Interview – Nest
Are we on the brink of the tide changing? We could be. After the global financial cri- sis, we had monetary policy without fiscal policy. This changed during Covid, when we had both working together. That turbocharged the economy probably a bit too much. In the UK, we also have the disruptions caused by Brexit which are muddying the water.
My view is that central banks do not want to return to the environment we saw post- financial crisis where they struggled to get inflation up to 2%. They can’t leave it at 10% but would settle for 3% or 4%.
You are implying that central banks can control inflation. What do you think of the view that this is beyond their control? Monetary policy should not respond to supply shocks because it does not solve such problems. What is interesting is that although wages are going up, particularly among low-skilled workers in the US, we are not seeing wage growth in real terms. There is no evidence yet that the wage- price spiral everyone seems to be worried about is happening.
It will be interesting to see what happens when the German unions start doing their settlements. The way the furlough-
our portfolio in private markets in the coming years.
With hindsight, defined
contribution should not have been set up with daily pricing. But we are where we are and going back is quite difficult.
ing scheme worked in Germany meant there was not a great resignation and sub- sequent mass search for new jobs. What the unions negotiate will set the terms for the rest of continental Europe.
MANAGING CAPITAL FLOWS Managing cash inflows has been a key issue for the master trust. Over the past year, Nest received on average £477m in contributions a month, which helped grow its assets to £24bn from £17bn. With one in three workers in Britain saving into a Nest pension, the master trust expects to manage more than £100bn in assets by the end of the next decade. To manage these inflows, Nest launched an efficient portfolio management mandate in May, selecting Amundi to provide derivatives con- tracts to rebalance Nest’s target allocations more efficiently. It will also help Nest equitise cash set aside for private market deployment. Nest has not committed an amount of money to the mandate, preferring to use derivatives to respond to specific market circumstances.
14 | portfolio institutional | September 2022 | issue 116
You mentioned changes to the correlation of asset classes. With bond and equity performance increas- ingly positively correlated, are you including other asset classes to ensure diversification?
Our focus in the past few years has been on opening up private markets and illiquids. Nest now has access to property, private credit, private equity and unlisted infrastructure. We have all the main tools we need to achieve the level of diversification we want. Our aim is to have a fifth of
Last year you predicted emerging markets were equipped to outperform coming out of the pandemic. What do you think now, given the strength of the dollar? A stronger US dollar and slower global growth are a headwind to emerging mar- kets. We are beginning to see challenges with many emerging market countries in default or debt distress. We do not see this as a major liquidity event, or that this default wave will impact stronger emerg- ing markets.
Emerging markets remain a fundamental part of the portfolio and should benefit from higher growth rates over the medium term. Research tends to show that they are relative beneficiaries in a higher global inflation environment. But to increase our exposure to emerging markets we will need to be compensated for the increased risks – we are monitor- ing the situation carefully.
How does the financial impact of climate change tie into these long-term trends? Climate change is one of the biggest risks facing society and the impacts from the transition to low-carbon economies will likely be significant. If not managed care- fully and proactively, climate change could reduce investment returns for our members. But we also believe climate change pre- sents an opportunity if we target assets which should only become more desira- ble, such as renewable energy infrastruc- ture and companies well-positioned to succeed in low-carbon economies.
More and more DC schemes are investing in private markets as the need for daily liquidity is being questioned. If market vol- atility continues, could requests for with- drawals from DC members increase? We have not seen any evidence of that. Surveys of our members suggest that they will react to market stress, but that hasn’t
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60
