Mark Fawcett, the man at the helm of investment at what could become the U.K.'s biggest defined contribution plan, is looking closely at potential shifts in asset allocation — including expanding its roster of investments.
“While we have quarterly asset allocation meetings, we typically only significantly change asset allocation about once a year,” Mr. Fawcett, chief investment officer, of the National Employment Savings Trust, London, told Pensions & Investments in an exclusive interview at the Southwark, England-based offices of NEST Corp., which manages the plan.
The £120 million ($200.8 million) DC plan is looking at new allocations right now. But the key to some of these opportunities, he says, is scale.
That doesn't look like too much of a challenge, for a plan that has grown 2,300% since this time last year, when assets were a meager £5 million. And with a general consensus that the plan could grow to as much as £200 billion by 2050 — a figure that a NEST spokeswoman said would depend on a number of factors, including membership and contribution levels — that should be no problem.
“We are looking at infrastructure at the moment, but as there is an advantage to having scale, we are happy to be patient. To get into infrastructure, you need significant size — we are not desperate to invest, but we would like to get involved at some point,” Mr. Fawcett said.
Mr. Fawcett has been CIO for six years — first for the Personal Accounts Delivery Authority, the name for the government-created DC plan for lower-income U.K. workers between 2008 and 2010. PADA then became NEST. It started taking on participants in 2011. He has kept a close eye on liquidity.
“We are not invested in bank loans at the moment because of illiquidity,” he said. “It's not about tying up the money, but getting the money into the asset class.” That concern over being able to actually invest assets to an allocation the growing fund would like also applies to infrastructure. Mr. Fawcett said he and members of his 16-person investment team are talking to infrastructure managers “and trying to work out how we can get a situation where cash flow can be absorbed more easily.”
It might be, Mr. Fawcett said, that the plan takes a similar approach to its investment in real estate: “We have a listed and unlisted split, and the listed investment takes on cash flow until the unlisted side is ready to invest it.”
NEST is also about to appoint two managers for new emerging markets equity allocations. The allocations to emerging markets debt and equity vary depending on which of three phases a participant is in. The spokeswoman said there will be an increase in these allocations, and the plan's investment team is modeling what that optimal allocation should be for each phase.
“Our emerging markets exposure right now is through a BlackRock diversified beta fund, a multiasset fund investing in passive trackers,” Mr. Fawcett said. “We only have a small exposure to emerging markets through that fund. Adding new mandates is a way to manage our exposure to this asset class more actively.
“Emerging markets have been underperforming recently, so it has been OK to be underweight. But they are getting cheap now, so we want to have the ability to increase our exposure over the coming years.”
One of NEST's biggest changes to its asset allocation came in October 2012, when the investment team ramped up its portfolio risk.
“When we launched in 2011, we had pretty low equity exposure because of the eurozone crisis. Our equity weighting (in the growth phase portfolios) had been around 40%,” Mr. Fawcett said. But in October 2012, the team increased its equity weighting to more than 50%, and also added corporate bonds into the mix. “We also sold virtually all of our U.K. gilts as we thought they were overvalued,” he said.
As for other allocations, Mr. Fawcett said it is “challenging to think we might ever invest in hedge funds or private equity — is it necessary?” He said fees — something NEST keeps a close eye on, with its 0.5% annual management fee for most participants — prohibit this. “In a hedge fund, you might get some beta and alpha, but is it worth paying two and 20 for that? I think not really,” he said, referring to the typical 2% management fee and 20% of profits hedge funds charge.
Similarly, he said, private equity can deliver “really good value, but if you're not in a top-quartile fund, you may as well be invested in public equity.”