NEST quarterly investment report

Transcription

1 NEST quarterly investment report January to March 2015 Fund facts Total size of assets under management 420m Annual management charge 0.3% Contribution charge 1.8% Pricing basis Single price NEST s fund managers For more information visit nestpensions.org.uk Commentary Mark Fawcett Chief investment officer Rising equity markets, falling bond yields and deflation were the defining characterisitics of the quarter. Looking first at equities, the FTSE All-Share rose by nearly 4 per cent, the MSCI Euro by around 18 per cent and the S&P by nearly half a per cent. UK property has done well with UK IPD TR All Property index rising by just over 3 per cent. We are looking to build up portfolios exposure to real estate, taking advantage of good value where we see it. Our corporate bond portfolio is still providing a decent yield. This is unlike Government bonds, particularly in Europe, where investors are effectively having to pay governments to lend them money. Headline inflation in the UK is currently zero to negative, some way below the Bank of England s 2 per cent target. The MPC expects inflation to fall further in the near term. This reflects falls in non-core constituents of inflation such as energy prices, which are continuing to be passed through to petrol prices and utility bills. The MPC expects inflation to begin to rise in the second half of 2015, projecting a return to target within two years before rising a little further. We agree with the MPC s expectations and will continue to monitor inflation in the context of our asset allocation risk map. Investing responsibly highlights This quarter we completed meetings on bribery and corruption in the pharmaceuticals and healthcare sector. These provided helpful insights and some best practice examples for smaller-scale companies. Legal & General Investment Management (LGIM), which provides NEST with two real estate building block funds, has started benchmarking energy consumption at its properties against best practice energy and water benchmarks. This covers both landlord and tenant energy and water consumption, allowing LGIM to set reduction targets for all. There were a number of notable actions by UBS, which provides NEST s global equities building block fund: UBS declined to support management on proposals for Italian company Mediolanum in light of concerns regarding changes to the remuneration approach. UBS supported a shareholder proposal to split Chairman and CEO roles at The Walt Disney Company to support greater accountability at board level. Taking into account continued concerns regarding the timing of audited accounts in South Korea, UBS voted against proposals to approve the financial statements at 113 South Korean AGMs during the quarter. Comparative risk This chart broadly compares different NEST funds in terms of risk, based on guidance given by the European Securities and Markets Authority (ESMA). The chart uses categories of 1 (low risk) to 7 (high risk) corresponding to different ranges of volatility. ESMA s guidance suggests volatility should be calculated on five-year historic. As NEST funds don t yet have five years of the above chart is based on forwardlooking long-term volatility estimates. As our funds gain the necessary history the chart will be updated to reflect historic volatility in accordance with ESMA s guidelines. Investment beliefs Annualised volatility 1 = 0-0.5% 2 = 0.5-2% 3 = 2-5% 4 = 5-10% 5 = 10-15% 6 = 15-25% 7 = >25% 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. These beliefs act as a guide to enable effective delivery of all investment functions: 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 January to March 2015 NEST 2040 Retirement Fund For the of the 47 single year NEST Retirement Date Funds please refer to NEST Retirement Date Funds 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. Growth phase Volatility Value at risk March % 11.9% Changes in these numbers could reflect a change to the amount of risk we wish to take, changes in the risk profile of asset classes in current conditions or a mix of both. 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 2040 by which time we expect it to be invested primarily in pre-retirement assets. 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, and its risk level relative to the projected risk budget range.

3 Page 3 NEST quarterly investment report January to March 2015 NEST 2022 Retirement Fund For the of the 47 single year NEST Retirement Date Funds please refer to NEST Retirement Date Funds 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 through 2020, the Consolidation phase objective is to manage the risks associated with converting a member s accumulated savings into a cash lump sum. Consolidation phase Volatility Value at risk March % 8.9% 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 expected volatility and value at risk (VaR) in this fund for the quarter. Changes in these numbers could reflect a change to the amount of risk we wish to take, changes in the risk profile of asset classes in current conditions or a mix of both. 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, and its risk level relative to the projected risk budget range.

4 Page 4 NEST quarterly investment report January to March 2015 NEST 2057 Retirement Fund For the of the 47 single year NEST Retirement Date Funds please refer to NEST Retirement Date Funds 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. Foundation phase Volatility Value at risk March % 8.8% 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 expected volatility and value at risk (VaR) in this fund for the quarter. Changes in these numbers could reflect a change to the amount of risk we wish to take, changes in the risk profile of asset classes in current conditions or a mix of both. Lifecycle of the NEST 2057 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 2057, by which time it will be invested primarily in pre-retirement assets. 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, and its risk level relative to the projected risk budget range.

5 Page 5 NEST quarterly investment report January to March 2015 NEST Ethical Fund 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 expect a long-term volatility average of 13 per cent aim for steady growth in real terms over a members time saving maximise incomes in retirement by taking sufficient investment risk at appropriate times while reducing the likelihood of investment shocks Ethical policy highlights Following efforts aimed at raising standards for migrant labour, Apple announced a ban on bonded labour in its supply chain, including the use of recruitment fees for foreign workers. Enhancing supply chain labour standards controls is crucial for the electronics sector to develop sustainable sourcing models and to mitigate reputational risks. Volatility Value at risk March % 11.9% 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 expected volatility and value at risk (VaR) in this fund for the quarter. Changes in these numbers could reflect a change to the amount of risk we wish to take, changes in the risk profile of asset classes in current conditions or a mix of both. 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 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 January to March 2015 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. Volatility Value at risk Volatility Value at risk March % 20.1% March % 17.7% Changes in these numbers could reflect changes in the risk profile of asset classes in current conditions. Changes in these numbers could reflect a change to the amount of risk we wish to take, changes in the risk profile of asset classes in current conditions or a mix of both.

7 Page 7 NEST quarterly investment report January to March 2015 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. Volatility Value at risk Volatility Value at risk March % 0.2% March % 6.1% Changes in these numbers could reflect changes in the risk profile of asset classes in current conditions or a mix of both. Changes in these numbers could reflect a change to the amount of risk we wish to take, changes in the risk profile of asset classes in current conditions or a mix of both.

8 Page 8 NEST quarterly investment report January to March 2015 NEST Retirement Date Funds For details of the underlying building blocks for all funds and the asset allocation of all NEST Retirement Date Funds, please read the Investment implementation document at nestpensions.org.uk NEST Retirement Date Fund 1 year 3 year 5 year Since launch NEST Retirement Date Fund 1 year 3 year 5 year Since launch % 1.63% % % 11.68% % % 2.72% % % 11.65% % % 3.81% % % 11.64% % % 8.58% % % 11.64% % % 9.10% % % 11.69% % % 9.64% % % 11.69% % % 10.11% % % 11.69% % % 10.63% % % 11.66% % % 11.22% % % 11.69% % % 11.56% % % 11.67% % % 11.66% % % 11.50% % % 11.66% % % 11.38% % % 11.72% % % 10.89% % % 11.56% % % 10.47% % % 11.66% % % 10.14% % % 11.66% % % 9.94% % % 11.61% % % 9.84% % % 11.64% % % 9.80% % % 11.67% % % 9.81% % % 11.67% % % % % 11.65% % % % % 11.65% % % % 11.66% % CPI -0.08% 1.45% % % 11.68% % CPI+3% 2.93% 4.49% % % 11.66% % 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 2015