A preference for passive management underpins the investment beliefs of the new UK defined contribution fund, NEST, which has finally outlined its investment approach.
Although one of the beliefs is that passive management – where available – generally delivers better value for money than active security selection, it also says that taking investment risk is usually rewarded in the long term.
The seven investment beliefs also incorporate environmental, social and governance factors and that risk-derived asset allocation is the biggest determinant of long-term performance.
Retirement Date Funds are the default fund option for NEST, and the expectation is that 90 per cent of members will invest in the 45 NEST Retirement Date Funds on offer.
Members will be enrolled into the fund that targets the year they are expected to want to take their money out of the fund Additional fund choices include a higher risk fund, a lower growth fund, a Sharia fund, an ethical fund, and a pre-retirement fund.
The investment target for the funds is investment returns in excess of inflation after all charges over the long term. In the growth phase the performance target will be CPI plus 3 per cent
There are three phases in accumulation – the foundation, growth and consolidation phases – and the transition between them will be managed dynamically on the basis of what is happening in financial markets and the economy.
Chair of NEST, Lawrence Churchill said that agreeing the investment approach was a significant landmark for NEST in achieving its aim of helping millions save confidently for retirement.
“The investment strategy will develop over time and we are confident our approach will encourage saving and support our members in achieving their aspirations for retirement.”
NEST investment beliefs
1. That understanding scheme member characteristics, circumstances and attitudes is essential to developing and maintaining an appropriate investment strategy
2. That as long-term investors, incorporating environmental, social and governance (ESG) factors within the investment process is in the interests of members
3. That taking investment risk is usually rewarded in the long term
4. That diversification is the key tool for managing risk and return
5. That risk-derived asset allocation is the biggest determinant of long-term performance
6. That analysis of both economic conditions and market regimes should be used to drive strategic decisions
7. That passive management – where available – generally delivers better value for money than active security selection.