Employees and Taxpayers in the State of Nevada Benefit From a Bold Decision to Refrain from Gambling
Investment committees that oversee institutional investment plans suffer from governance vulnerabilities that have existed since the US Navy established the first funded pension plan in 1800 . The vulnerabilities derive from the fact that committees meet infrequently , trustees bring variable levels of investment expertise and chronic turnover of trustees often leads to strategic and tactical errors . This forces trustees to rely heavily on advice provided by agents , such as investment consultants , outsourced chief investment officers ( OCIOs ) and full-time staff .
The problem is that agents have strong incentives to recommend active managers ( not to mention expensive alternative asset classes ), because the viability of their business models and careers depends on the claim that their advice adds value . Trustees are , therefore , led to believe that the use of active managers has a positive expected value , even though a preponderance of evidence reveals otherwise . For example , each year the S & P Dow Jones Indices , LLC reports the aggregate performance of institutional accounts . The results are depressingly consistent . In the latest report , issued in July 2023 , 78 % of equity institutional accounts and 59 % of fixed income institutional accounts underperformed comparable indices on a net-offees basis over the trailing 10-year period .
According to the previously explained rule of thumb , it is only by deviating from the pack that investors can hope to produce relative outperformance — provided , of course , that their strategy is sensible . In the early 2000s , the investment leadership at Nevada PERS decided to leave the pack .
Abiding by the Law of Large Numbers
Steve Edmundson joined the Nevada PERS in 2005 and was appointed to the position of deputy CIO in 2006 . Prior to his arrival , the portfolio was roughly divided equally between actively managed funds and index funds . Over the next seven years , Edmundson and the CIO , Kenneth Lambert , steadily migrated the portfolio to a heavier index orientation . In 2012 , Lambert departed and Edmundson was promoted to CIO . At the time , 75 % of publicly traded securities were allocated to index funds , but
Edmundson continued the transition until 100 % of publicly traded securities were allocated to index funds by 2014 . The remaining 12 % of the total portfolio remained in private assets . Edmundson ’ s simple rationale was that , in the longrun , gross-of-fees returns of index funds would differ little from active funds , but net-of-fees returns would be considerably higher .
For nearly 20 years , the performance of Nevada PERS has validated their unconventional approach . The table below shows the annualized gross-offees returns relative to public pension plans with greater than $ 1 billion in assets , as well as the percentile ranking of Nevada PERS in a peer universe provided by the investment consulting firm Callan Associates . It is also worth noting that this analysis substantially underestimates Nevada ’ s performance advantage because it does not account for the fact that their fees are much lower than those of their peers .
Annualized Gross-of-Fees Returns of Nevada PERS Period Ending March 31 , 2024
5- Year 7-Year 10-Year 15-Year 20-Year Nevada PERS 10.12 9.59 8.59 10.49 7.79 Median Plan (>$ 1 Billion ) 8.40 8.20 7.40 9.74 7.21
Relative Outperformance 1.72 1.39 1.19 0.75 0.58 Nevada PERS Percentile Ranking 2nd 2nd 4th 10th 11th
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