Sunday, July 22, 2018

Navajo Nation’s Master Trust Program & Permanent Trust Fund

TSW Community

In light of the recent offer of up to $525M in cash from the Navajo Nation to purchase Remington Outdoors, I'm reading more about the Navajo Nation's trust structure.

Current State:

According to the Navajo Times, the Navajo Nation's Master Trust Program ended 2017 with $3.28B in assets under management (AUM). The trust portfolio is currently made up of 41% in domestic equities, 33% ("about one third") in fixed income, 6% in real estate and about 20% in other strategies.

The largest fund is the Permanent Trust Fund. Other earmarked funds include Chapter Government Nation Building Fund, College Scholarship Fund, Vocational Education Scholarship, Handicap Trust Fund, Elderly Senior Citizen Trust Fund, Navajo Academy/Preparatory School, Land Acquisition Fund and Veterans Trust Funds.


The Master Trust is managed by the six members of the Nation's Investment Committee, made up of the following individuals (source):
  1. Controller of the Navajo Nation
  2. Appointee of the Navajo Nation President
  3. Chair of the Navajo Nation Budget & Finance Committee
  4. Appointee of the Navajo Nation Budget & Finance Committee
  5. Auditor General of the Navajo Nation 
  6. Attorney General of the Navajo Nation
The investment committee currently uses Portland, Oregon-based RVK for investment consulting services. RVK charges a flat consulting fee vs a fee based on assets under advisement (e.g., 10 BPS), and helps manage more than 20 fund managers across the asset classes.


According to a presentation from former Navajo Nation President Peterson Zah, the roots of the Trust started with $217M received from renegotiated royalties (coal, right-of-way, oil and gas) following the successful case against Kerr-McGee. That year, the Navajo Nation council passed resolution CJY-53-85 authorizing the creation of a permanent fund. 

The Permanent Trust Fund, which makes up the majority of the Master Trust Program, was established in 1985 with an investment of $26M. In establishing the Permanent Trust Fund, the objective was to diversify income streams away from the Nation's largely natural resources-based revenues AND protect future generations.

Governing Rules:
  1. Each year, the Nation would deposit 12% of annual revenue into the fund.
  2. For the first 20 years (1986-2007) the fund would have a spending policy of 0% (i.e., no distributions from the fund; 100% reinvestment of all returns). This would allow for the maximum benefit of compounding interest to growth the assets of the fund.
  3. After 20 years, 95% of the annual income generated by the fund (not the corpus of the fund) can be spent according to a 5-year plan approved by the Council.
  4. After 20 years, 5% of the annual income generated by the fund must be reinvested in the fund.
  5. All expenses incurred by the fund (administration, advisors, etc) would need to be paid by the fund.
Initial Spending Committee:

In 2002, a Permanent Fund Work Group (PFWG) was established to determine the details of the spending policy which was to begin in 2007. The work group recommended 50% of annual income would go to a Local Governance Trust Fund (LGTF) for certified chapters*, 45% of annual income would be reserved to plan for by the PFWG, and 5% would be reinvested according to the original guidance. 

The group then sought to test its recommendations through public hearings. Overwhelmingly, the public advised the work group and Council to reinvest the income (at least until AUM reached $1B) and to add financial controls to restrict the spending of the principal or corpus.

From these sessions came 5 recommendations:
  1. Develop a vision / strategic plan for the Navajo Nation
  2. Reinvest PF income for 5 years
  3. Repeal recommendation for 50% diversion to LGTF
  4. Resist further diversion and collateralization of PF
  5. Establish a mechanism for determining future expenditures of PF income
Protection of Assets:

Out of the recommendations came additional layers of financial control. Layer one requires a two-thirds vote by the Navajo Nation Council to authorize a referendum vote. The second layer requires approval by two-thirds of Navajo voters before the principal / corpus can be touched.

All-in-all, the Navajo Nation have been successful in the establishment and growth of their permanent fund. They took a deliberate step to establish the institution and save a portion of their wealth for the future, have been consistent with their strategy, and have been diligent on protecting the corpus through downturns in markets. They would be a good model to research if you're thinking of forming your own TSWF.

In Perpetuity,

* The Navajo Nation government is broken down into Agencies (regional governments) and Chapters (local governments).

Remington Rejects $0.5 Billion Cash Bid from Navajo Nation

TSW Community,

Did you see the news lately?

According to The New York Times, Cerberus rejected an offer valued up to $525M from the Navajo Nation to purchase Remington Outdoor (the gun manufacturer). Remington Outdoor is currently in Chapter 11 bankruptcy.

Navajo's plan for the business included both impact and return-oriented initiatives:

  • Impact Driven:
    • Eliminate AR-15 rifles
    • Eliminate consumer business except hunting rifles and shotguns
    • Invest in R&D around fingerprint "smart" gun technology
    • Shift assembly to the Navajo Nation to create jobs
  • Return Driven:
    • Focus sales efforts on law enforcement and military
    • Leverage minority ownership for contract preference
The Navajo bid was rejected after two months of consideration by the Remington Board of Directors.

The Navajo used the services of turnaround bankers Teneo Restructuring and was advised by attorney Drew Ryce, who was also involved in the attempt by Morongo to acquire gun-maker Colt out of Chapter 11 bankruptcy in 2015.

Both the Colt and Remington pursuits included a core thesis of helping the businesses qualify for government contracts under tribal / minority ownership. Generally, this is through the Small Business Administration's (SBA) 8(a) program. As a program of the SBA, any 8(a) advantages would be subject to size standards (i.e., the maximum size to be considered a "small" business) such as total revenue or number of employees. Assuming the use of NAICS code 332994 (small arms, ordnance and ordnance accessories manufacturing), the SBA states the size standard is 1,000 employees (link here for size standards). A quick google search shows Remington has more than 3,000 employees (source) and, as of Q3 2017, had $467M in revenue YTD.

As for the smart gun technology, NPR's Planet Money and Huffington Post both recently covered the challenges surrounding the technology.

The Navajo Nation made the offer in cash from its $3.3B investment trust. Had the transaction been completed, the single holding would have made up about 16% of the trust portfolio. According to a recent report from the Navajo Times, the trust portfolio is currently made up of 41% domestic equities, 33% in fixed income, 6% in real estate and about 20% in other strategies. RVK advises the trust committee as an investment consultant.

The Master Trust is managed by the six members of the Nation's Investment Committee, made up of the following individuals:
  1. Controller of the Navajo Nation
  2. Appointee of the Navajo Nation President
  3. Chair of the Navajo Nation Budget & Finance Committee
  4. Appointee of the Navajo Nation Budget & Finance Committee
  5. Auditor General of the Navajo Nation 
  6. Attorney General of the Navajo Nation
Interestingly, the President of the Navajo Nation has publicly expressed his concern on the offer:

This would be an interesting case study for future board members and managers of TSW Funds. 

What are your thoughts? How would you weigh the potential risks and rewards? How would you think about portfolio concentration and diversification? How would you balance impact and return-driven objectives? How would you balance the need for confidentiality and transparency? What diligence would need to be done to make you comfortable w/ the deal?

In Perpetuity,