NEST quarterly investment report End of Dec 2016 to end of March 2017 Fund facts Total size of assets under management 1.66bn 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 We ve witnessed some significant political events with various market impacts worldwide this quarter. US President Donald Trump was inaugurated in January. The elections in the Netherlands were expected to deliver gains for populist anti-eu parties. And on 29 March Prime Minister Theresa May invoked Article 50, setting the UK on course to leave the EU by early 2019. President Trump s agenda of tax cuts and deregulation caused a market rally. Markets also welcomed the outcome of the Dutch elections where mainstream parties triumphed. Meanwhile Article 50, a longanticipated event, provoked only very little market reaction. Forecasts now suggest that the UK s economic slowdown won t be as severe this year as previously feared. However consumer spending, the main driver of economic growth, may be affected if Brexit negotiations cause further weakness in the Pound. The Bank of England will likely look through the expected rises in inflation this year. But the Federal Reserve took action to limit rising consumer prices in the US when it increased interest rates by another 25bps in March. Projections indicate two more rate increases this year. Other developed central banks, including the Bank of England, Bank of Japan and European Central Bank look likely to maintain their expansionary policies for now. The European Central Bank in particular is likely to remain conservative until a number of national elections in continental Europe have taken place. The consequent risk of volatility in European equities is something we ll be looking to manage in our portfolios. Investing responsibly highlights NEST launched and seeded a new climate aware fund which is managed by our global equity manager UBS. The launch comes after a long period of research and work with UBS to develop a fund that manages climate change risks and opportunities across a proportion of our global equity allocation. The fund s methodology will overweight or underweight companies in climatically sensitive sectors according to their contribution to climate change. Engagement and voting guidelines are incorporated in the management of the fund. We ve renewed our contract with proxy voting and analysis firm Manifest. They ll continue assisting with our stewardship activities. NEST also responded to the Government s green paper on corporate governance reform, supporting a number of their proposals on executive pay and reporting. 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. 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.
Page 2 NEST quarterly investment report End of December 2016 to end of March 2017 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 2 22.0% 2 1 13.0% 11.3% 10.8% 1 5.4% 4.0% 4.5% 4.7% 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 40.3% Global developed equities 15% Sterling corporate bonds Growth phase Monthly value at risk 13.1% Hybrid Property 9.9% Climate aware global developed equities 5.4% Emerging market debt 5% Short duration investment grade bonds 3.5% Low-risk sterling liquidity 3% Global listed property 6.8% -2.6% 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 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. 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. 2% Global emerging market equities (ESG screened) 1.8% Global emerging market equities (economic weighting) 1% Gilts
Page 3 NEST quarterly investment report End of December 2016 to end of March 2017 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% 15.8% 14.0% 12.0% 1 10.3% 9.5% 9.2% 8.0% 6.0% 4.0% 2.3% 2.0% 0.9% 1.5% 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 25.2% Global developed equities 17.5% Sterling corporate bonds 12.5% Ultra short duration investment grade bonds 12.2% Short duration investment grade bonds 7.5% Hybrid Property 6.4% Low-risk sterling liquidity 5.6% Emerging market debt 4.7% UK direct property 4.7% Climate aware global developed equities 1.4% Global listed property 0.9% Global emerging market equities (ESG screened) 0.9% Global emerging market equities (economic weighting) 0.5% Gilts Consolidation phase Monthly value at risk 5.8% -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 2022. 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.
Page 4 NEST quarterly investment report End of December 2016 to end of March 2017 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% 16.0% 14.0% 12.0% 9.8% 1 9.0% 8.0% 6.0% 4.0% 2.3% 2.0% 0.9% 1.0% 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. 25.7% Global developed equities 15.1% Sterling corporate bonds 12.5% Short duration investment grade bonds 11.1% Climate aware global developed equities 10% Ultra short duration investment grade bonds 9.8% Hybrid Property 6.1% Emerging market debt 5% Low-risk sterling liquidity 2.9% Global listed property 1% Gilts 1% Index-linked gilts Foundation phase Monthly value at risk 5% -1.4% 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 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 2060. 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.
Page 5 NEST quarterly investment report End of December 2016 to end of March 2017 NEST Ethical Fund growth phase portfolio 2 20.8% 2 1 13.8% 11.8% 11.8% 1 5.4% 4.0% 4.5% 4.7% 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 ethical equities fund manager BMO has made Wells Fargo unacceptable for their Responsible Fund range. They have significant concerns about the governance of the company. Last year it was involved in the cross-selling scandal and subsequent dismissal of over 5,000 employees. Their concerns relate to the multiple allegations and lack of accountability at senior management and board level. Last autumn the company made some changes that BMO saw as positive in terms of mitigating reputation risk. However, BMO did not believe the changes were as comprehensive as they needed to be and feel that Wells Fargo has missed an important opportunity to bring about meaningful change. 59.8% Ethical global equities 20% Ethical sterling corporate bonds 15.5% UK direct property 3.6% Short-dated gilts 1% Gilts Monthly value at risk 7% -2.6% 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 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.
Page 6 NEST quarterly investment report End of December 2016 to end of March 2017 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. Monthly value at risk Monthly value at risk 12.2% -4.4% 9.8% -3.8% 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 annualised realised volatility and monthly realised value at risk (VaR) in this fund. 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 3 2 2 1 30.2% 29.8% 17.6% 17.7% 14.8% 15.1% 14.4% 1 3 2 2 1 28.4% 15.3% 13.5% 12.7% 1 1 Benchmark: Dow Jones Islamic Market Titans 100 Index 100% Sharia compliant equities 53.1% Global developed equities 14.5% Hybrid Property 13.6% Climate aware global developed equities 8.1% Emerging market debt 3.9% Global listed property 3.5% Global emerging market equities (ESG screened) 3.4% Global emerging market equities (economic weighting)
Page 7 NEST quarterly investment report End of December 2016 to end of March 2017 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. Monthly value at risk Monthly value at risk 0.05% 0.03% 4.4% -2% 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. 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. 0.5% 0.4% 0.3% 0.2% 0.1% 0.4% 0.4% 0.4% 0.4% 0.3% 0.3% 0.2% 0.4% 8.0% 7.0% 6.0% 4.0% 3.0% 2.0% 7.1% 5.4% 5.1% 5.7% 1.0% Benchmark: 7-day sterling LIBID rate 100% Low-risk sterling liquidity 37.6% Gilts 37.6% Sterling corporate bonds 24.9% Low-risk sterling liquidity
Page 8 NEST quarterly investment report End of December 2016 to end of March 2017 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 2063 - - - 2.9 % 2037 22.0 % 13.0 % 11.3 % 10.8 % 2062 15.7 % - - 14.6 % 2036 22.0 % 13.0 % 11.3 % 10.8 % 2061 15.9 % - - 9.2 % 2035 22.0 % 13.0 % 11.3 % 10.8 % 2060 16.0 % 9.8 % - 9.0 % 2034 22.0 % 13.0 % 11.3 % 10.8 % 2059 16.0 % 10.0 % - 9.8 % 2033 22.0 % 13.0 % 11.3 % 10.8 % 2058 16.0 % 9.9 % 9.2 % 9.3 % 2032 22.0 % 13.0 % 11.3 % 10.8 % 2057 16.6 % 10.2 % 9.4 % 9.1 % 2031 22.0 % 13.0 % 11.3 % 10.8 % 2056 17.3 % 10.4 % 9.5 % 9.3 % 2030 22.1 % 13.0 % 11.3 % 10.8 % 2055 18.5 % 11.0 % 9.8 % 9.5 % 2029 22.0 % 13.0 % 11.3 % 10.8 % 2054 19.7 % 11.5 % 10.1 % 9.8 % 2028 22.1 % 13.0 % 11.3 % 10.8 % 2053 21.0 % 12.2 % 10.5 % 10.2 % 2027 22.1 % 13.0 % 11.4 % 10.8 % 2052 22.0 % 12.7 % 11.0 % 10.6 % 2026 21.2 % 12.7 % 11.2 % 10.7 % 2051 22.0 % 12.9 % 11.2 % 10.8 % 2025 19.8 % 12.3 % 10.9 % 10.4 % 2050 22.0 % 13.0 % 11.2 % 10.8 % 2024 18.5 % 11.7 % 10.6 % 10.2 % 2049 22.0 % 13.0 % 11.3 % 10.9 % 2023 17.2 % 11.1 % 10.2 % 9.8 % 2048 22.0 % 13.0 % 11.4 % 10.9 % 2022 15.8 % 10.3 % 9.5 % 9.2 % 2047 22.0 % 13.0 % 11.3 % 10.8 % 2021 14.5 % 9.6 % 8.9 % 8.7 % 2046 22.0 % 13.0 % 11.4 % 10.8 % 2020 7.7 % 7.5 % 7.5 % 7.5 % 2045 22.0 % 13.0 % 11.4 % 10.8 % 2019 5.7 % 6.6 % 6.8 % 6.9 % 2044 22.0 % 13.0 % 11.4 % 10.8 % 2018 3.8 % 5.5 % 5.9 % 6.1 % 2043 22.0 % 13.0 % 11.3 % 10.8 % 2017 1.3 % 2.0 % 2.7 % 2.8 % 2042 22.1 % 13.0 % 11.3 % 10.8 % 2016 0.5 % 1.1 % 1.8 % 1.9 % 2041 22.0 % 13.0 % 11.3 % 10.8 % Post 0.9 % 0.7 % 0.0 % 0.6 % 2040 22.0 % 13.0 % 11.3 % 10.8 % CPI 2.3 % 0.9 % 1.5 % 1.7 % 2039 22.1 % 13.0 % 11.3 % 10.8 % CPI + 3% 5.4 % 4.0 % 4.5 % 4.7 % 2038 22.0 % 13.0 % 11.3 % 10.8 % *NEST makes these funds available to members joining before they re eligible for auto enrolment or who leave money in NEST after State Pension Age. Members money can also be moved to the Post Retirement Fund if they ve selected a retirement date between their 55th birthday and their State Pension Age if they don t retire on the date they chose. This is because the NEST Retirement Date Fund they were invested in would have matured and closed down and at this stage we move the money over to the 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 www.nestpensions.org.uk 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 p50224v1 10319-2 04/17