Elizabeth Fernando Deputy CIO,
National Employment Savings Trust
Elizabeth Fernando

“Elizabeth has had a fantastic impact since arriving at Nest. Having spent over 20 years at USS in a variety of roles, she brings vast experience into the team and at the same time she has embraced our innovative mindset and collaborative working approach with energy. Her key achievements to date have been to evolve the asset allocation process (which is already adding significant value) and work on developing our investment objectives—by taking advantage of our scale and the investment opportunities that opens up, we are ensuring that our members have the best possible and most appropriate portfolio at every stage of their savings journey.”

—Mark Fawcett, CIO, National Employment Savings Trust

The CIO Editorial Team shared a dozen questions with all of our NextGen nominees and asked them each to pick six to answer. Their answers informed our decision to include them as a NextGen. Below are the answers from Elizabeth Fernando.

CIO: How are you dealing with rising inflation and interest rates?

Fernando: Turning points in markets are always challenging, and we’ve not been in a rising rate, high-inflation environment for many years. Nest is a long-term investor and keeping that perspective at times when the market is reacting strongly to every new data point is a constant challenge. We launched a project in mid-2021 when the transitory-sticky inflation debate was still ongoing to investigate how asset class returns and most importantly asset class correlations could change if we were to move to a high-inflation or more volatile inflation environment. We looked back at past historical episodes and leveraged our external fund manager’s analysis to support us in this. Within the portfolio we have not had exposure to developed market sovereign bonds for many years, preferring investment-grade corporates, which have higher yields and shorter duration. We have maintained an allocation to commodities and have been reducing our underweight in U.K. property as both have some inflation-protecting characteristics. We started building our allocation to unlisted infrastructure in Q2 2021 as another way of gaining inflation protection. At times of uncertainty, when the long-term picture is unclear, we prefer to run a diversified portfolio and do not force ourselves to express conviction in positions where the evidence to support them is weak.

CIO: What is the best way to bring more diversity to the financial industry?

Fernando: There are two distinct problems on diversity which need different solutions. The first is ensuring the intake of trainees is diverse—we try to do this at Nest starting with neutral wording of our job advertisements … and then making sure CVs are neutralized. Having selected candidates for interview we make sure the interview panel is diverse. Diverse team members are a great strength for reducing blind spots and group think, but it does require strong team leadership to make diversity a strength rather than a weakness. Like anything, if diversity is done poorly, especially when building a team, it could lead to conflict, feelings of not fitting in or being listened to. Training and supporting leaders to manage diverse teams, organizing meetings and discussions in ways which suit different personality types, checking in regularly to see what is and isn’t working for individuals are all necessary if we are to reduce attrition.

CIO: What role do blockchain or tokenization have in the future of institutional investing?

Fernando: Tokenization has particular potential in the sphere of illiquid assets where the ability to split these large assets into smaller pieces will make them accessible to a wider range of investors and lead to an associated improvement in price discovery as the prices that these smaller blocks or tokens are being exchanged for become visible.

Blockchain has a role in both settlement and custody. Instant trade settlement eliminates the small window of default risk which still exists in some markets which do not use the delivery versus payment approach. Correcting errors on pricing or unit allocation between beneficial owners would be auditable. This also leads to significant potential improvements in voting and securities litigation. Voting is an important part of stewardship and many asset owners and managers publish details on how and where they have voted. At present the voting chain is long and it is often unverifiable that the instructions given have been transmitted, received and counted. Blockchain technology could address this. In securities litigation you need to provide proof of ownership and records of transactions to show eligibility to participate in a class action. Collecting this data is often time-consuming, whereas the blockchain record would have a single record of transactions in a security.

CIO: Which component of ESG investing do you think will have the most influence on institutional investing going forward, and why?

Fernando: Climate (and carbon within that) have rightly had a high degree of attention in ESG: there is a larger quantity of accessible and comparable data associated with carbon emissions than exists for other areas covered by ESG. We think this needs to expand to natural capital more broadly, i.e., recognizing that environment is a multi- not uni-dimensional problem. Feedback loops between natural capital and climate change are well-established, so considering the topic more holistically is sensible. Data comparability and availability will improve in these areas over time as it has with climate data, and will make the addition of natural capital into the investment process more straightforward. The other area we would highlight is social and in particular business culture. Demographic trends are shrinking the pool of working-age population in many countries and will raise competition for labor. Attracting and retaining workers will be key to continuing success as not everything can be automated and businesses which support workers in retraining to adapt skills to changing business demands are likely to be the long-term winners.

CIO: What are the most important alternative asset classes for institutional investors, and why?

Fernando: Alternative asset classes which offer access to return streams which are not available in publicly listed forms are of most interest to us, and we are particularly interested in assets which are either uncorrelated with listed alternatives or help solve the longevity protection challenge—avoiding our members outliving their savings. To that end, we added infrastructure and renewables to our portfolio in 2021, as these assets often come with explicit or implicit inflation linkage and are long-lived. We are also attracted by assets which help support the U.K. economy—ultimately our members benefit from a strong economy and if we can earn good returns by investing in assets that support that we have a win-win situation. We recently started investing in private equity and are focusing on the growth part of that asset class—this supports small businesses who have graduated from the venture stage in the next leg of their development. Many of our employers are in this SME segment so this aligns well.

CIO: What investing decision have you made for your organization that you’re most proud of?

Fernando: When I joined Nest I was tasked with reviewing both how our asset allocation process worked on a day-to-day basis and the more philosophical question about how we allocate our assets. In the 18 months since, we have introduced a new framework for our decisions centered on written investment cases for the views we’re taking. These focus on what we expect to change—what will push the market away from its current equilibrium, a premortem of why we were wrong and perhaps most importantly indicators we can track to see if we are on or off course. This helps avoid decisions drifting and keeps the whole team “honest” in their view. Changing your mind isn’t a problem and is encouraged if the facts are changing, but you do need to make that change explicit.

On the “how should we allocate our assets” question, we’ve had a really high-quality conversation with our Board, Investment Committee, ExCo and other external stakeholders about our investment objectives—pension schemes need to know their objectives to work out the best way of achieving them. This is grounded in research conducted by colleagues in Nest Insight and Customer Experience into both our membership and more general retirement saving trends in the U.K. Their last report was published at the end of last year and it underpins all our discussions. We haven’t done a root and branch review like this since Nest was established. At that time, we didn’t have any members so we had to estimate who they might be and how they might behave. This time we have 10 years of actual member data to use. One in three of the U.K. working population are a member of Nest and many earn below the median wage. The pension we deliver can have a meaningful impact on the quality of their life in retirement, making me very proud of the work we are doing.

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