By Lauren Bailey
In the sprint toward alpha, Steve Edmundson, the Nevada Public Employees Retirement System’s (NVPERS) chief investment officer, is proving slow and steady ultimately wins the race.
The pension fund recently underwent a “second-opinion review” of its investment program, for which it received high marks. The review, which was performed by consultancy Meketa, is required once every 10 years as a fiduciary measure outlined in NVPERS’ board policy.
It found the pension fund’s streamlined equities, fixed-income allocations asset mix and highly selective use of private market assets has enabled it to perform in line with, or far greater than, its peers.
To Edmundson, the results reinforce that the science behind the fund’s overall strategy continues to drive results and that the targets he and the Retirement Board have put in place are guiding the way. “It’s obviously good to get a clean bill of health,” he said in an interview with Markets Group, noting it helps to have a supportive board. “We’ve been pretty fortunate in Nevada to be able to maintain the simple approach that we’ve been implementing now for four decades.”
And by “simple,” the CIO isn’t just understating his hand. Edmundson has been with the pension fund for 20 years, first serving as assistant investment officer and later moving into his current role in 2012. He began his term as CIO with a staff of two and has managed to maintain a very trim office — for a period of time the pension fund operated with just Edmundson at the helm. In 2021, he hired Lauren Larson as the System’s chief financial officer, and she has since taken on the role of deputy investment officer.
As of June 30, 2024, NVPERS’ net position was $64.5B, an increase of $6.1B from the year prior, according to its 2024 annual report. The time-weighted return (gross of fees) for its fiscal year 2024 was 12.1%, which added $6.9B in investment income, and its funded ratio increased to 75% from 74% in 2023.
The smoothest ride
Over the years — and throughout numerous market regimes — Edmundson has learned it’s okay to forego the more direct path to alpha in favor of the smoothest ride.
The alchemy behind NVPERS’ allocation mix relies heavily on public equities. For instance, the median exposure to U.S. stocks is 26%, while its target allocation is 34%, according to the consultant’s report. One would assume that NVPERS’ high exposure to stocks would make it susceptible to the ups and downs of the market. Notably, Meketa credited the fund’s robust investment performance primarily to strong returns from U.S. and international stocks.
In the review, the consultancy highlighted the fund’s focus on large-cap and developed market equities in tandem with its use of treasury-only bond managers as the secret sauce. As a result of the allocation mix, NVPERS’ performance has been in line with, or performed far greater than, the actuarial assumed rate of return over most rolling 10-year periods, said Meketa.
“Our goal here at the retirement system is to fund our liabilities over a long-term horizon,” said Edmundson, noting the fund’s higher allocation to public equity than some of its peers means, by staying the course, it stands to gain long-term rewards from strong public equity performance.
To ensure market dynamics don’t drive the fund offroad, Edmundson uses treasuries to smooth out the ride. “We have an investment return assumption at 7.25%. That’s our bogey that we strive to hit over an extended time period and with the least amount of risk . . . and we’ve done it primarily with public markets in the portfolio.”
The pension fund’s short-term investment allocation is comprised of U.S. Treasury, U.S. government agencies/GSEs, and certain U.S. Treasury money market mutual funds. Meketa noted that comparable plans have a 1.6% exposure to short-term investments/cash equivalents, compared to Nevada PERS’ 12%.
The fund’s strategy is paying off; Meketa noted its performance has exceeded the median peer return for most of the fund’s history, and its fees are exceptionally low in basis points and dollars for a fund of its size.
The low fees are also a result of the fund’s decision to remain 100% indexed across public markets and keeping its bond portfolio focused 100% on treasuries. “We utilize indexing as the primary tool to implement those market exposures in the most efficient way that we can, and a byproduct of that is keeping our fees low.”
At the same time, Meketa pointed out the pension fund has room to play more in the alternatives space, particularly in private equity, private credit, and real estate, noting in these areas, “NVPERS’ allocations stand at about half of the peer median.”
The consultant said the plan’s highly liquid investment portfolio could likely tolerate greater exposure to less liquid segments of the global marketplace, such as corporate bonds and other “spread” fixed income securities, as well as private credit.
Nonetheless, Edmundson said the fund has no plans to add any additional asset classes. He added that there isn’t a one-size-fits all model investment approach for every public fund. “The key thing for us, and a lot of other plans that have been successful, is implementing an approach that fits the culture and underlying philosophy of the fund that allows us to stick with it over an entire market cycle. . . . That’s really been the main secret to the plan’s success — consistent implementation.”
Meketa certainly agreed, noting NVPERS’ allocation recipe puts it on the road to realizing its objective of generating a 7.25% long-term annualized return with the least possible volatility.
