NEST – one of the leading providers of auto-enrolment pensions in the UK – has taken its first step into commodities with a mandate to be run by US firm CoreCommodity Management.

The defined contribution master trust is to invest roughly £200m (€226m) in a segregated mandate. It is the first time NEST has invested in a bespoke vehicle rather than a pooled fund.

Chief investment officer Mark Fawcett said NEST would invest roughly 5% of its growth fund in the mandate, with an upper limit of 10%.

He said the asset class’ recent five-year “slump” meant it was “a good time to be investing in commodities”.

“While markets have been benign since auto-enrolment kicked off six years ago, we’ve had a turbulent start to 2018 and volatility looks set to rise,” Fawcett added.

Mark Fawcett of NEST, speaking at the EDHECinfra 2018 conference

Mark Fawcett, CIO, NEST

“It’s our responsibility to help members weather all sorts of markets to achieve decent, consistent returns on their pots.

“Commodities offer good value protection as inflationary pressures rise around the world and are supported by strong global trends.”

What the mandate looks like

The commodities allocation consists of 80% long-only futures with 20% in commodity-related equities.

CoreCommodity will only invest in the top 20 most liquid futures markets, said co-founder Adam De Chiara. The mandate will aim to outperform the Bloomberg Commodities Index.

The asset manager has also implemented NEST’s environmental, social and corporate governance (ESG) risk overlay, resulting in several commodities being excluded from the fund’s universe.

Energy providers with high climate risk exposure are excluded, as are companies focused on thermal coal, palm oil, uranium, and tobacco.

NEST has also banned investments in cobalt miners operating in the Democratic Republic of Congo, after a recent CBS investigation uncovered evidence of child labour in cobalt mines.

“There will be some equities we decide are unacceptable,” Fawcett said. “For others there will be engagement – but this is more of a quant-driven systematic portfolio.”

He added: “We want to manage the ESG risk but don’t want to disrupt management too much.”

Companies that systemically breach the UN Global Compact have also been excluded, the CIO said. However, he maintained that the ESG policy would not have a significant impact on the portfolio’s volatility or return.

Solar panels

Solar power is one of 42 commodity types included in the mandate

Among the 42 sub-classes listed in the mandate’s universe are both ‘hard’ and ‘soft’ commodities, from oil, natural gas, and solar and wind energy, to livestock, sugar, cotton and water, as well as 21 types of industrial and precious metals.

Adam De Chiara, co-founder of CoreCommodity Management, described the mandate as a “customised real asset strategy that has been thoughtfully designed to provide portfolio diversification and inflation protection to NEST’s members in an ESG-compliant format”.

The mandate does not have a set end date, as Fawcett said NEST wanted to forge long-term partnerships with its fund managers.

Fawcett said NEST expected to double its assets under management next year as the rollout of the UK’s auto-enrolment project takes hold. Minimum contributions rose in April and will do so again in April next year.