New Nest CIO Elizabeth Fernando Plans Steady-as-We-Go Strategy

Elizabeth Fernando

Elizabeth Fernando, the new CIO at the U.K.’s National Employment Savings Trust pension fund, is committed to maintaining the same strategy that proved successful under her predecessor, Mark Fawcett.

That means moving into alternative investments and hardy support for renewable energy investments, as seen by the fund’s pressure on Shell to honor the oil giant’s commitment to shrink its carbon-fuel emphasis.

“I see more of the same” for Nest’s policy direction, Fernando says in an interview following her April elevation to the top investing job. “Mark and I will continue working close together,” with the former CIO having input into asset allocation, she says. Fawcett will remain in his role as the CEO of Nest Invest, the pension scheme’s Financial Conduct Authority-authorized subsidiary.

By all accounts, Nest (assets: $36 billion) has had a good performance record. Witness the quarterly report for its flagship 2040 retirement fund, whose allocation is relatively close to the classic 60-40 equity-debt split: It had a 7.3% annual return over the 10 years ending in March, more than a percentage point ahead of the 60-40 Morningstar average for the same period.

Fernando joined Nest in 2020, became deputy CIO in 2021 and has 25 years of investment experience. She was named a CIO NextGen leader in 2022. Before Nest, she was head of equities at the U.K.’s Universities Superannuation Scheme.

She says the fund’s investment “teams are good,” so little change is needed, other than some small alterations about “reporting lines.” About half the fund is in public equities, and Nest is gradually moving that into alts such as real estate and private equity. She is aiming to raise allocation to alts, which she refers to as “illiquids,” to 30%, from around 18% now. “We are going at a pace where we can find attractive opportunities,” she says.

One area in disfavor at Nest is emerging markets, in which the fund has slightly less than 5% in debt. “The risk premium is not high enough to compensate” for problems in this area, Fernando indicates. Indeed, some smaller EM nations, such as Ghana and the Bahamas, sponsor bonds that are selling at a substantial discount, with yields in the low teens. Fawcett had moved EM investments to underweight, she notes.

In assessing EM investing, Fernando focused on China, which makes up the largest chunk of the equity-centered MSCI Emerging Market Index (almost 30%), despite its status as the world’s second biggest economy. She expresses wariness about China’s “deep-seated problems with property,” which is over-built and is suffering from slumping prices in both commercial and home sales. Beijing’s tighter regulations on business and data, “showing the Chinese consumer is cautious,” give her pause.

Fernando registers disappointment at Shell, which she criticizes for not pursuing more aggressive emissions standards. Nest, which has just a fraction of 1% of Shell’s shares, teamed up with other climate-minded institutions in voting to urge Shell to match its 2030 target to the 2015 Paris Agreement.

The group’s resolution on the subject garnered 20% of the vote, the same as the year before. Nest also joined in on a minority vote against Shell Chair Andrew Mackenzie. The May investors’ meeting was marked by chants and songs from some attendees objecting to company policy.

Shell has a “reluctance to follow through and has gone off track somehow,” Fernando says. “We’re not comfortable with the answers we’re getting” from the company. Shell’s investor relations staff deals with dissenting shareholders “with a dismissive tone,” she adds, and Shell has increased its budget for oil and natural gas exploration.

For its part, Shell has proclaimed its goal of meeting a zero-emissions standard by 2050 and has touted its commitment to eliminate gas flaring and linking some staffers’ pay to lowering carbon emissions 20% by 2030. Shell plans to spend some $40 billion on oil and gas production and trading from 2023 through 2025, compared with $35 billion previously, it announced. Shell did not respond to a request for comment on Fernando’s remarks.