Steve Edmundson is the investment officer at the Public Employees' Retirement System of Nevada (NVPERS). As a one-man team, he oversees all aspects of the system’s $34.9 billion (as of 2016) investment program, including investment operations, compliance, research, manager oversight and implementation of investment strategy.
Nevada’s pension fund is known for its simple and conservative portfolio strategy despite an increasing trend of complex investment strategies pursued by many of its pension peers. In this interview, Edmundson explains why his simple model is just as good as any other investment model and why doing nothing is something.
Mr. Edmundson was recently named on Trusted Insight’s Top 30 Public Pension Chief Investment Officers of 2016. He graciously spoke with us on November 15, 2016.
Trusted Insight: What is the makeup your investment team and governing body?
Steve Edmundson: We have one of the more unique investment teams in the industry. I'm the only investment employee here in Nevada.
Our board is comprised of seven public employees, either actively working or retired. The investment staff makes recommendations and the board either approves or doesn't approve those recommendations.
Trusted Insight: What is your investment strategy within private markets and how has it evolved over time?
Steve Edmundson: The private market strategy has been fairly consistent being targeted at 10 percent of total fund assets. I think the last time it was changed was 2009. It's a fairly conservative structure. Our private real estate allocation entirely consists of unlevered, fully-leased core assets, which is also consistent with our total fund structure. We have a focus on high-quality assets throughout the fund, including our private markets allocation. The Nevada model has really become synonymous with simplicity with a focus on keeping costs low and an emphasis on high-quality assets. That kind of high-quality bias is consistent throughout the fund, not just in our private market's allocation.
Trusted Insight: Is there a reason why you favor real estate and private equity over other types of alternative asset classes such as hedge funds?
Steve Edmundson: Yes. We have made an overt decision not to invest in hedge funds, so we have never had a hedge fund allocation. Again, the high-quality focus. But beyond that, we see hedge funds more as a management style rather than a specific asset class, and have never been comfortable with the complexity, lack of transparency and fee structure associated with hedge funds. They just haven't found a spot. Hedge funds aren't consistent with our overall high-quality, simple approach to investing.
Trusted Insight: What's your view on applying the endowment model to public pensions?
Steve Edmundson: We're kind of the opposite of the endowment model, and we've had a lot of success with that. However, that doesn't mean that I think that the endowment model can’t work well. It is more of a question of what fits the comfort level and culture of each particular fund. I think that the endowment model can be a successful approach, and a number of funds have certainly proven that they can be successful with that approach. However, what works for one fund won’t necessarily work for another. In our case, I don't think that the endowment approach would be successful in Nevada.
At the same time, however, because we've had success with a simple approach doesn’t mean it would necessarily fit the culture of another fund, and may fail, because in order for any strategy to succeed, the people who invest in it need to stick with it when it becomes difficult. If you can't stick with it, then it's going to be a failure, and so the question becomes -- Are you able to stick with it? Does this fit what your constituents want you to be invested in? Does it fit with the culture of your state? Does it fit with the culture of your fund in general? If it does and you're able to apply it across all time periods, then I think ultimately it can be successful.
I think that the endowment model is not going to go anywhere in terms of being utilized, and at the end of the day it probably has as good of a chance of succeeding as any other model as long as it's applied consistently across all market cycles. You have to stick with it.
Trusted Insight: How do you manage to not be swayed by temporary market ups and downs, popular opinions, etc. and stick to your strategy?
Steve Edmundson: We have been doing it this way for so long that discipline and patience are built into our fund’s DNA. In fact, if we started acting on current sentiment or short term market moves I think it would raise some eyebrows. We know who we are as investors and so do our constituents.
Trusted Insight: Many pensions that invest in alternative assets are terminating such terms, such as hedge funds. Do you think they're overreacting?
Steve Edmundson: While I can't speak to what other funds are doing specifically, I do think that's partially in response to the fee structure, and obviously that performance in the hedge fund industry has suffered over recent years. The combination of those two things are really why that's happening.
Whether or not hedge funds would be a fit in somebody else's portfolio is a tough thing for us to make a call on, because other funds are structured differently and they may very well be comfortable with the complexity and the fees associated with hedge funds if they think that provides them with the return streams that they're looking for.
Trusted Insight: In the history of the NVPERS, were there any market turbulences that put this simple structure in significant risks?
Steve Edmundson: There's certainly been volatile markets where our returns have reacted accordingly and our assets' growth has acted accordingly. However, I'd say that any long-term investor that has significant exposure to risk assets whether they're stocks, private equity, real estate or high-yield bonds, should expect some volatility. We certainly are not immune to the ups and the downs of markets – 2008 and 2009 come to mind – but we did well on a relative basis because our high-quality bias served the fund well over that time.
I think that as much as anything else, as long-term investors we should expect those time periods. They're going to happen, they have happened, and they will happen again. What’s part of being a disciplined, long-term investor, is looking past those time periods and not changing strategy when they inevitably happen.
Trusted Insight: In the current low-return environment, do you see a trend in the near-term that public pensions are moving capital into low-cost, passive investment products?
Steve Edmundson: Lower absolute returns have likely influenced the migration towards indexing. If returns are lower, fees consume a greater portion of an investor’s return. So yes, I think that is part of the reason. However, ultimately, I think the bigger reason indexing is gaining in popularity is simply because it is the most efficient way for investors to get the specific market exposures they want in their portfolios.
Trusted Insight: What do you like most about working at a public pension?
Steve Edmundson: I think that the most exciting thing about working for a public pension is that, unlike a lot of jobs, I never forget why I'm here. Our job is to ensure that the investment portfolio does its job for our members and beneficiaries. Every day I see myself coming to work for the 150,000 members who are public employees of our system. I feel pretty good about that. I feel good about getting to do something that I feel is worthwhile and can positively influence the hardworking public employees of the State of Nevada. I believe in what we're doing and that is the most exciting thing about working for Nevada PERS.
More so than the investments. I enjoy the investment stuff very much as well, and obviously that's why I'm here, but doing it for something that you believe in is what makes it worthwhile.
Trusted Insight: What career advice would you give to young people who look to enter public pensions or institutional investing overall?
Steve Edmundson: I would say patience. Be willing to put in the time and always remember what the organization is there to do from the get-go, whether it's an endowment or a public pension. As a pension, we're here to support public employees. So, be patient with their chosen career path and always keep in mind why they've decided to go down the path of being a public employee. I think it's always important to remember that.
And on the investment side, I would advise younger people in the industry not to lose sight of the big picture. Investment decisions should always relate back to the impact on the total fund. It becomes easy to spend too much time and place too much importance on things that don’t move the needle.
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