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NEST adds to list of investment beliefs as growth fund returns 4.4%

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The UK’s National Employment Savings Trust (NEST) returned a marginally below benchmark 4.4% over its 2013-14 period, with strong gains in developed market equities.

The fund, which said this week it had reached £162m (€204m) from £104m at the end of March, has also made two additions to its investment beliefs for the coming year.

NEST, created through state backing to service the development of auto enrolment, now has more than 1m contributing members, up from 81,000 a year earlier.

In addition to its original seven investment beliefs, the fund has said an “appropriately resourced” in-house investment team would be the most beneficial to its members, hinting towards further growth in its internal capabilities.

It also amended its core investment belief on management style, backing alternative indexation processes over basic passive, although sticking with those being more advantageous than active management.

The fund will also begin integrating valuation considerations of investments and put economic conditions and long-term market development at the heart of its allocation choices.

NEST’s default investment strategy comprises four different funds, depending on where the member is in their retirement cycle.

The foundation phase for younger members in their 20s, which invests in risk assets but more aversely for capital preservation, returned 3.67%, 2 percentage points above benchmark.

Its main growth fund, in which some members can be invested for 30 years, returned 4.39%, slightly below its 4.67% benchmark, but close to 3 percentage points higher on a three-year basis.

The fund comprises of a mixture of equities, accounting for around 50% of the portfolio, with other classes including property and high yield.

NEST also recently announced the potential inclusion of emerging market equities in its growth fund, starting with an approximately 1.5% allocation.

It selected two alternative indexed EM equity funds from HSBC Global Asset Management and Northern Trust Asset Management.

Its higher-risk fund option, for members to choose outside of the default, returned 6.3% over the year and 9.84% on an annualised three-year basis.

The lower-risk fund returned 0.39%, above its benchmark on both an annual and a three-year basis.

However, NEST’s Sharia Fund option, for members of the Islamic faith, once again performed below its benchmark, returning 7.09% compared with 8.1%.

The master trust said this was due to the lagging nature of Sharia-compliant investments.

“There can be create greater tracking margins than you might find in non-Sharia funds,” it said. “The nature of Sharia-compliant investing means funds may not be changed immediately in order to exactly match the index.”

The final overall asset allocation sees the fund with around 40% in developed market equities, 17% in property, 13.4% in UK corporate bonds and 12.3% in money market instruments, with additional allocations to global sovereign bonds, index-linked bonds and small-cap equities.

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