Down With Convention(al Gilts) | Chief Investment Officer

(June 11, 2013) – The UK’s multi-employer defined contribution scheme National Employment Savings Trust (Nest) has reduced its growth phase fund’s exposure to conventional gilts to just 2%, following months of negative real returns.

The weightings were changed last autumn after CIO Mark Fawcett and his team decided conventional gilts were over-valued.

“Gilt yields had been low for a while, but at that point they’d reached an extreme,” Fawcett told aiCIO. “It meant the rest of the portfolio was having to work harder.”

Nest decided to move assets from conventional gilts into its UK sterling and corporate bond fund, as well as increasing exposure to index-linked gilts. It also slightly reduced exposure to overseas fixed income.

For the foundation phase, which young members of the pension fund sit in for the first five or so years, the allocation to conventional gilts shrunk from 12% to 3.5%, with index-linked gilts increasing from 8% to 12.5% (a sector which has since rallied 10%). Allocation to the UK sterling and corporate bond fund increased from 18% to 19.5%.

In the growth phase, where members spend the majority of their savings life, conventional gilts were reduced from 6% to 2%, index-linked gilts were increased from 4.5% to 7% and UK sterling and corporate bond saw an increase in allocation from 9.5% to 7%.

Asked whether there would be further changes in light of the recent comments from the US about the unwinding of quantitative easing (QE), Fawcett said he was unable to disclose allocation changes, but confirmed that QE and interest rate changes were factors.

“We’re not interested in market timing, it’s all about risk management,” he said.

“A pick-up in inflation and the unwinding of QE are concerns (but) the suggestions are that Bernanke will be cautious about the unwinding of QE.”

Nest is also close to appointing a real estate manager. An announcement is due “in the coming weeks”, according to Fawcett. The new asset class will provide Nest with exposure to global listed and UK listed real estate for the first time.