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).


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