Nest mulls post-Brexit move into high-yield debt


Nest, which stands for the National Employment Savings Trust, was set up in 2011 to act as a default workplace pension for companies that don’t want to set up their own schemes. It has since grown to three million members and £1 billion in assets and is set to grow further.

Mark Fawcett, its chief investment officer, said in an interview with Financial News the fund had decided to take profits on its holdings of UK government gilts, both nominal and index-linked, earlier this year. Between December and March, Nest’s typical “growth phase” fund, comprising the bulk of its savers, dropped its holdings of UK government securities from over 10% to around 2%.

It began investing part of that money in its new emerging market bond fund, managed by French fund manager Amundi, which was hired by the scheme in March.

The gilts selldown means that emerging markets debt accounted for a bigger proportion of the typical Nest “growth phase” fund’s portfolio as of the end of March, according to a chart in Nest’s latest quarterly investment report – and Fawcett said further diversification was on the cards.

He said: “High-yield bonds are on our radar as a potential procurement in the next few months. Not necessarily to rush out there and pile in, but we would like to have the ability. Yields can spike up [and prices fall] quite quickly in that market, as we saw last year when the oil price fell. We want to have the ability to take advantage of moves like that.”

Nest’s members have a small exposure to high-yield bonds already, through a multi-asset fund run by BlackRock, which forms part of the scheme’s “growth” phase, its investment fund for those members in the middle of their careers where its investment staff are aiming to grow members’ savings.

However, the potential new allocation would mark its first stand-alone mandate, separately run by a high-yield specialist, which would give Nest’s investment staff more control over when and how to invest.

A Nest spokesman confirmed its investment team was “actively researching” a stand-alone allocation to high-yield bonds, but no decision had yet been taken by the scheme’s trustee board.

Nest also released figures showing it made 10.1% a year on average, net of fees and charges, during the three years to the end of July, and virtually the same percentage over five years to the same date – with Fawcett saying of the numbers: “We think they hold their own.” The figures relate to the pension fund’s growth phase.

Nest’s results compare favourably to some of the industry’s largest multi-asset fund managers who have a similar asset allocation job to do. Over the three years to July 31, popular multi-asset funds from BlackRock, Schroders and Standard Life Investments have made 2.4% a year, 4% and 2.4%, respectively, net of retail fees, and over five years, 2.7%, 4.3% and 4.2% ,respectively, according to figures from FE Analytics.

All the funds have been eclipsed by strong returns from stock markets: the MSCI World has made 12.6% a year in sterling terms, on average, over the past five years, and 11.4% over three.

Nest has achieved its result with lower volatility than equities, however, giving savers a smoother ride – its annualised volatility for the five-year period is 6.9% a year, Fawcett said, compared to roughly 10.5% a year for stocks.

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