Nevada’s pension fund is invested in stocks and bonds that are all in low-cost funds that mimic indexes

Cutting costs and investing in low risk bonds and stocks

Nevada’s pension fund is invested in stocks and bonds that are all in low-cost funds that mimic indexes. Mr. Edmundson rarely makes more than one change to his portfolio every year. News headlines don’t matter much to him, whether it’s local or global.

Mr. Edmundson’s secret isn’t a complex formula or inside information on the markets, instead his strategy is not to outperform the market, but instead keep expenses low. He’s stated numerous times that his firm is “bare bones”, when it comes to expenses.

Instead of racking up expenses Mr. Edmundson prefers to save every penny his fund has. This is why he doesn’t have expensive office furniture, or high end perks, nor does he even buy lunch. He has stated that he doesn’t want to spend $10 every day in order to have lunch.

Despite his frugalness Mr. Edmundson’s funds over 1 year to 10 year periods ending on June 30, have shown greater returns than many of America’s largest public pensions, such as the New York Public Employees’ Retirement system, or The California Public Employees’ Retirement System (CalPERS).

Is doing nothing, really better than doing something?

In light of Nevada’s high returns, other state pension funds have taken note of Mr. Edmundson’s strategy, and the spokeswomen for CalPERS, which is valued at $300 billion compared to Nevada’s $35 billion, said that Nevada reduces the complexity, costs and risks in a portfolio.

For that reason, a big number of famous public pension funds have now taken up Nevada’s strategy, as numerous pension funds are dealing with low cash reserves and reduced interest rates. Even California’s $300 billion public pension fund has decided it would cut ties with 50% of firms that are handling its money.

Accordingly, compared to a decade ago nearly half of US public pensions are now in low-cost index funds. Many investors are now “migrating towards Nevada”, states says Stephen McCourt, who is the co-CEO at pension investments consultant Meketa Investment Group Inc.

However, other investors disapprove of Nevada’s do nothing approach. Mr. Chattergy is the pension chief investment officer for Hawaii and a friend of Mr. Edmundson’s, who disagrees with Mr. Edmundson’s approach. Unlike Mr. Edmundson’s approach, Mr. Chattergy relies on a myriad of investment market strategies, which have thus far been successful in getting him returns comparable to Nevada.

Should you turn funds passive?

In 2005, when Mr. Edmundson was brought onto the Nevada pension plan as an analyst, almost 60% of the funds stocks were in indexes. After becoming Chief investment officer in 2012, Mr. Edmundson did something unprecedented, by turning the fund more passive. By 2015, Mr. Edmundson had fired ten external managers, and put all of Nevada’s bonds and stocks into passively managed funds.

unprecedented, by turning the fund more passive. By 2015, Mr. Edmundson had fired ten external managers, and put all of Nevada’s bonds and stocks into passively managed funds.

unprecedented, by turning the fund more passive. By 2015, Mr. Edmundson had fired ten external managers, and put all of Nevada’s bonds and stocks into passively managed funds.

Subsequently, Mr. Edmundson saved the Nevada fund a fortune, as its outside management bill was nearly 1/7th of the other public pension’s, according to Callan Associates, which tracks retirement-plan expenses.

If Mr. Edmundson relied on outside management like other public pensions, he would have racked up $120 million annually in fees; however in 2016 the Nevada fund only paid $18 million.

Despite the success of Mr. Edmunson’s cost cutting, he still does day to day work, like any other average office employee. He prepares material for board meetings, drafts proposals and does administrative tasks, as he believes taking on extra employees would cut into costs.

Nonetheless, Mr. Edmunson still has some way to go if he truly wants his fund to succeed, as Nevada’s current assets would only fund 73% of what is needed to meet future retirement obligations to workers.

Key takeaways

Unlike other investment firms that woo and buy the attention of their clients, through expensive lunches or grandiose presentations, Mr. Edmunson often councils Nevada’s top pension officials on interest-rate risk, as well as investment targets in his small boardroom, through uninspiring Powerpoint presentations. Additionally, he avoids taking his clients out for expensive dinners, as he sees it as an unnecessary expense.

Moreover, Mr. Edmunson generally doesn’t work overtime, outside his normal 8-5 hours, drives to work every day in his 2005 Honda Element, which has over 280,000 kilometers on it, and in 2015 his salary was $127,121.75, according to a Nevada Policy Research Institute database.

The key take away from Mr. Edmunson’s success is not necessarily hard work, instead it’s the opposite. By doing the least work possible, Mr. Edmunson has cut huge risks and expense for his fund, and instead provided huge returns.

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