The UK’s National Employment Savings Trust (NEST) has hired Amundi to oversee its push into emerging market (EM) debt, but it would not be drawn on when it will begin allocating towards an asset class that has recently seen significant volatility.
Mark Fawcett, CIO at the £690m (€936m) defined contribution fund, said it had not yet begun investing, noting the decision would be reached down the line by its investment committee.
He explained that the decision on when to invest would be based on how NEST perceived the opportunity compared with its other asset classes, which include EM equity and property.
“I would expect the emerging market debt weighting to be in a range of 0-10% – our modelling was suggesting that would be a typical range – and we will slowly build up to a level somewhere in the middle of that.”
Fawcett emphasised he did not mean the fund would immediately head for a 5% allocation but that it was instead a rough estimate.
The actively managed Amundi mandate, tendered in September last year, will allocate to corporate and government debt across around 25 local and hard currencies without hedging the fund’s currency exposure.
The mandate comes as part of NEST’s push into single-asset mandates.
“We wanted a manager that could take advantage of the opportunities where they lay,” Fawcett said, explaining the decision to opt for an actively managed mandate.
“I don’t view it as our job, certainly at our current size in the state of evolution, to make the call on hard currency versus local, versus corporates.”
Amundi was positive that the current low oil price would not see the number of sovereign defaults markedly increase, although its global EM strategist Abbas Ameli-Renani said the company was “extremely concerned” about a potential default by Venezuela as soon as this year.
“That’s very much the exception, as far as sovereigns are concerned,” he said, noting the importance in the resurgence of flexible exchange rates
“We are seeing more and more currencies in EM allowing floating exchange rates – countries such as Kazakhstan and Azerbaijan – which were previously fixed exchange rates to the dollar.”
Ameli-Renani said exchange rates acted as an “adjustment valve” for oil-rich nations, and that, as a result, many had been able to avoid declines in fiscal balances.
Fawcett said that his initial estimates for an exposure of up to 10% to EM debt referred to the growth phase of NEST’s default fund.
But he said the foundation phase – roughly the first five years of a member’s working life – would see some exposure to the asset class.
He contrasted the approach with the absence of emerging market equities from the foundation phase, arguing that the region’s stocks were too volatile.
The fund’s foundation phase targets a long-term volatility of 7%, compared with up to 12% for the growth phase, and is only expected to keep pace with inflation.