UK – The National Employment Savings Trust (NEST) has argued that its decision to allocate 20% of assets to real estate is a "reasonable proposition" and grounded firmly in its requirement to offer returns above inflation.
Speaking with IPE after NEST decided to appoint Legal & General Investment Management to a property mandate – investing in UK property and a global real estate investment trust (REIT) index – CIO Mark Fawcett said the allocation was needed to hedge some of the scheme's investment risk.
Explaining the decision to allocate around one-fifth of assets from members in the growth phase to property, Fawcett said: "There is this strategic question as to how much we should have in real assets, and then there is this risk management question [on] relative attractiveness of other assets in the shorter term."
On the strategic question, he said he firmly believed the defined contribution (DC) fund set up to aid the UK's auto-enrolment reform should offer members a well-diversified portfolio.
However, he said the 20% allocation to real estate would not be solely invested in real estate if the fund has access to all asset classes.
"About one-fifth in real assets – almost whichever way we run the models and crunch the numbers – that seems to be a reasonable position," Fawcett said.
He explained that, in NEST's view, real assets are a "good way of hedging some of that inflation risk" – with the fund seeking to outperform the UK consumer prices index (CPI).
He said the fund considered infrastructure part of the real asset category, and that there had been discussions to invest in the asset class in future.
"It's just the case at the moment that real estate is easier to access for a DC scheme, and also we think, if managed well, it is an attractive asset class to be invested in," he said.
Fawcett explained that, depending on the relative merits of infrastructure versus real estate at the time, NEST would have "a lot less" than 20% invested in real estate.
Asked whether the move was risky compared with fixed income investment, Fawcett said he would "argue quite the reverse".
"We would view Gilts, in particular, as pretty risky investments in terms of potential return relative to potential downside, given the low level of nominal yields," he said.
"Putting more money into assets yielding around inflation, or possibly negative, is not going to help us achieve our benchmark of CPI-plus, whereas the yield we can get on real estate in the UK is pretty attractive and can deliver that sort of return."
He concluded: "Relative to government bonds, real estate is very attractive, even relative to corporate bonds.
"We like corporate bonds, but […] we wouldn't necessarily say they are more attractive than real estate at this point in the cycle."
IPE and Stirling Capital Partners are co-hosting a conference, Infrastructure for Pension Funds and other Capital Owners, to take place on 2 October in London. For more information, please visit www.ipe.com/infrastructure.