Millions of Workers Auto-Invested into Higher Risk Bonds

NEST, the government's default pension scheme for auto-enrolled workers has announced it will be investing in emerging market bonds for the first time

Emma Wall 3 March, 2016 | 11:00AM
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Millions of workers enrolled in their workplace pension will soon be invested in higher risk bonds issued in emerging markets. The Government run default scheme NEST, which runs pension plans for more than 69,000 companies with a total of 2.8 million employees, has announced plans to include emerging market bonds in their multi-asset portfolios.

Hunt for Yield Outside the UK

NEST already invested in government and corporate bonds issued in the UK, US and Europe as well as global equities, cash and property. But investing in emerging market bonds is a first for the pension provider. Emerging market bonds are widely considered more risky than their developed market counterparts; there is a higher risk of default with these types of fixed income, but the investor is generally rewarded for this risk with a higher rate of return.

Mark Fawcett, NEST chief investment officer, said that the new mandate was in line with members’ long-term investment horizon.

“Emerging markets represent a diverse and opportunity-rich investment universe. This move will give NEST members access to new opportunities for investment growth and allow us to spread risk across a wider range of global assets,” he said.

“Our members are investing for the long term and we make decisions on how to diversify their portfolios against a backdrop of long-term market developments and valuation outlooks.”

Fawcett added that he thought emerging market debt was currently undervalued, a view shared by BlackRock’s head of emerging market fixed income Sergio Trigo Paz this week.

Trigo Paz said he was optimistic about the outlook for emerging market debt because local currency sovereign debt would directly benefit from social and politic reforms. He admitted that the asset class was volatile but insisted the fundamentals were sound.

Amundi to Run New Mandate

NEST has awarded the emerging market bond fund mandate to Amundi Asset Management. Amundi runs both passive and active funds for retail and institutional clients. The NEST mandate will be actively managed, and will invest in emerging market bonds issued in both local currencies and those re-based to the US dollar. This blended-currency approach gives Amundi more flexibility to manage market volatility.

“Amundi has the experience and expertise to both provide NEST members with access to the opportunities and navigate the risks. It has a strong track record managing emerging market debt since 1999, investing in local, sovereign and corporate debt with good performance history,” said Fawcett. “Amundi also shares NEST’s values, with responsible investment becoming one of the cornerstones of its development strategy, making this choice right for NEST and our members.”

Morningstar fund analyst Mathieu Caquineau says that they appreciate Amundi’s considerable efforts to better communicate portfolio holdings to investors in their retail funds, but the firm still has room to improve in order to be comparable to industry standards.

Some funds have very reasonable fees and the performance fee structure has improved but a few fee aberrations remain, though, most notably in the fixed income line-up.

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About Author

Emma Wall  is former Senior International Editor for Morningstar