NEST stays cautious despite positive 2019 returns

NEST, the UK’s largest master trust with assets worth £9.6bn (€11.4bn), will continue adopting a cautious stance regarding its investment strategy, even though it has seen a positive year as returns for all its major asset classes posted positive returns during 2019.

Mark Fawcett, chief investment officer at NEST Corporation, the master trust’s trustee body, said: “Our current stance is on the cautious side, making sure we have enough exposure to growth assets that will continue to deliver strong returns.”

He told IPE its US equities had been its strongest developed market on returns – NEST holds tech shares in companies such as Amazon and Google, which have a major impact on the global economy.

He said the positive returns were driven by an accommodative Federal Reserve stance and the fourth quarter saw a final tailwind come through as markets welcomed signs of economic stability.

He added that the trade war between the US and China also seemed to be subsiding, which was helping global markets generally.

The asset owner has seen good performance across high yield bonds, emerging market debt and equity overall, however, it doesn’t expect numbers of the same magnitude for 2020, Fawcett said.

Over the last five years, NEST’s sharia fund has seen a cumulative performance of 95.7% as of end of December 2019, while its ethical growth and higher risk funds have returned 66.8% and 64.6%, respectively.

Long-term diversification

NEST receives more than £400m a month in member contributions and is forecasting £20bn in asset under management by 2022.

With a forecast to almost double its assets in the next couple of years, it is imperative that the trust avoids short-term asset allocation changes, and focuses on a long-term strategy, while also keeping an eye on market risks, Fawcett explained.

The investor has a low equity allocation (55%), he said, compared to other master trusts, which hold around 80-90% of their assets.

“We’ve made use of this lower risk profile and use the rest of our assets for a well diversified portfolio, which is likely to work out well over the next few years, as we see the economic cycle peak,” Fawcett added.

The CIO sees investment opportunities in renewables, infrastructure debt and equity – it launched a tender last month seeking unlisted infrastructure equity managers in a bid for further portfolio diversification.

He also said NEST has already started funding its first private credit projects – which included wind and solar farms in Europe and is also looking for opportunities in the US.

“If growth underwhelms, public financial markets are likely to struggle to achieve the stellar returns seen in 2019”

Mark Fawcett, CIO at NEST Corporation

The trust received authorisation last month from the Financial Conduct Authority (FCA) to form NEST Invest as an Occupational Pension Scheme (OPS) firm, which will help implement more sophisticated ways of investing on behalf of its members.

Looking ahead, economic expansion is expected to continue, though significant geopolitical risk remains, Fawcett said. “Markets must wait for UK-EU trade talks, the US presidential election, whether the ‘Phase One’ [trade] deal will hold and whether the tension in Middle East will escalate.”

He said: “If growth underwhelms, public financial markets are likely to struggle to achieve the stellar returns seen in 2019. Our caution is a significant factor in seeking investment returns in alternative areas such as private credit, which we recently added to our portfolio.”

Responsible investment

Fawcett told IPE that one of the key factors to drive NEST’s asset allocation is the increased focus on climate change and the need to transition to a low carbon strategy.

NEST has published its fourth annual responsible investment report, ‘Paving the Way’, which outlines the trust’s work on integrating environmental, social and governance (ESG) factors into its investment approach, engaging with companies and other stakeholders and communicating with its members.

“We included our key highlights through the year such as the several letters we wrote to companies listed on the FTSE100 urging them to become accredited Living Wage employers,” he said, adding that it has also joined Climate Action 100+.

The trust has also co-authored and published a report late last year with RPMI Railpen on cyber security, which Fawcett hopes will act as a guide for asset owners on integrating cyber security considerations in their investment approach.