The UK’s National Employment Savings Trust (NEST), launched in 2011, is set to grow exponentially as more individuals are automatically enrolled into pensions. CIO Mark Fawcett explains his plans to manage an ever-increasing pool of assets—and members.
“The solution we build needs to be scalable: We will be one of the largest defined contribution funds in the UK at some point in the future. That has influenced our thinking right through: our investment horizon, our target-date funds, our asset allocation.
We have a lot of younger members so we can take a long-term view, which allows us to invest in less liquid asset classes. There is a 20% allocation to real estate in our growth phase funds. We don’t want to be selling out of these funds at the wrong time, so we have created a strategy in which we never have to go into the market and sell an illiquid asset. It helps that we are growing very rapidly and can use that to absorb any sales.
(Art by Edward Kinsella)
The property fund is 70% real estate and 30% global real estate investment trusts (REITs). When we have a lot of money to put in and our real estate fund manager Legal & General can’t absorb it directly, we can put it into REITs until the opportunities are there.
We’re looking at doing something similar in infrastructure. There are benefits with scale: The larger we are, the easier this asset class will be. We will focus on local assets and those in Europe—where we can be assured of good governance—and maybe some global listed infrastructure.
We’ve tried not to get involved in complex derivatives. It is fine when you’ve got £200 million, but when you’ve got £20 billion that becomes a lot harder. We don’t want a track record in something that can’t be replicated later on.
The key to NEST’s success will be making sure my team is sufficiently well-resourced to manage the money we have. At the moment we outsource all securities selection, while asset allocation is done in-house.
The team may need to grow as we get bigger. If we go down the route of the Universities Superannuation Scheme or the BT Pension Scheme then we might start bringing capabilities in-house, but that is a long way off—maybe more than a decade away. We’d do it if there are customer benefits. It’s very easy to get the headline figures for the benefits of doing something in-house, but there is quite a lot of risk. You need to put systems in place to minimise the risk of error—outsourcing means the manager bears this risk.
There is a better opportunity when you bring private equity or infrastructure in-house, as some Canadian funds have done. The fees are so high it makes sense to build that capability in-house. People have also gone down the co-investment route; many years down the line it’s something we may think about.
I would never think one investment strategy is sufficient; you have to keep evolving. If you stay with one investment strategy forever the market will eventually catch up with you. You need to thoughtfully evolve your processes and if something new comes along, e.g. risk parity, then it makes sense to look at it and whether it will help you.
We have nine investment beliefs, creating a framework for us to have conversations with our trustees and providers, and acting as a guiding framework for my team. Teams with these explicit beliefs tend to be better performers.
One of our beliefs was that passive management is more efficient than active management. Now we state that indexed management is generally more efficient—it means we recognise that smart beta is becoming a valuable tool, and have incorporated a smart beta emerging markets fund into our portfolio. We have actively managed corporate bonds and real estate. It is hard to commit to being active in all areas in a super large portfolio. Generally you need some type of indexed management.
We have made some reasonably good calls so far. The launch was good timing: It was during the Eurozone crisis, so we invested very cautiously and increased our equity weighting and risky assets at a good time. We have made sensible decisions and things have gone pretty well—I wouldn’t say the pressure is off, though.”