NEST quarterly investment report End of October 2016 to end of December 2016

Transcription

1 NEST quarterly investment report End of October 2016 to end of December 2016 Fund facts Total size of assets under management 1.42bn Annual management charge/total expense ratio 0.3% Contribution charge 1.8% Pricing basis Single price NEST s fund managers For more information visit nestpensions.org.uk * Please note that F&C funds are distributed by BMO Global Asset Management. Commentary Mark Fawcett Chief investment officer While the political world was surprised by the US election result, markets took the result in their stride. There was hardly a ripple in equity prices over the quarter. In fact stocks rallied and bonds fell. US 10 year yields rose nearly 100 bps over the quarter as investors anticipated looser fiscal policy under President Trump. The expectation of tax cuts and infrastructure spending boosting growth sent markets upwards. The prospect of stronger growth is also likely to lead to tighter monetary policy, which has already begun as the US Federal Reserve raised interest rates in December. Given the NEST Retirement Date Funds have significant exposure to US equities and no investments in US treasuries this has been positive for. While global growth hasn t been strong overall there were small positive surprises that we ve been pleased to see. The UK economy showed further resilience after the EU referendum and GDP growth exceeded expectations. Even Chinese growth ended the year on a positive note due to stronger consumer consumption and a rebound in the property market. We added two short duration bond funds to our building blocks this quarter. We moved assets into these rather than holding money market instruments, which are generating very low rates of return in this interest rate environment. We made this move across most of our fund range in order to improve returns on any short term liquidity we ve been holding. UK inflation is picking up as expected due to sterling weakness. Our has had favourable tailwinds to date given the strong of asset markets and low inflation. As our objective returns rise in line with inflation, we will continue to keep a close eye on the best ways to meet them. Investing responsibly highlights NEST has submitted a proposal to the Financial Reporting Council (FRC) on the topic of pay and progression in the workforce. The FRC has agreed to launch a formal reporting project and engage investors and companies on what metrics can be developed to help investors assess how companies are considering workforce pay and progression. We have continued to work alongside colleagues on the Banking Futures Project whose aim is to help create a healthy, resilient and inclusive banking sector in the UK. The project is sponsored by main UK banks and the report is due at the end of NEST has made progress with its climate aware investment research, and aims to start investing in a climate aware fund in Comparative risk This chart compares different NEST funds in terms of forward looking risk. The chart uses categories of 1 (low risk) to 7 (high risk) corresponding to different ranges of volatility. Annualised volatility 1 = 0-0.5% 2 = 0.5-2% 3 = 2-5% 4 = 5-10% 5 = 10-15% 6 = 15-25% 7 = >25% Investment beliefs There is no generally agreed objective framework for investors that adequately describes how to view capital markets, or how to apply these insights for investment purposes. Investment beliefs are established by investors to provide them with focus and assist effective decision making in a complex environment. The Trustee of NEST has set out its investment beliefs to provide a transparent framework for consistent decision making. Our beliefs, which are reviewed on a regular basis, are: 1. Understanding scheme member characteristics, circumstances and attitudes is essential to developing and maintaining an appropriate investment strategy. 2. As long-term investors, incorporating environmental, social and governance (ESG) factors is integral to the investment management process. 3. Taking investment risk is usually rewarded in the long term. 4. Diversification is the key tool for managing risk. 5. Risk-based asset allocation is the biggest driver of long-term. 6. Taking account of asset values and asset prices, economic conditions and long-term market developments enhances long-term and informs strategic decisions. 7. Indexed management, where available, is often more efficient than active management. 8. Good governance, including an appropriately resourced in-house investment function, is in the best interests of NEST s members.

2 Page 2 NEST quarterly investment report End of October 2016 to end of December 2016 NEST 2040 Retirement Fund For the of each of the single year NEST Retirement Date Funds please refer to the last page of this report 25.0% 21.0% % 12.0% 11.4% 10.6% 1 4.6% 3.8% 4.5% 4.7% 5.0% Benchmark: CPI + 3% Growth phase target investment returns equivalent to inflation plus 3 per cent and cover all scheme charges target a long-term volatility average of 11 per cent aim for steady growth in real terms over the life of the fund maximise retirement incomes by taking sufficient investment risk at appropriate times while reducing the likelihood of extreme investment shocks The Growth phase is the engine room of the NEST Retirement Date Funds and where we concentrate on growing the pot quickly. While we need to take substantial investment risk to generate sufficient investment return, our research suggests that members are intimidated by the idea of extreme investment shocks. For this reason we also manage the volatility of the portfolio throughout the Growth phase. The Growth phase will typically continue until 10 years before the expected retirement date at which time the fund will move into the Consolidation phase. We use the Consumer Price Index measure for inflation. 5.1% Emerging market debt Growth phase 3.8% Emerging market equities 48.1% Developed market equities 16.6% Property 14.3% Sterling investment grade bonds 0.9% UK index-linked gilts 0.9% UK gilts 8.1% Money market investments Annualised volatility Monthly value at risk 7% -2.7% annualised realised volatility and monthly realised value at risk (VaR) in this fund. 2.1% Short-dated investment grade bonds Lifecycle of the NEST 2040 Retirement Fund This NEST Retirement Date Fund is in the Growth phase. Over its lifetime it will experience both the Growth phase and the Consolidation phase until it matures in The NEST lifecycle ensures that our members are exposed to the right amount of risk at different stages in their savings career. Our estimate of this risk path is shown as the middle line on the lifecycle chart. We dynamically manage the actual amount of risk taken depending on the investment environment. The upper and lower limits of the risk budget are shown above and below the estimated risk path. The actual amount of risk taken will vary between these limits. The marker shows the fund s current place in its lifecycle.

3 Page 3 NEST quarterly investment report End of October 2016 to end of December 2016 NEST 2022 Retirement Fund For the of the single year NEST Retirement Date Funds please refer to the last page of this report 18.0% 16.0% 15.7% 14.0% 12.0% 9.7% 9.8% 1 9.0% 8.0% 6.0% 4.0% 2.0% 1.6% 0.8% 1.4% 1.7% Consolidation phase The Consolidation phase prepares a scheme member s assets for retirement and typically begins ten years before their NEST Retirement Date Fund matures. Investments in this phase are progressively switched out of higher risk assets. The primary objective of the Consolidation phase for funds maturing from 2021 is to outperform CPI after all charges while aiming to progressively dampen volatility as a scheme member s fund approaches maturity. For NEST Retirement Date Funds maturing up to 2020, the Consolidation phase objective is to manage the risks associated with converting a member s accumulated savings into a cash lump sum. Benchmark: CPI 5.3% Emerging market debt 2% Emerging market equities 30.8% Developed market equities 14.3% Property 38% Sterling investment grade bonds 0.5% UK index-linked gilts 0.5% UK gilts 2.1% UK short-dated gilts 6.6% Money market investments Consolidation phase Annualised volatility Monthly value at risk 5.9% -1.9% We monitor risk carefully using a variety of tools to make sure the risk we re taking in each fund is appropriately rewarded. This table shows annualised realised volatility and monthly realised value at risk (VaR) in this fund. Lifecycle of the NEST 2022 Retirement Fund This NEST Retirement Date Fund is in the Consolidation phase. As it has a relatively short period to maturity, it will only experience this final phase. It will be exposed to decreasing degrees of risk until it closes in The NEST lifecycle ensures that our members are exposed to the right amount of risk at different stages in their savings career. Our estimate of this risk path is shown as the middle line on the lifecycle chart. We dynamically manage the actual amount of risk taken depending on the investment environment. The upper and lower limits of the risk budget are shown above and below the estimated risk path. The actual amount of risk taken will vary between these limits. The marker shows the fund s current place in its lifecycle.

4 Page 4 NEST quarterly investment report End of October 2016 to end of December 2016 NEST 2060 Retirement Fund For the of the single year NEST Retirement Date Funds please refer to the last page of this report 18.0% 16.0% 14.0% 12.0% 1 8.0% 6.0% 4.0% 2.0% 15.4% 9.0% 8.7% 1.6% 0.8% 0.9% Benchmark: CPI Foundation phase preserve capital while seeking sufficient return to match inflation and cover all scheme charges target a long-term volatility average of 7 per cent significantly reduce the likelihood of extreme investment shocks take appropriate risk at appropriate times, taking account of current economic and market conditions. During our research, younger savers told us that they would react very negatively to falls in the value of their savings. For this reason, members who join in their 20s will typically spend up to five years in the Foundation phase. In this phase we concentrate on steadily growing the balance rather than exposing our members to substantial investment risk. This lower volatility approach still aims to at least match inflation after taking charges into account. We use the Consumer Price Index measure for inflation. 5.7% Emerging market debt Foundation phase 36.2% Developed market equities Annualised volatility Monthly value at risk 12.9% Property 36.9 Sterling investment grade bonds 1% UK index-linked gilts 1% UK gilts 3% UK short-dated gilts 5.2% -1.5% We monitor risk carefully using a variety of tools to make sure the risk we re taking in each fund is appropriately rewarded. This table shows annualised realised volatility and monthly realised value at risk (VaR) in this fund. 3.2% Money market investments Lifecycle of the NEST 2060 Retirement Fund This NEST Retirement Date Fund is in the Foundation phase. Over its lifecycle it will experience all three phases until it matures in The NEST lifecycle ensures that our members are exposed to the right amount of risk at different stages in their savings career. Our estimate of this risk path is shown as the middle line on the lifecycle chart. We dynamically manage the actual amount of risk taken depending on the investment environment. The upper and lower limits of the risk budget are shown above and below the central risk path. The actual amount of risk taken will vary between these limits. The marker shows the fund s current place in its lifecycle.

5 Page 5 NEST quarterly investment report End of October 2016 to end of December 2016 NEST Ethical Fund growth phase portfolio 18.0% 16.2% 16.0% 14.0% 12.5% 12.0% 12.0% 11.5% 1 8.0% 6.0% 4.6% 4.5% 4.7% 3.8% 4.0% 2.0% Benchmark: CPI + 3% provide a fund choice for members who want to invest in a portfolio that reflects their ethical concerns target investment returns of inflation plus 3 per cent and cover all scheme charges and expect a long-term volatility average of 13 per cent aim for steady growth in real terms over a members time saving and maximise incomes in retirement by taking sufficient investment risk at appropriate times while reducing the likelihood of investment shocks Ethical policy highlights Our fund manager BMO have reviewed the UN Sustainable Development Goals and how these overlap with their Responsible Funds and their engagement approach. They are considering how they can measure progress towards the 2030 target. Engagement continues to be a focus for BMO Global Asset Management s funds and in Q they had 58 engagements with 32 companies held in Responsible Global Equity and Responsible Sterling Bond. 59.3% Developed market equities 16.3% Property Annualised volatility Monthly value at risk 7.1% -2.7% 15.8% Sterling investment grade bonds 1% UK index-linked gilts We monitor risk carefully using a variety of tools to make sure the risk we re taking in each fund is appropriately rewarded. This table shows annualised realised volatility and monthly realised value at risk (VaR) in this fund. 1% UK gilts 6.7% UK short-dated gilts Lifecycle of the NEST Ethical Fund The NEST Ethical Fund currently offers members a diversified portfolio of ethical equities, real estate and ethical corporate bonds as well as nominal and index-linked gilts. As with the NEST Retirement Date Funds we manage the allocation between these asset types to protect members retirement pots and take advantage of market growth. In addition, the NEST Ethical Fund follows a similar lifecycle to NEST Retirement Date Funds using separate Foundation, Growth and Consolidation funds. At the moment we move members between these phases using a formula based on their NEST retirement date. However, as our membership expands we ll look at ways we could dynamically manage transitions as we do for the NEST Retirement Date Funds.

6 Page 6 NEST quarterly investment report End of October 2016 to end of December 2016 NEST Sharia Fund NEST Higher Risk Fund provide a fund with an investment approach based on Islamic law expect a long-term volatility average of 22 per cent grow a member s pot in real terms over the course of their savings career This fund aims to deliver investment growth after inflation and charges are taken into account while investing only in Sharia-compliant equities. Lifestyling and diversification at the asset allocation level are not currently possible for this fund as it invests entirely in a single asset class. take more investment risk than the NEST Retirement Date Funds in pursuit of higher potential returns expect a long-term volatility average of 17 per cent reduce the likelihood of extreme investment shocks by diversifying across a range of return-seeking asset classes Members investments will gradually be de-risked as they approach retirement. Annualised volatility Monthly value at risk Annualised volatility Monthly value at risk 12.4% -4.5% 10% -3.8% annualised realised volatility and monthly realised value at risk (VaR) in this fund. annualised realised volatility and monthly realised value at risk (VaR) in this fund % % 1 5.0% 26% 25.3% 15.6% 15.5% 14.9% 15.2% 14% 14.4% % % 1 5.0% 26.2% 13.8% 14.1% 12.4% Benchmark: Dow Jones Islamic Market Titans 100 Index 7.9% Emerging market debt 6.9% Emerging market equities 100% Developed market equities 66.7% Developed market equities 18.5% Property

7 Page 7 NEST quarterly investment report End of October 2016 to end of December 2016 NEST Lower Growth Fund NEST Pre-retirement Fund preserve the nominal value of contributions and grow the fund in line with low-risk money market investments achieve an investment return that is in line with or better than wholesale money market short-term interest rates before charges expect a long-term volatility average of 0.5 per cent This fund is provided for members who seek to take as little investment risk as possible. invest in 75 per cent annuity-tracking and 25 per cent liquiditymatching assets expect a long-term volatility average of 4 per cent This fund provides a savings vehicle for members close to retirement who expect to buy a retirement income through an annuity and take 25 per cent of their pot as a cash lump sum. NEST Retirement Date Funds that are close to maturity are currently targeting 100 per cent liquiditymatching assets on the assumption that savers will take these small pots as cash lumps sums. This fund is offered as an alternative approach. Annualised volatility Monthly value at risk Annualised volatility Monthly value at risk 0.05% 0.03% 4.4% -2.1% annualised realised volatility and monthly realised value at risk (VaR) in this fund. annualised realised volatility and monthly realised value at risk (VaR) in this fund. 0.6% 0.5% 0.4% 0.3% 0.2% 0.1% 0.5% 0.4% 0.4% 0.4% 0.4% 0.4% 0.3% 0.3% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 8.2% 5.5% 5.6% 4.5% Benchmark: 7-day sterling LIBID rate 37.4% Sterling investment grade bonds 37.9% UK gilts 100% Money market investments 24.7% Money market investments

8 Page 8 NEST quarterly investment report End of October 2016 to end of December 2016 NEST Retirement Date Funds NEST Retirement Date Fund 1 year 3 year 5 year Since launch NEST Retirement Date Fund 1 year 3 year 5 year Since launch Starter* % 9.70 % 9.44 % 9.13 % % % % % % % % % % % % % % % % % % 9.03 % % % % % % % 9.37 % % % % % % % 9.29 % 9.16 % 9.16 % % % % % % 9.48 % 9.26 % 8.97 % % % % % % 9.69 % 9.37 % 9.07 % % % % % % % 9.63 % 9.31 % % % % % % % 9.92 % 9.58 % % % % % % % % 9.90 % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % 9.66 % % % % % % 9.73 % 9.75 % 9.03 % % % % % % 9.14 % 9.08 % 8.56 % % % % % % 7.59 % 7.87 % 7.59 % % % % % % 6.86 % 7.12 % 7.04 % % % % % % 5.85 % 6.21 % 6.34 % % % % % % 2.09 % 3.05 % 2.88 % % % % % % 1.16 % 2.10 % 2.00 % % % % % Post* 0.68 % 0.59 % % % % % % CPI 1.60 % 0.79 % 1.41 % 1.66 % % % % % CPI + 3% 4.64 % 3.82 % 4.46 % 4.71 % % % % % *NEST makes these funds available to members joining before they re eligible for auto enrolment or who join NEST after their State Pension Age or who haven t taken their money out of NEST in the year they were expected to. NEST Retirement Date Funds that have matured will be closed down and any money remaining in them will be moved over to the NEST Post Retirement Fund. You can find the latest details of the underlying building blocks for all funds and the asset allocation of all NEST Retirement Date Funds in the Investment implementation document (IID) at nestpensions.org.uk. The IID is updated quarterly. Important information The value of investments may go down as well as up and the return of your investment is not guaranteed. Fluctuations in financial markets, currencies and other risks may cause fluctuations in the value of investments. Any fund objective or target should not be considered as guarantee of of any fund. Derivatives may also be used for efficient portfolio management purpose. This factsheet does not constitute advice on whether to invest in this fund. Neither this factsheet nor any data contained within this factsheet is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. You may wish to consult with an appropriately qualified financial adviser in relation to your investments and any change to them. This factsheet has been created by National Employment Savings Trust (NEST). This factsheet is valid as at the date of its publication. This factsheet and data contained within this factsheet is provided for information purposes only and may not be reproduced or extracted or used for any other purpose. This factsheet includes and/or is based on data that is owned by and obtained from third party sources. Data from third party sources is provided as is and is not verified by NEST. Additional disclaimers which apply to the third party data are available on our website No undertaking is given, or representation or warranty is made, express or implied, by NEST or by any third party source that the information in this document is current, accurate, complete or error free, and the information must not be relied upon as such. Neither the third party sources nor NEST accept responsibility for any loss caused to any recipient of this document as a result of any error, inaccuracy or incompleteness of this factsheet or as a result of any third party data. NEST Corporation 2017 p50026v /17