Steve Edmundson is the investment officer at the Public Employees' Retirement System of Nevada (NVPERS), where he oversees all aspects of the system’s $38.5 billion in assets (as of June 30, 2017). Previously, he explained why a simple model is just as good as any other investment model and why doing nothing is something, in a 2016 interview.
In this second interview, Edmundson discussed NVPERS' simple and low-cost approach to investing; his strategy to offset losses in the event of a market downturn; and the importance of building an investment program that matches the fund's underlying culture.
Edmundson was named on Trusted Insight's 2017 Top 30 Public Pension Chief Investment Officers. He graciously spoke with us on Oct. 3, 2017. The following interview has been edited for clarity.
Trusted Insight: Being that you're a one-man team, you practice a very conservative approach. Do you think other pensions should adopt this investment philosophy or is this approach particularly unique to Nevada?
Steve Edmundson: Nevada PERS’ approach focuses on top-down asset allocation and keeping things simple. Having fewer moving pieces and keeping costs low has been successful here in Nevada. I think that's largely because we've been doing it this way for a long time, certainly before I became chief investment officer. It's a long-standing philosophy that the fund adopted and as a result, it’s worked for us.
We've been able to stick with this approach through all different types of markets. Whether or not it would work at another fund, is really difficult for me to say. All these big public funds have different governing structures and risk appetites. They have different liabilities as well, so I don't think that there's necessarily one way to do it.
"It’s fair to say that we employ a barbell approach with public equity on one side and a purely a diversifying asset relative to our equity exposure on the other."
There are a number of different paths to success and what works here might not necessarily work someplace else. At some places, the endowment approach has worked well. In other places, internally managed portfolios have been successful. In Nevada, we have found success with our simple, low-cost approach to investing.
Trusted Insight: Nevada PERS has a heavy allocation in domestic equity and a conservative 10% allocation in private markets. What steps have you taken to mitigate risks of a major market correction?
Steve Edmundson: Well, we have opted to use public equities as our growth engine, but we're certainly aware that that comes with a fair bit of volatility. As a result, we elected to strip out all of the equity-linked risk from our fixed income allocation. Our 30 percent target allocation to fixed income is 100 percent in U.S. Treasury bonds, so there's no credit risk in our fixed allocation. It’s fair to say that we employ a barbell approach with public equity on one side and a purely a diversifying asset relative to our equity exposure on the other.
In the event of a recession or a sell-off in risk assets, generally speaking, risk assets or other assets that are highly correlated equities usually sell off as well. The corollary to that is when there is a flight to safety, treasury bonds have been historically the recipient of those flows. So we feel it's a pretty good insurance policy for us.
Trusted Insight: One of the biggest hurdles for a pension is to achieve its assumed rate of return. If the current low-return environment persists, how achievable is your assumed rate of return over the next few years?
Steve Edmundson: With interest rates as low as they are and current valuations of risk assets being relatively high, it wouldn't at all be surprising if we went through a near-term period where returns were below our investment return assumption. However, we have a long-term return target which is something that's important to remember. Over the next five to seven years experiencing lower returns wouldn't be altogether surprising, however, we are 40- to 50-year investors. We don't expect to hit our target every year, and I think it's unrealistic for people to have that expectation.
"This isn't a world where one size fits all. It's really important to keep in mind the underlying culture and risk appetite of the place you're located in. "
It's important to remember that these investment programs are designed to work over long time horizons, and so we really keep our focus on that longer time horizon. If we have a period of four or five years of low returns, that's okay. That's going to happen in the course of a 50-year investment program. It's something that everybody should expect and anticipate.
Trusted Insight: Government entities, by nature, don’t offer the same type of compensation that the private sector might. What’s kept you at Nevada PERS for more than a decade?
Steve Edmundson: I have been here a little more than 12 years, and there's a number of reasons why. For one, I’m fortunate enough to live in a great place like Nevada. Our office is in Carson City, which is the state capital and is in the northern part of the state. It's a beautiful city at the foot of the Sierra Nevada mountain range and just down the hill from Lake Tahoe.
To be able to live in a place like this and have the opportunity to have a really engaging and interesting job, is a really big benefit and draw for me. Beyond that, I believe in what we do here in Nevada. I believe in our pension fund and the way that we invest money. If I didn’t believe in what we are doing, I wouldn’t be here.
Trusted Insight: One of our missions is to help foster the next generation of chief investment officers. What’s the number one lesson you learned during your tenure at Nevada?
Steve Edmundson: There's a number of lessons that I can think of. I think it's really important to know who you are as an investor and to know the culture of the fund. You need to have a distinct understanding as an organization of what you're trying to accomplish and a buy-in from all parties as to the type of investment program you want to build. This isn't a world where one size fits all. It's really important to keep in mind the underlying culture and risk appetite of the place you're located in. Your members, beneficiaries and constituency need to be kept in mind when developing a program, because an investment program is only as good as its ability to withstand the difficult times.
You have to build a program where the investment portfolio is a fit for the underlying culture of the organization to get you through those tough times that are always inevitable. Bear markets happen and investment styles go in and out of favor over time. The one thing that you don't want to see happen are major changes to a program at the worst possible time and an investment program that matches the overall culture helps to avoid that situation. It enables discipline when things get tough.
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