Nest’s deputy CIO talks managers and mandates

The deputy CIO of the small but fast-growing UK defined-contribution pension highlights its use of mandates, ETFs and ESG factors. The plan also just issued its first private credit RFP.
Nest’s deputy CIO talks managers and mandates

The UK’s retirement industry may be a good deal more mature than most of its counterparts in Asia, but they all face a similar, key challenge: how to support the growing proportion of pensioners as the world’s population ages and birth rates decline.

John St Hill

National Employment Savings Trust (Nest) is the UK’s default auto-enrolment pensions scheme. With 6.5 million members, it manages money on behalf of a collection of small pension pots. Its job is to provide solutions to people who work for a variety of employers.

Around 50% of the allocation for all its funds is in equities, including overseas stocks. It also has allocations to EM debt, high yield, UK corporate bonds, property and some short-dated gilt portfolios.

Nest is also exploring new asset classes. Yesterday (September 4) it invited fund managers to pitch affordable private credit solutions appropriate for defined-contribution schemes, as it views developed market equities and bonds as “fairly fully valued”.

The fund said the traditional model of small closed-ended funds was unlikely to meet its needs. Hence it is seeking managers that can operate “evergreen, scalable” funds focusing on unlisted infrastructure debt, real estate debt and corporate loans.

Nest said it was welcoming innovative ideas about how to access these markets either independently or in a multi-asset solution.

In future, the scheme will have enough assets under management to explore direct and co-investment opportunities, it said in a statement, and is looking to work with managers to help it develop its in-house expertise in this area.

The private credit request for proposals followed Nest's selection of CoreCommodity as its first commodity asset manager in July.

AsianInvestor spoke to John St Hill, deputy chief investment officer of Nest, about a host of issues,  from the possibility of reaching capacity limits for the portfolio to manager selection and the use of ESG factors.

Q  Nest’s assets are set to grow very fast; is there a capacity limit for the portfolio?

A Not really. We were built for scale from day one and that’s one of the things that’s enabled us to build a high-quality product for people who have relatively small pension pots.

We’re a digital scheme, so a lot of the interactions we have with our members are electronic. We’re designed for efficiency and for people to be able to contribute relatively small amounts and for their pot to remain open so even if they change employers, they can always use their same Nest pot.

Q What’s the typical size of mandates?

A The biggest ones are over £1 billion ($1.28 billion) and the smallest are £50 million to £100 million.

Q What’s the typical number of managers you assess per asset class or mandate?

A Generally, there are between five and seven in the final list, but the number of responses can range between 30 and 60, depending on the asset class.

Q Do you use consultants to select managers?

A We will use third-party consultants where they have a capability we don’t have in-house. For example, we have worked with Cardano on our research into private credit markets.

Q Do you use exchange-traded funds?

A We have ETFs in the book but owned by the [external] managers. We think ETFs can play an important role to help managers manage risk exposure and efficiently.

Q What’s your approach to environmental, social and governance (ESG) factors?

A It’s one of our investment beliefs that incorporating environmental, social and governance factors is integral to the investment management process. We take account of ESG factors in all relevant asset classes and ensure our fund managers are appropriately monitoring and managing ESG risks.

This is the second part of an interview that was featured in the August/September issue of AsianInvestor magazine. For the first part, click here.



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