UK’s Nest Considers New Emerging Markets Mandates

Terry Flanagan

Nest, the UK National Employment Savings Trust, is looking for fund managers to run some new emerging markets mandates and is also interested in investing in infrastructure.

Nest is a defined contribution occupational pension scheme backed by the UK government which was launched in 2010. In September 2012 workers in companies without a pension scheme began to automatically enrolled into Nest with contributions required from their employers. One year later the scheme had about 500,000 members and assets under management of around £30 million.

This month Nest appointed Allianz Global Investors Global Solutions as its investment strategy adviser. The scheme said that due to its expected scale it has built significant in-house capability but the trustee reserves the right to seek additional advice where needed.

Nest said in an email to Markets Media that approximately a dozen bidders responded to the tender for this roie. The scheme has previously used companies including Allianz, Mercer and Aon Hewitt as investment strategy advisers and said it chose Allianz as it offered the best solution to meet Nest’s needs and had the most relevant expertise.

Nest said: “Allianz Global Investors, through their RiskLab division, provides us with the outputs of their ‘economic scenario generator’ – namely the capital market assumptions that feed into our asset allocation framework, as well as other inputs for our modelling, both for live analysis of our current strategy as well as ‘what-if’ research.”

The scheme has a Retirement Date Fund for every year a member could choose to take their money out. By default Nest makes investment for members in these funds based on their age although some members can choose from other options – an Ethical Fund, Sharia Fund, Higher Risk Fund, Lower Growth Fund and Pre-retirement Fund. At present 98.8% of assets under management are invested in the default Nest Retirement Date Funds.

All funds are managed by external managers and Nest currently uses UBS Global Asset Management, State Street Global Advisors, BlackRock, F&C Investments, HSBC Global Asset Management, Royal London Asset Management and Legal & General Investment Management.

“We’ve built our base of third party building block funds by picking the strategies that we consider offer the best combinations of sustainable risk-adjusted returns and value for money,” added Nest. “In order to prioritize our market research and procurement activities we look at an ‘unconstrained’ asset allocation and then try to identify the next asset class where we don’t currently have as a separate mandate, which will help us improve the level of diversification of the portfolios.”

The scheme allocates assets based on an internally developed model which combines mean variance optimised (MVO) portfolios with risk derived optimisation (RDO) portfolios in order to minimize volatility and idiosyncratic risks.

“Our research suggests that combining MVO and RDO portfolios can yield better risk adjusted returns than either would in isolation. We generate the MVO portfolio through the Black-Litterman framework; incorporating our capital market assumptions and in-house views and constraints,” said Nest.

The scheme currently invests in asset classes including global developed equities, UK gilts and both UK and global property.

Nest said it is looking at some new emerging market equity mandates. “Nest currently has access to emerging markets via Blackrock’s Diversified Beta building block. Further access to this asset class will provide greater flexibility for NEST’s active risk management approach,” added the scheme. “Beyond emerging markets, we are looking with great interest at infrastructure.”

The scheme said it has designed its investment approach in order to minimise trading costs, including using passive or indexed investment management such as UBS Life World Equity Tracker Fund to gain exposure to global developed equities and SSgA index funds to get exposure to UK gilts and UK index-linked gilts.

“We use up to 50 target dated funds, the NEST Retirement Date Funds, and it’s through these that we have created an ‘internal market’,” added Nest. “This reduces the amount of times we have to transact with the external market and incur the costs associated with buying and selling different investments.”

Nest said that its annualized performance since inception is approximately 8.4% for growth phase funds, above its benchmark of 3% above inflation after all charges in the growth phase of the default funds. The scheme added: “However we should stress that the objective is a long term objective – and so the ‘since inception’ timescale is far too short to assess our performance.”

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