Talk about starting from scratch.

Mark Fawcett joined the UK’s National Employment Savings Trust (NEST) in 2008 as chief investment officer, around the time that the then-new Pensions Act mandated automatic enrollment for workplace pensions. Unlike a variety of for-profit “master trusts” created by insurers and asset managers, it was intended to be a low-cost, public option. In other words, Fawcett was beginning from square one.

Now, among the 40 or so master trusts, NEST is one of the biggest. Thanks in part to an annual management charge of 0.3% and a contribution charge of 1.8%, 778,000 employers have registered to use NEST, around 8.5 million workers have been signed up, and assets under management are around £9 billion ($9.98 billion), increasing by around £450 million every month. For the five years ending September 2019, returns for NEST’s 2040 Retirement Fund, its default fund, were 56%.

Creating a Strategy from the Ground Up

Fawcett’s first task was formidable. First, he had to form a team; it’s now about 30 people. At the same time, “I had to build the strategy,” he says. So Fawcett spent two years researching how to set up the best investment approach, researching members’ needs—what returns were they likely to need, for example, and their capacity for risk, given their typically low-to-moderate income level—and using that intelligence to underpin investment objectives and portfolio design. “The question has been how cost-effectively to create the kind of quality that normally only rich people get,” he says.

At the same time, he also looked around the world for best practices. For models, he mostly turned to the US and Australia, the former to study target-date funds, the latter for approaches to illiquid assets and diversified portfolios.

Starting small, Fawcett also understood that he needed what he calls a “clear road map” of how to evolve over the next decade, as the plan grew bigger. That has meant, for example, moving slowly into such areas as private credit, which NEST just began to invest  in. While hedge funds, according to Fawcett, are off the table, he’s soon launching a search for a fund manager in unlisted infrastructure equity. In addition, because members aren’t interested in a “super volatile ride,” according to Fawcett, he needed a diversification strategy that included less risk. Still, Fawcett also saw promising investment opportunities outside of equities that provided sound risk-adjusted returns. He started with corporate bonds, then expanded to such areas as emerging market debt and equities.

Now asset allocation in its default strategy is most heavily in global developed equities, both GBP hedged and non-hedged (33%). But there’s also, for example, 3.2% in global listed property, 5.8% in global emerging market equities, and 4.1% in emerging market debt. Fawcett attributes the plan’s high performance in large part to the scheme’s diversified portfolio, which has benefited from the bull market in equities and has allowed the capture of strong returns from a variety of asset groups, from UK corporate bonds to global real estate. 

Creating that roadmap was only part of the battle. Next came selling it to the board of trustees. According to Fawcett, he spent a year and a half on that process. “We were doing something that had never been done in the UK, or the world,” he says. “So convincing them to have an appetite for innovation was a challenge.” Ultimately, Fawcett succeeded. “They were up for it,” he says.

Fawcett opted for a target date, rather than a lifestyle approach. He thought it would be easier to build an adjusted glide path over time for different cohorts based on year of retirement, while also avoiding the administrative challenges of a lifestyle approach for individual members.

Climate Change and ESG

Taking into account climate change and environmental, social, and governance (ESG) risks also plays a big part in NEST’s approach. With the youngest members of NEST just around 16 years old, “We knew we would be investing for a very long time,” says Fawcett. “And one of the biggest risks facing investors and the planet over the next 50 years is climate change.”

When Fawcett couldn’t find any funds he liked, he decided to create a home-grown alternative. He helped to design the Climate Aware Fund (CAF), with an eye toward shifting the portfolio over time to less carbon exposure, as well as giving more weight to companies transitioning from high-to-low carbon exposure. To date, £1.1 billion has been invested by CAF, which is managed by UBS. That’s about 10% of total investments in NEST’s default strategy. Through the CAF, UBS targets the 50 weakest-performing businesses from a climate change perspective and focuses on improving their performance. During the past three years, the CAF has had a -2.4% average annual growth rate of CO2 emissions vs. the FTSE Developed Index’s +1.6% average annual growth rate over the same period.

In addition, NEST systematically analyzes annual reports and statements and, working with other pension funds, engages with companies to improve climate disclosure. “If a company is not disclosing, we will avoid them,” Fawcett says. Over the past year, NEST’s global equity fund manager co-filed its first ever shareholder resolution, which was at BP. The resolution, which received significant investor backing, asked that BP set out a business strategy consistent with the goals of the Paris Agreement on climate change.

One focus in the ESG approach has been on tobacco. The primary reason, according to Fawcett, relates to pressure on companies’ bottom lines, thanks to increasing regulation and taxation. “We think this is a really bad business to be investing in,” he says. He’s in the process of going tobacco-free across the entire portfolio. Plans are to achieve that goal by 2021.

For Fawcett, who spent much of his career as an equity portfolio manager, as well as CIO of American Express International, among other positions, his time at NEST has offered an opportunity to draw on his previous experience. But he credits his success at NEST to two major factors. First, he points to the two-and-a-half year period he was able to spend developing the enterprise before launch. Plus, he didn’t realize quite how large the scheme would be. “It made the effort less daunting in the beginning,” he says.

—Anne Field