Transport for London, the organisation behind the network of buses, underground or “tube” trains, trams and bicycles that keep the United Kingdom’s capital city on the move, has a reputation for its generous employee benefits. But of all the staff perks on offer, including 30 days holiday a year and subsidised travel expenses, membership of the gold-plated, defined benefit Transport for London Pension Fund (TfL), is the biggest. Investment strategy at the thriving £6.9-billion ($10.5-billion) scheme, grown from $7.6 billion in 2010, has recently shifted with the fund nurturing a growing $1.5-billion alternatives portfolio comprising hedge funds, infrastructure, real estate and private equity in its bid to diversify and improve the scheme’s risk-adjusted returns over the medium to long term.

Strategy shift

The shift in strategy comes despite equities being TfL’s best performing asset this year. United States small cap and global equity mandates have led the field, says Padmesh Shukla, investment officer at TfL (pictured right), based in London’s Borough of Westminster. “Listed real estate has also seen a strong performance, and bonds and emerging market currencies fared well, but for the recent market pullback,” he says. padmesh-120The fund runs a large foreign exchange overlay program to hedge currency risk in the equity portfolio and active management has also helped boost returns, with 60 per cent of the equity portfolio actively managed. Active investment mandates include global unconstrained, US small cap, Japan, emerging markets and Asia, lists Shukla. “These markets are generally under-researched and have of late seen dispersions widen, making active management more optimal.” Passive investments are in markets widely regarded as efficient such as Europe, North America and the UK.

The current portfolio is split between equities (55 per cent), bonds (25 per cent), all actively managed bar a “very small holding” for rebalancing purposes, and alternative investments (20 per cent). The expanding allocation to alternatives will increase to 25 per cent over the course of 2013, primarily funded from equities. Additional allocation will be made to unlisted real estate, one or two new hedge fund strategies, “possibly” renewable energy and private equity, says Shukla.

Private equity

It’s a private equity allocation that is supported by the scheme’s “negligible” liquidity requirements, he explains. “Private equity is a way for us to extract illiquidity premium and earn higher returns, but at the same time try to reduce the market-to-market volatility of public markets,” he says. “Our private equity allocation is driven by a strong fundamental understanding of less efficient segments in the market and less desire to time the markets.” Going forward, the scheme will likely increase its allocation via a separate account format, investing in primaries, secondary and co-investments, diversified “but not overly” by sectors, managers, vintages and regions. Unlike the scheme’s hedge fund program – where it makes direct investments – in private equity, fund of funds is TfL’s preferred approach to better access more specialist and small-to-mid-size managers outside the known big names.

The fund also lacks the resources to build its own private equity specialists. TfL has an internal team of seven covering investments, accounting, finance and compliance, although it is in the process of beefing up its investment and compliance capabilities. “We aren’t FSA-authorised; all investments are done through external managers,” says Shukla.

Hedge fund portions

TfL’s hedge fund allocation is portioned to commodities, structured and distressed credit, emerging market currencies, reinsurance and global macro trends.

“Hedge funds in the distress and event driven space have performed well, both in absolute and risk-adjusted terms,” says Shukla. Over the last year new allocations have gone to Arrowgrass Capital Partners, Och Ziff Capital Management and the world’s largest hedge fund, Bridgewater Associates and its Global Macro Systematic Hedge Fund. Over half of the 4 per cent infrastructure allocation is invested in mature PPP projects predominately in the UK and with limited construction risk in an allocation managed by Semperian PPP Investment Partners.

TfL does run an LDI program, but only plans to expand its strategy to hedge out inflation and interest rate risk if “real rates go up; we believe the current levels are very low.” Although investments are also made in liability-matching proxies such as infrastructure and real estate, the fund’s long maturity profile – it boasts 83,000 members comprising 23,000 contributing members, 18,000 deferred pensioners and 42,000 dependants – means it is still cash positive. “We expect to remain cash positive for a significant period of time – an important consideration in both hedging and investment decisions,” says Shukla. Nor is the scheme weighed down by a huge deficit, with a funding level of 91 per cent compared to 73 per cent at the last triennial valuation in March 2009. “The aim is for a 100-per-cent funding level by 2020 and staging-post targets between now and then,” says Shukla.

The wrath of the European sovereign debt crisis may have left its mark on Italy in more ways than one, with both its financial and political scenes regularly sliding into crisis mode for the past year or two. However, the nation’s largest private pension investor, the €7.75-billion ($10.1-billion) Cometa fund, has firmly kept on track through the testing times though.

Maurizio Agazzi, Cometa’s director, says that whatever happens in the world outside of its Milan office, “we must not forget our mission” as a long-term investor. On being asked about any investment positions, Cometa may have taken in the heat of Italy’s crisis, Agazzi simply says, “Our asset management is based on investment plans that are long term, with no speculative choices made.”

Although Cometa is a bond-heavy investor, the fund appears to have avoided a blow from its country’s sovereign debt woes by having a global outlook. Its largest two sub funds, Reddito and Monetario Plus – which make up the vast majority of total assets among Cometa’s four funds – are dominated by mandates investing to global benchmarks, such as JPM Global and Barclays Capital Global. Cometa’s biggest sovereign debt mandate is meanwhile well diversified across the continent, with a $1.3-billion-plus investment in the Barclays Capital Euro Treasury index.

As Agazzi reels off more sets of indices, it becomes clear that identifying the right benchmark is a major focus of Cometa’s investment strategy. While Cometa wants to define what its external managers invest towards, Agazzi explains that the fund also believes in giving its managers plenty of freedom to make tactical calls and granting them full investment autonomy. “A close partnership with managers must be based on choosing the strategies best suited to achieving pension objectives”, he argues. This notion of partnership leads to Cometa keeping a close eye on its external managers – a major set of mandate awards in 2010 inspired Cometa to launch a new code of standards for managers. This built a desire to keep a tight watch on managers into the fund’s control mechanisms and has led to the fund routinely hauling managers in for meetings.

Few equities

Cometa has fewer benchmarking decisions to make in the equity space, simply because exposure to the asset class is limited. Just 15 per cent of the $5.4-billion Reddito fund is invested in equities, while the $3-billion Monetario Plus fund is 100-per-cent bond invested. International diversification defines the equity strategy at the Reddito sub fund, with 50 per cent invested in non-European stocks, a third in a European and the remainder in Italian equity mandates. Only in the small Crescita fund (with $520 million assets) do equities take a noticeably chunky share of the portfolio at 40 per cent.

The low overall equity allocation is a possible consequence of Italy’s risk-averse pension fund-investment legislation. Agazzi explains that, “Italy has a strict regulation on how second-pillar pension funds have to invest their assets, with a lot of qualitative and quantitative constraints.” One of these constraints is that Italian funds have faced limits on investments in non-OECD nations, something that appears to have held them away from the trend to emerging market investments. Cometa’s entire government bond portfolio is invested in OECD countries, Agazzi says.

You would perhaps expect an investor of Cometa’s size to relish a long-touted change in Italy’s pension investments regulations. Agazzi is wary though of the impact of a sudden liberalisation. “I do feel it is important for laws to preserve that distinction between investments for pension purposes innate in the second pillar system,” he says, “and merely speculative investment.”

Controlled enthusiasm

Alternative asset classes have traditionally been difficult for Cometa and other Italian investors to access due to their regulations. A dose of cautious interest seems to pervade Cometa’s attitude towards alternatives. It designated a strategic allocation to both private equity and real estate back in 2010, but Agazzi says it is yet to implement the moves into these asset classes pending further consideration.

Diversification was the mantra behind its 2010 mandate awards – reported to be one of the largest mandate hires in Europe that year. Agazzi explains that a full mix of passive and active mandates was sought in the big hire, together with a range of value-at-risk limits and capital protection objectives. Different risk profiles are evident in that several of Cometa’s largest mandates are invested to hedged or inflation-linked benchmarks. Extending the duration on the fund’s assets is another possible step to further diversification under consideration, Agazzi adds.

While some deem the Italian institutional investing environment as restrictive, clearly Cometa has found no shortage of ways to diversify.

With total assets growing by over $2.6 billion in the last two years, Cometa has managed to navigate a tough time in Italian economic history in some style. Being a defined contribution investor has perhaps shielded it from any funding pressures that could have resulted from tumultuous movements in government bond yield and equity markets in Italy. The Reddito fund has averaged returns of over 4 per cent between 2009 and 2011 though, figures that might make some investment managers in other pension markets envious.

 

In this paper MSCI applies its framework for defining macroeconomic risk to strategic asset allocation, labelling assets as either risk premium or risk hedging. It applies the analysis to arisk-parity portfolio, showing how its relatively high exposure to inflation shocks makes it a risk premium portfolio.

 

To access the paper click here

 

 

The emerging market story is a puzzle with many pieces. From an overall philosophical standpoint, the demographic and economic shifts are obvious reasons to have a weighting to emerging markets. But the complexity comes into play with the question of how to invest.

Investors can consider private equity, property and other direct investments as a way of investing in emerging markets, but it is via the three main areas of debt, equities and currency that most of the action occurs.

Within fixed income there has been a recent structural shift that has implications for the way investors view the asset class, and its correlations.

Emerging market economies – a structural reduction of risk, a paper by Neuberger Berman’s Alan Dorsey, Juliana Hadas and Parth Brahmbhatt, outlines emerging-market sovereign-debt issuers have migrated to investment grade credit, which has meant that emerging market debt as an asset class has seen a reduction in its correlation to non-investment grade corporate-debt indices and an increase in its correlation to investment grade indices.

This means hard currency, or dollar-denominated emerging market debt, is trading at a much lower risk premium versus high yield than it has historically.

 

Secular, not cyclical

The paper outlines the possibility that this risk premium compression is secular, not cyclical.

In other words, it may be a one-time transformation in the perceived “riskiness” of the emerging debt asset class.

Co-head of Neuberger Berman’s emerging market debt team, Gorky Urquieta, says the detail of this structural transformation is seen by looking at the comparison of external debt to domestic debt in emerging markets, as well as the emerging markets compared to developed markets.

“It is clear how there is a divergence, with emerging market debt to GDP at 40 per cent and declining, while developed markets is around 100 per cent and increasing,” he says.

There has also been an increase in local demand for emerging market debt, with debt rotating from external to internal, especially in countries such as Russia and Brazil, which has contributed to economic growth and the stabilisation of debt markets.

“Emerging markets are net external creditors – they have more assets than liabilities – that provides them with a significant buffer,” he says. “The dynamics are better than in the developed world, and achieved on much higher growth rates and better management of fiscal accounts.”

 

Performance matters

Emerging market debt issuance is at record levels, in both issuance and dollar value, as investors seek new markets with the prospect of enhanced returns in the low interest rate environment of developed markets.

Flow data shows there has been an estimated $17 billion of inflows into emerging market debt in the year to mid-March with a bias towards emerging market local currency and emerging market corporate funds.

Dealogic, an investment banking platform, reports that in 2012 the deal value of emerging market debt issuance was close to $900 billion and for the first quarter of 2013 that was already over $300 billion.

In size, it is now comparable with the US treasury market.

At a time in which investors have been desperate to find investments with decent yields, emerging market debt was a logical choice given the robust underlying fundamentals of the asset class.

Emerging debt has seen strong performance and in the 10 years to October 31, 2012: the average annual total return was 11.34 per cent based on the JP Morgan EMI Global Diversified Index, making emerging markets the best-performing fixed income asset class in the period.

But investors around the world have typically had low allocations to the emerging market fixed income space, US investors for example have around 2 to 3 per cent in emerging markets.

“In the context of any measure, it is extremely inadequate,” Urquieta says.

Historically the concerns have been around transparency and the size of these markets which has fed ultimately into liquidity concerns.

“If there is risk-off, then emerging markets are still risk assets; there is no mechanism for sovereign defaults. And corporate recoveries are lower than in the developed world,” Urquieta says.

 

Yield and structural shift

But with risks there can be opportunity.

Phil Edwards, principal at Mercer in London, says emerging market debt has gone through a transformation in recent years.

He says in 2009-2010 there was interest when yields looked attractive, especially compared to developed markets, and allocations grew quite quickly.

A Mercer survey shows that 13 per cent of European funds have an allocation to emerging market debt, with the average allocation about 5 per cent of total assets.

“Even though yield has come down materially, there is still a case for investing in emerging market equities and debt,” he says. “There is a crossover element. We have seen some, but not many, investors making use of emerging market multi-asset funds. Our preference is to access specialist expertise in each space because they are different and need different skills.”

Edwards is intrigued by the “interesting characteristics” in emerging market credit.

“Funds are seeking exposure through the same emerging-market-debt mandates but broadening it to credit, expanding mandates to allow managers to go into credit.”

The €140-billion ($183-billion) Dutch fund, PGGM, has about 5 per cent of its total portfolio in emerging market local currency debt, which relatively speaking is an overweight position.

It says that while risk premiums have decreased, markets have grown, there is more liquidity, and fundamentals have improved across deficits, debt and policy.

This means that both risks and rewards have decreased, but the giant fund still says there is added value for emerging market debt in local currency because yields are still substantially above developed market yields.

Within emerging markets there has been a structural shift away from sovereign to corporate credit. On average corporates are better rated than sovereigns (see JPM index) and more than half of the assets are investment grade.

The fixed income portfolio of the $65-billion Washington State Investment Board is positioned to take advantage of the structural shift in emerging market debt.

While it doesn’t have a set allocation to emerging markets debt, it currently has about 36 per cent in emerging and frontier market debt, about half of which is in non-denominated bonds.

This is a significant overweight position compared with the Barclays Universal benchmark which is mostly developed market bonds. (Incidentally Barclays has 12 specific emerging market bond indexes).

In addition, the WSIB portfolio has a lot of corporate debt, which it started building in the mid-1990s, and executive director Theresa Whitmarsh says the team is agnostic to geography, rather it looks at macroeconomics, fundamentals and valuation, alongside its own judgement.

“Emerging markets have a great growth story, great demographics, urbanisation trends and fiscal strength. Following the Asian crisis they had to put their fiscal shops in order, and they did, and they are in good shape.”

The WSIB bond portfolio has about 70 per cent exposure to corporates overall, and within emerging markets fixed-income allocations, only two of the top 10 holdings are sovereign debt.

 

What will emerging markets become?

The emerging markets secular trend of improving fundamentals, has different ways to play.

Emerging markets equities is one way, currency another, risk premium on emerging markets sovereign or credit or a combination, another.

Rob Drijkoningen, co-head of emerging markets at Neuberger Berman, says that in the early 1990s investment grade was a negligible part of the index, now 56 per cent is investment grade.

“It has become less volatile and credit quality has improved,” he says.

In addition, local yield curves have developed, which could create a credit culture, leading to the need for a benchmark culture, and then the pricing of other products.

“We are seeing the establishment of local yield curves,” he says.

Head of investment strategy and risk at Neuberger Berman, Alan Dorsey, acknowledges low yields but says spreads are not at all-time lows.

“Global monetary policy created low yields, but investors still need to make money, beneficiaries still need to eat. Where do you go to get that money and provide that food?” he says.

Dorsey believes emerging market debt is still something of an inefficient asset class especially if corporates are included.

And Drijkoningen believes emerging markets corporations are under-researched and undervalued.

“The market is similar in size to US high yields, but in emerging market corporates the opportunities have a long way to go.”

“The expansion of names and size is interesting,” he says.

While most investors are still looking at emerging markets as one asset class, Urquieta believes in three to five years’ time there might be the low/high investment grade split in mandates.

“For example, in the corporate universe we will see investment grade or high yield exposures. Those types of enquiries, such as investment grade only mandates, are taking place.”

It is possible in the future that mandates will look like a best-idea investment-grade mandate across emerging markets and developed markets.

But a word of warning from Moodys says that assessments of corporate credit risk in emerging markets can also be affected by broader sovereign risk considerations, given the strong links between corporates, financial institutions and sovereigns.

This means that determining risk credits will rely more on qualitative rather than quantitative assessments.

 

 

 

The richest seam in the UK’s pension landscape traces the M62 corridor, a motorway that threads east to west across northern England beginning in Liverpool and taking in Manchester, Bradford and Leeds.

These cities are home to the biggest local authority pension schemes in England and custodians to a vast cluster of wealth.

“Merseyside, Tameside, West Yorkshire there is a huge amount of money in a very small space here,” enthuses Rodney Barton, director of the Bradford-based £9.9 billion ($15 billion) West Yorkshire Pension Fund which he joined four years ago from nearby schemes East Riding, and before that Merseyside.

Despite these funds proximity, each is guided by its own particular ethos. At West Yorkshire the mantra has been a bold equity strategy that it refused to pare back in the wake of the financial crisis. Now the fund is reaping the benefits of the equity lift off, returning 14 per cent in the year to March 2013.

About 67 per cent of West Yorkshire’s assets are portioned to equity in a portfolio split between the UK (36 per cent) the US and Europe (8 per cent each) Japan (4 per cent) and Asian and emerging markets (12 per cent) with the UK allocation invested only in companies with a global reach.

“We choose big companies that are not dependent on UK income,” says Barton. As the scheme taps global markets through UK equities, so it taps emerging markets – an allocation it plans to grow – through companies deriving their profits from growth in developing markets but listed elsewhere.

“We gain exposure to China through Hong Kong or Taiwan,” says Barton. “One of our primary concerns is corporate governance so we want exposure this way because we can be more certain of the accuracy of the annual report.”

Although the scheme will use unit trusts or exchange traded funds in smaller markets, the bulk of the equity portfolio is actively managed in-house.

“In markets of any size we own the stocks directly,” he says. Even the US allocation, where some pension funds have abandoned any attempt to outperform the market, is actively managed.

“Compared to other markets the US is more difficult,” he admits. “Recently we have come in below the index but not enough to worry us; long-term we are still ahead of the game.”

 

Equity downturn

Barton expects the equity boom to tail off, predicting total equity returns of 7 per cent over the long run.

“Years like this are nice but they won’t continue,” he says. But there is no plan to pare down the scheme’s equity allocation just yet.

An actuarial evaluation, out in nine months, will cast more light on the fund’s liability profile but until then, backed by rosy fundamentals, it is full steam ahead.

Of West Yorkshire’s 245,000 members, 91,000 still actively contribute to the fund and 81,000 have deferred benefits; the fact the scheme is 93 per cent funded, adds to the buoyant mood. It’s a small deficit that Barton attributes to a decision six years ago to ask members to contribute more.

“We were fairly aggressive in increasing our contribution rates back in 2007,” he says.

The scheme has also worked hard to cut costs, topping the list of the UK’s 89 local authority schemes in a recent report by the Local Government Pension Scheme.

“Our scheme costs each of our members just £28 ($43) a year; we have a very tight grip on out costs. One of the ways we do this is in-house management. It’s cheaper to do it yourself.”

 

Allocation changes

After an eight year hiatus during which the fund hasn’t allocated any fresh money to property, the scheme is now looking at boosting its 3 per cent allocation.

Assets here are currently portioned between the UK (two thirds) and Europe (one third). Similarly, West Yorkshire’s unquoted infrastructure allocation is minimal, perhaps 1 per cent, with most exposure channelled through the equity portfolio via investments in utilities like water companies, where it has “positions with big dividend payers.”

Unquoted PFI infrastructure funds sit in the 5 per cent private equity allocation.  “The original PFI contracts had a much higher risk and reward and they now provide long-term index-linked cash flow and are very attractive assets for pension funds.”

The scheme hasn’t joined the government’s Pension Infrastructure Platform partly because “it wasn’t approached in the first wave and discounted the idea” but also because of the stop-start nature of the PIP’s progress to date as it struggles to find a balance between the priorities of its founder members, and the government’s desire for infrastructure investment.

Elsewhere, a 6 per cent allocation to hedge funds stood West Yorkshire in good stead during the financial crisis. Since then the allocation has disappointed however, and been shaved to 3 per cent.

“After 2007 I don’t think hedge funds saw the recovery coming. They got left behind and once you are left behind it is very difficult to catch up.”

In contrast, private equity has faired better. “Our experience with private equity has been pretty good; it’s delivered long-term 11-12 per cent returns. The bad periods have been a function of the equity market and an inability to sell anything, but pleasingly we had lots of realisations in 2011.” West Yorkshire’s most consistent private equity returns have come from small and medium-sized funds. All allocations to private equity, property and infrastructure are managed externally.

West Yorkshire has an 18 per cent allocation to bonds, a quarter of which is in corporate bonds and three quarters in government and index-linked bonds in the UK and overseas.

“We recently increased our corporate bond exposure because they have a shorter maturity and we have grown nervous around government bonds.” Most corporate bond exposure is in UK and US however. “We come across fewer opportunities at the right price to invest in European corporate bonds; companies there are much close to their banks,” he says.

Many institutional funds boast responsible investing credentials, but Switzerland’s Nest Sammelstiftung has taken the extra step of molding its investment strategy around a sustainable template.

The sustainable agenda is more than just a focus for Nest. It forms the very ethos of a fund that markets itself to potential members as “the ecological and ethical pension fund”.

Following a sustainable line to any level can be an exhaustive task, but Peter Signer, head of investments at Nest Sammelstiftung, admits that when investment strategy decisions run into debates in the sustainable sphere, an extra dimension of soul searching results.

For instance, should a sustainable investor adopt a hedge fund strategy?

Signer says that “there has been plenty of discussion as to whether we feel hedge funds are acceptable on sustainable grounds”.

It is not always a matter of simply accepting or rejecting an asset class though, and Nest’s pioneering approach has seen novel ideas being floated where the responsible investing and strategic asset interests meet.

Although it has not been able to realise it yet, Signer says there has been serious discussion of Nest Sammelstiftung launching a long-short strategy that would see it short sell the equities of companies it deems unsustainable.

If this strategy takes off it might be bad news for Swiss banking giants UBS and Credit Suisse.

The CHF 1.4 billion ($1.5 billion) Nest fund has blacklisted UBS “ever since we began our sustainable approach I think” says Signer – with perceived corporate governance shortcomings and the banking giant’s financing strategy coming under question.

While Credit Suisse “is close to rejoining our investment universe”, Nest Sammelstiftung’s ban on UBS remains on place.

Other banks are also on the blacklist with Nest tracking funding policies and in particular the financing of weaponry firms – an activity it feels violates its sustainable beliefs.

Signer makes it clear that these exclusions result from a careful sustainable policy rather than an anti-finance bias. After all, Nest invests close to CHF 5 million ($5.40 million) in London-based HSBC, while Russia’s Sberbank and China’s ICBC are both among its top-ten emerging market equity stakes.

Avoiding investing in ETFs is named by Signer as another consequence of Nest formulating its asset strategy under a sustainable gaze.

The fund shuns the index products just as it steers clear of all benchmarks – it would rather pick its own sector biases rather than have them carried into the strategy by the market.

In particular “we want to avoid investing in commodities as they are not at the top for us on sustainable reasons,” says Signer.

 

Ethical taste unsatisfied

Nest Sammelstiftung has taken its sustainable focus so far that its asset strategy is simply unable to keep pace in some regards.

Signer explains that its 25.7 per cent real estate holdings and 2.9 per cent private equity exposure would both be bigger positions if it was easier to invest towards its ideals in these asset classes.

The problem with real estate is that Nest is actively looking to invest in buildings with maximum energy efficiency – and there are apparently not enough ways to do that yet in its native Switzerland.

“There is not a big enough market for energy efficient buildings here so we have taken an indirect approach via funds” explains Signer. That has led it into a further stumbling block of accessing suitable funds, and ultimately “as not all real estate funds have green criteria we haven’t been able to fully implement our approach”, Signer reflects.

In the private equity space, the Nest fund has switched from investing via fund-of-funds to look for sustainable private equity funds under a managed account.

Signer is pleased that Nest has been able to use its private equity exposure to spur the development of renewable energies. It is an industry that a sustainable fund can clearly reap benefits from throughout the long investment horizons of its members.

“There have been a few problems in the European renewable energy industry and while growth isn’t linear we think there is good long-term potential”, says a convinced Signer.

Exclusion by business activity plays a part in Nest’s sustainable approach, with nuclear and weapon firms lodged on its blacklist. The fund aims for dialogue with companies that are close to falling out of its universe or alternatively are in a position to join.

While converts to the sustainable investment movement are these days free to pick and choose from a number of sustainable consultants, Nest has forged its own way to assess the myriad of companies it could invest in.

The fund co-founded the Inrate sustainable investing rating agency in 1995, a dozen years after its own foundation. Signer says that using Inrate has allowed Nest to tap into worldwide networks and bring engagement to its international equity picks. He says that sustainable scrutiny has seen Nest focusing its investment universe on merely a third of companies in the MSCI World index – a strategy which he confesses makes stock picking a difficult task.

 

Hard realities

 

No matter how sustainable its investing approach is, Nest clearly operates in the same environment as the rest of the world’s pension funds. It has made a substantial change in strategy in the past couple of years due to a background of persistent low bond yields.

Its fixed income exposure has been reduced since the start of 2011 to March 2013 from 39 per cent to 29 per cent – a figure at the very bottom of its tactical allocation range. Over the same period, equities have leapt from under 23 per cent to over 30 per cent with Signer saying “we don’t have many alternatives to equities” to mitigate fears of rising interest rates.

Nest was able to safeguard against Euro crisis fears though by reducing its government debt exposure to cover only Switzerland, Germany, the Netherlands and the UK. A new position on insurance-linked strategies is set to enter the portfolio in the second half of the year as Nest seeks further diversification, Signer adds. Other alternative approaches, like the possible long-short strategy might follow in time.

 

Nest Sammelstiftung’s 2012 returns of 6.31 per cent look good but perhaps unspectacular. Has it found its mission to grow its assets compromised in any way by its strictly ethical approach?

“Sustainable investing doesn’t always help returns but in the long run it will”, says Signer. Looking across the Swiss pension landscape, “our returns are higher than average but with a greater standard deviation”, he argues. Just as importantly for the staff at Nest’s headquarters, the sustainable credentials are proving a real attraction to the small and medium enterprises Nest seeks to provide pension cover for.