Interview – NatWest Group Pension Scheme
INTERVIEW – ROBERT WAUGH
“Our ESG strategy is to engage our equity, ditch our debt and get active in alternatives.”
The chief executive and co-chief investment officer of the £53bn pension fund talks to Andrew Holt about the legacy of the financial crisis, having a small risk appetite, the attraction of wood and not being able to say you worked for a bank.
Why is your portfolio dominated by cash, gilts, swaps and liquidity funds? Our job is to meet the liabilities, which are linked to inflation and interest rates. We are a big pension fund, relative to the size of our sponsor, hence we have a small appetite for risk. So, the first thing we do is hedge unre- warded risk. Therefore, two-thirds of our portfolio is in gilts and cash. Our liability- driven investments cover 90% of the sen- sitivity of the liabilities to interest rates and inflation.
You have small allocations to global equities, investment-grade credit, UK real estate, infrastructure, US residential property, syndicated loans and emerging market credit. What returns are you aiming for here? It starts with our investment beliefs. We want to maximize our diversification and
12 | portfolio institutional | April 2022 | issue 112
are strong believers in beta rather than alpha. So, we want exposure to as many rewarded risks as possible. We do not see evidence of there being much alpha and do not believe we are smart enough to find it the whole time. So, we prefer to buy beta. It is lower risk and offers a more stable return.
How successful has this approach been? The markets have been kind. We have compounded at just over 10% per annum for more than 10 years, which has far exceeded our liabilities.
When we set this team up in 2010, we were 50% funded, discounting the liabilities, on a gilts-flat basis. We are now almost 100% and are eight years ahead of our target.
Looking back from the safety of today, was this a problem in 2011?
There was a huge problem. I took this job in 2010 and our parent company [RBS] had just been taken over by the government. Then a year later, we had the euro crisis. The deficit of the pension fund was, at the time, a significant proportion of the capi- talisation of the bank. We were running a position that was enormously long to equi- ties and enormously short to interest rates, with little hedging in place. It was a very different position to where we are today.
That must have been challenging. I sleep better today than I did back then. I went in thinking it would be a challenge but underestimated the size of that challenge.
Back in 2011, it was difficult to admit that you worked for RBS. It was a long and difficult turnaround. But, as I say, mar- kets have been kind. My colleagues
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