Interview by Muskan Arora
Muskan Arora: You recently introduced
Timberland to your portfolio, what kind of opportunities prompted you towards
doing so? How much do you plan to allocate to the portfolio and through what
strategies?
Liz Fernando: I joined Nest back in 2020 and was the deputy Chief Investment Officer before I took up the main role, so I was already plugged-in on what Nest was doing and where it was heading before becoming CIO.
As CIO, my focus has been on
continuing Nest’s growth by opening up more asset classes to our members,
particularly in private markets. Over the past few years, we’ve begun investing
in private credit, unlisted infrastructure, private (growth) equity. Our
priority has been ensuring that these first steps were successful and
delivering the performance we sought. I’m delighted to say that they have been,
and we’ll continue expanding our private market allocations.
I want Nest to continue
refining our investment strategy, working hard to achieve the best
risk-adjusted returns for our members. I see this being accomplished by
continuously looking for ways to improve our portfolios through additional
diversification where that makes sense, looking for enhancements to our
existing allocations, and identifying opportunities to make our portfolio more
efficient by reducing or removing any drag on performance.
We recently add timberland to
the portfolio, which is a great example of adding another tool to our
‘investment toolbox’. Timberland has some interesting characteristics – it is a
long-lived asset that appreciates steadily over time, generates a steady income,
is uncorrelated with financial markets, and plays an important role in
mitigating climate change. With around £500m in member contributions coming in
monthly, we need a range of asset classes to help us maintain our desired asset
allocation.
We selected Campbell Global
to source and then manage our investments in timberland. We expect
timberland to grow to at least 2% of Nest’s AUM after the initial ramp up
period, during which we estimate investing around
£550 million over a 3-year period. This will be a fund solely for Nest and will be
actively managed by Campbell Global, selecting
viable sites in the US, Australia, New Zealand and Chile.
Arora: What do you think have been the advantages of having a CEO who was once a chief investor?
Fernando: Working with Mark was one of
the key reasons I was drawn to Nest. The work he’s done to set Nest up,
developing the investment approach from managing £19 to more than £43 billion,
is phenomenal. The Nest team, over the past 10+ years, deserve a lot of credit
for the excellent work they’ve accomplished.
There are many benefits to
working with a former CIO. For one, Mark understands what the job entails and
knows where he can add real value. He’s also a great sounding board if I need
him. What Mark excels at, though, is giving me the space to operate as CIO and
to get on with the day job. We’ve formed an effective dynamic.
As Nest continues to grow, ensuring we have the right senior experience guiding us through the years ahead is crucial. We have some superb people at Nest Invest, and it’s a fantastic place to work. Supporting our team members as they grow in their roles and take on more responsibility is a top priority.
Arora: Could you highlight a
few red and green flags you look for in managers?
Fernando: The appointment of the right
fund managers is crucial to the success of a scheme like Nest. We appoint them
to invest on behalf of our members, empowering them to use their expertise to
find the right deals. We need to have full confidence in their ability to
deliver on their side of the agreement.
We are a committed
responsible investor, knowing that managing risks facing the portfolio is the
best way to manage long-term risks facing our members and their investments. To
achieve this, we have a number of policies of what we expect from our fund managers.
Adhering to these policies and aligning with our investment beliefs is
essential for a successful partnership.
We also conduct very thorough
due diligence before we appoint any managers. This gives us confidence that we
can establish long-term partnerships and that our members’ money is being well
looked after. As part of that process, we particularly assess the working
culture of the fund manager, the diversity of their team, and how well ESG is
integrated into their investment process. These are material factors for us,
not ‘nice to haves’.
Once a manager is on board,
we are looking for any changes to the investment philosophy and process,
turnover of the key people investing for us, or corporate events which might
distract the team from their day-job. Performance is an outcome of the investment
process, not something a manager can directly control. Therefore, maintaining
confidence that the manager is consistently and thoughtfully applying the
process we hired them to implement is critical.
Arora: Has the growth of your fund opened new opportunities for you, perhaps with more competitive managers, etc?
Fernando: Undoubtedly it has helped us
when it comes to negotiating with fund managers, particularly around fees. It
has also allowed us to move from pooled to segregated funds in most asset
classes, giving us greater influence over mandate design and ensuring it aligns
with Nest’s needs. We offer an attractive opportunity for a fund manager – a
regular flow of capital and long-term partnerships. Many managers have also
recognised that we represent a third of the UK workforce, and by partnering
with us, they can help improve pension provision for millions of people.
Our size and scale also help
break down barriers to entry in certain asset classes, most obviously in
private markets. We can deploy large sums of money quickly, allowing us to set
up co-investment opportunities in private equity deals. This can help our fund
managers avoid missing out on excellent deals simply because they cannot raise
enough capital to meet the ticket size.
Arora: Nest has been a fast-growing pension plan, what does “keeping a watchful eye" on the economy mean and could you elaborate on your defensive strategies?
Fernando: All investors should take
note of what’s happening in the markets they operate in. This helps us spot
emerging trends and supports our responsible investment strategy in managing
risks for our membership. However, it’s important to always keep looking to the
horizon. I’ve described our approach in the past as looking for when the tide
is changing and making sure we navigate those shifts well, rather than trying
to manage every wave. We leave day trading to others; our job is to help our
members grow their pension over decades. The best approach we can take is to
implement a diversified portfolio and take advantage of the magic of
compounding.
One of the best defensive
strategies we adopted was divesting from the tobacco industry. Back in 2019, we
saw that tobacco companies were facing legal challenges globally, with
governments taking action against an industry causing serious harm to their citizens.
The harsher regulatory environment was stopping tobacco companies from
attracting new customers and encouraging many existing smokers to quit. In our
view, tobacco was, and still is, a struggling industry being regulated out of
existence. With this position, the only logical conclusion was to remove any
exposure out members may have to tobacco companies, which we did.
