wrote Callan to ask for assurances that conflict-of-interest allegations of “pay to play” from years ago were “firmly in the rear view mirror.”

Besides advising institutional investors like the State Investment Board, Callan provides research and education services to investment firms. Twelve of 14 firms Callan recommended that the investment board hire to manage the Legacy Fund paid Callan.


Callan routinely discloses the firms it receives payments from and maintains strict “firewalls” between its business units, Ann DeLuce, Callan’s chief of compliance, told advisory board members.

The fees the investment firms pay Callan are kept confidential, however, she said. So the staff members who advise North Dakota on which investment managers to hire don’t know about the fees, one of the steps Callan takes to prevent a potential conflict of interest, DeLuce said.

Callan never has been found to have engaged in “pay to play” conflicts of interest by any regulatory body, although the company periodically is called upon to answer questions, she said.

Darren Schulz, the state’s deputy chief investment officer, bristled at any suggestion of “pay to play” involving Callan’s work for the state. The Forum has written about the questions Beadle raised and allegations about Callan during the early 2000s in other states.

“I must tell you these allegations of pay to play are insulting to me personally,” and to other staff members, Schulz told the advisory board. The staff operates independently of Callan, he said.

“There’s fake perceptions that Callan is pulling puppets,” he said. “It’s all garbage.”

Those perceptions are held by members of the public, however, Hogan said, adding that she’s getting questions from constituents. Legislators should deal with those perceptions, she said.

Advisory board members also heard from 50 South Capital, the Chicago firm that will manage the Legacy Fund’s new program for investing within the state, the 1889 Fund.


50 South Capital executives have traveled the state to meet with bankers, entrepreneurs and others and are setting up an office in North Dakota. The program launches Aug. 1 and will make private equity and venture capital investments in fledgling or expanding firms, finance sources that are scarce in North Dakota.

Those investments are different than the more traditional investments the Legacy Fund has made since its inception in 2010, Hogan said. “This is going to be significantly different and we have to be clear about the expectations,” she said.

Rep. Keith Kempenich, R-Bowman, chairman of the advisory board and a non-voting member of the investment board, said it will take time to see a return on investment.

Kempenich said he doesn’t expect to see much in the way of results for the first three years of the 1889 Fund, but the state will expect to see a return on its investments.

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