NatWest Group Pension Scheme – Interview


one is doing a good job of managing risk or whether they are doing a good job of transitioning to a low carbon economy.


So, it is down to how you measure the data? Yes. Like most things in life, it is quite complicated. A question to ask is: how is what you are doing affecting the real world? Equity per se does not release car- bon, a company releases carbon.


Where do you see future investment opportunities? Well, as I say, we try to create a diversified approach to lots of different sources of beta. We harvest as many as we can. There are plenty of opportunities. One example is timber. There are various reasons why timber demand will increase. You can turn timber into a carbon sink and take carbon credits, which is appealing. We have just done that with one of our for- ests. Alternatively, if you are going to reduce plastic in packaging, paper is going to be a key replacement product. Timber may also become more promi- nent in construction as cement and steel are reduced. So, demand for timber and timber products increases but it takes 25 to 30 years to grow a tree, so that is limit- ing supply. Then there is Russia being a big exporter. So, it strikes me that timber may be quite an attractive asset for the next five to 10 years.


Why do you use and promote the Cost Transparency Initiative? Try compounding your return at 50-basis points less over 30 years. It makes a huge impact on outcomes. The initiative is important because there is not enough transparency and visibility in financial markets. There is far too much agency in the finance sector taking a piece of every- one’s savings and not necessarily adding value in the way that they should be.


You are the scheme’s chief executive and co-chief investment officer. Does that raise any governance issues?


It could, but we are fortunate in that the alumni of NatWest pro- duces a wonderful array of potential trustees for us. For example, our member appointed trustees include a chief execu- tive of a Swiss pension fund and an ex-senior executive from the Pension Protection Fund and Smart Pensions. We have a high- quality trustee board, including independent trustees, who hold us to account and deal with any conflicts that may arise. We are lucky in having such a strong trustee body.


ROBERT WAUGH


2020-present: NatWest Group Pension Fund, CEO and Co-CIO


2003-2010: Scottish Widows Investment Part- nership, Head of UK equities, responsible for £15bn of assets


2001-2003: Edinburgh Fund Managers, Head of UK equities


1986-2001: Phillips & Drew (Now, UBS Asset Management),UK equity fund manager


Will the invasion of Ukraine result in you adjusting your portfolio?


What is happening in Ukraine is clearly a tragedy. We put a ban on purchasing any Russian investments on day one of the invasion. Russia and Ukraine are low sin- gle figure basis points of exposure in our portfolio, so not material in asset terms. The portfolio benefits from high power prices, because we have quite a lot of energy exposure, so we may lock in some of the higher power price through our hedging. It reminds you that the ‘G’ in ESG is important. There will be knock-on effects that are just emerging, including supply chain problems, food inflation and an increase spend on defence.


What is your outlook for the investment environment?


I have learnt not to try to predict what the investment environment is going to be. Our job is to maximize our chances of paying our liabilities and make sure that we are ready for whatever the environ- ment turns out to be.


What have been the biggest challenges you have faced in your role?


Balancing how much risk we could afford to take versus how much risk we needed to take to fill the significant funding gap with- out damaging the covenant of the sponsor.


In the early 2010s, where you had a whole load of problems for the sponsor, such as conduct fines and the sponsor not making a profit for a number of years and then ring fencing – getting through all that were the biggest chal- lenges. We got through them. Markets have been kind.


What are the biggest lessons you have learned during your career?


The biggest lesson is to realise that your job is to pay a liability. 200,000 people are relying on the fund for their pension. Therefore, success is measured on the probability of all your liabilities being paid with the assets you have, not maxi- mizing asset returns.


When I started as a chief investment officer at an asset owner, I thought my job was to make high investment returns. There is a difference. So, it is about meas- uring assets versus liabilities, not just asset returns. That changes how you behave.


The other thing is that collateral and liquidity are everything. In times like now, your ability to act is directly propor- tionate to the collateral and liquidity that you hold enabling you to take advantage of opportunities when they come. The most important lesson though is to employ and work with good people, have open transparent debate, welcome con- flicting opinions and be willing to act when you reach a decision.


Issue 112 | April 2022 | portfolio institutional | 15


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