Nest recently announced a new focus on investing in commodities. Sara Benwell spoke to Mark Fawcett, chief investment officer, to find out more

NEST_CMYK_300dpi

What made you decide to focus on commodities?

While markets have been benign since auto enrolment kicked off six years ago, we’ve had a turbulent start to 2018 and volatility looks set to rise. It’s our responsibility to help members weather all sorts of markets to achieve decent, consistent returns on their pots. Commodities offer good value protection as inflationary pressures rise around the world and are supported by strong global trends.

Our initial allocation to commodities will be up to 5 per cent of the portfolio but the NEST investment team will adjust the allocation over time according to market condition

How is the fund invested?

The fund will be predominantly invested in commodity futures but will include a proportion of shares in companies involved in commodities production. It will be actively managed, aiming to outperform the Bloomberg Commodity Index.

We wanted to manage the ESG risk of the portfolio

It will apply exclusions based on the methodology in NEST’s climate aware fund to avoid energy producers with the highest exposure to climate risk, including coal. It will also exclude producers focusing on thermal coal, palm oil, uranium, and tobacco, and on mining for cobalt from cobalt mines in the Democratic Republic of Congo, from both the futures and equity portfolios.

Why have you shifted from pooled funds to a segregated mandate?

We are already receiving over £200m in contributions from members every month and that is set to double next year and rise rapidly from there. We are steadily growing into becoming one of the biggest pension schemes by assets in the world and so we’re able to harness that growth to cost-effectively access new sources of return without increasing members’ investment risk.

The mandate gives us greater control over the objectives and design of the fund. In particular we wanted to manage the ESG risk of the portfolio and we worked closely with the manager to achieve that. Specifically in addition to the exclusions mentioned earlier, we will look to exclude from the portfolio companies who persistently breach the UN Global Compact Principles. We will also be taking control of the voting and engagement of the shares within the portfolio.

Our approach is to help members’ money grow as smoothly and steadily as possible 

Is this part of a wider strategy?

The commodities fund makes up one of the asset class building blocks in the pension scheme’s default strategy and is specifically targeting an improvement in the risk/return characteristics of the portfolios.

Our approach is to help members’ money grow as smoothly and steadily as possible over decades and we do that by spreading it carefully across a range of different types of investments.

Is NEST likely to use more segregated funds in future?

NEST might use more segregated funds in the future. However, when searching for mandates we seek to use the right investment vehicle, which can deliver on our objectives and is cost effective and operationally efficient.

We’re looking at investing more in alternative assets

Is this a sign that NEST will be moving away from passive investment?

NEST already uses a range of passive and active investment strategies. Our credit and direct property is active, and we use customised indices (or smart beta strategies) for a large part of the equity portfolios. We think carefully about the best approach to achieve our objectives for each asset class within our constraints.

What are the next priorities for NEST’s investment strategy?

We’re looking at investing more in alternative assets and we want to grow our ‘building blocks’ further over the coming months, for example exploring private credit funds including infrastructure debt.

How are you communicating these changes to members?

Each quarter we produce an investment report which highlights any changes to our investment strategy and we also produce an annual responsible investment report. The next report is due later this year and will include the commodities fund approach and how, when designing this fund, we took ESG issues into consideration.

This report is perhaps more interesting to our members as it goes into far more detail than what is included in the quarterly investment reports.