Nest CIO Fawcett on ETFs, Control, and Renewables Push

Ollie Smith: Now, I’ve interviewed Morningstar’s CEO, and I’ve spoken to one of our external speakers about the environment today, but it’s now time to talk to someone who knows what it’s like to be an actual asset owner. Mark Fawcett is Chief Investment Officer at Nest, and he joins me now.

Mark, thank you for being with me. Can I just ask you generally, first and foremost, how are you positioned at the moment?

Mark Fawcett: So, at Nest we have about £25 billion of assets. Obviously, that’s fluctuating quite a lot at the moment, and we’re taking in about £5 billion of contributions every year. So, that gives us the opportunity to grow the portfolios and think about how we’re diversifying across a range of asset classes. So, we’re globally diversified, both in public markets and increasingly in private markets. So, we are probably about 50%, 55% in equities, and we have credit portfolios and in particular, we’re increasing our exposure to private credit, private equity and infrastructure.

OS: Sure. This afternoon, I’m going to be leading the mini discussion about active and passive and the rise of a disruptive force that’s brought prices down and increased competition. But there are also concerns about active and passive. Do you share any of the concerns of active and passive, concentration risk, so on and so forth?

MF: When we started, we were very small. Our first contribution was £19. So, we had to invest passively at the start. We’ve increased the active allocation and that active allocation is very focused on managing risk. So, there are clearly risks just being passive. So, even our equity portfolios are now semi-passive, so they have systematic tilts, climate being the key one. So, we think it’s really important to think about the risks of a passive portfolio.

We have concerns around governance, particularly in things like ETFs. So, we don’t invest in ETFs because we want to be actively engaging with our fund managers to make sure that they are engaging with the companies we invest in. And ETFs, there’s risks of layering of fees and lack of engagement over which we have no control. So, I think it’s really important even if you are passively invested to be close enough to the portfolio managers that you can act as good stewards.

OS: Sure. And just finally, we’re about to launch a lot of coverage at Morningstar on the coming winter, the energy crisis. How is Nest positioned for the energy crisis? What are your current thoughts?

MF: Well, we are long-term investors. So, we try not to react to, sort of, short-term fluctuations in the market, and if anything, we would take advantage of better pricing, particularly in some of the private markets. So, we are really focusing on investing in renewables, and we think that there’s got to be both a shorter-term and a long-term solution too to the energy crisis. So, we recently took a stake in the Hornsea Wind Farm, which is the largest wind farm in the world, and we are financing the construction of new solar farms, new wind farms, battery storage, et cetera.

OS: Very forward thinking. For more on the energy crisis, and indeed, active and passive and institutional investing, check out any of our editorial websites across the world. For now, I’ve been Ollie Smith for Morningstar.