1 Where on the core vs core-plus spectrum do managers think the best opportunities are, in the current micro, macro and regulatory environments?
Why: We’re looking for managers who invest in core and core-plus assets, but we recognise the line between the two is somewhat subjective and some managers may specialise in one more than the other. We want to offer flexible mandates to managers so they can deploy their skills appropriately in different markets and different conditions.
In our procurement for unlisted infrastructure equity, we’re asking managers to outline their positioning on the risk-return profile, and how they add value within their chosen part of the spectrum. We’re open to different solutions as long as we get a robust rationale as to why that’s the right position to adopt. What we want to avoid is significantly doubling up risk exposures we already have elsewhere in our portfolio. For example, by taking on a lot of systematic merchant energy risk that correlates highly to our commodities allocation.
2 How are they managing environmental, social and governance risks in their searches?
W: Funds which don’t consider ESG factors in their strategy are failing to manage clear investment risks. We want to see consideration not only for managing primary environmental risks – such as stranded fossil fuel assets and being left behind in the transition to the low carbon economy – but also managing second-order risks. For example, when it comes to water utilities, has the company tackled leakages and the damaging impact chemicals can have on biodiversity? Environmental and health concerns are prioritised by authorities who are taking more action on poorly performing companies, seen in sizeable fines and other punitive measures.
“We won’t be paying performance fees and want to see how fund managers justify the fees they charge”
3 Can GPs provide a pipeline for deals which matches our needs as a growing defined contribution scheme?
W: National Employment Savings Trust is a rapidly growing master trust and our exposure to assets needs to match this growth. We currently have around £10 billion ($13 billion, €11.9 billion) in assets under management, but this is forecast to double within a couple of years. We want evergreen and scalable models, giving us a range of ticket sizes for investing. Equally, as we grow, we want to have access to co-investing opportunities to unlock some of the largest projects.
4 Is what they’re offering a high-quality, low-cost solution which is suitable for a DC scheme like us?
W: Nest is a not-for-profit scheme with a clear focus to drive value for money on behalf of our members. We want to be investing in high-quality, low-cost solutions – we won’t be paying performance fees and want to see how fund managers justify the fees they charge. There are also particular benefits for fund managers of working with a cashflow positive, DC scheme like Nest. So, we want to see how solutions can be tailored, instead of being offered the same approaches previously used by defined benefit schemes. We want to see innovation rather than the same as what’s gone before.
5 Can the fund manager source deals from across the world?
W: Geographical factors should not limit investment opportunities. We want fund managers with a worldwide perspective, who can advise us on whether there are good deals to be had in places like North America, Asia or South America. We want to tap into the expertise of the fund manager as to whether some areas are more attractive than others. That said, we are also amenable to managers who specialise in, say, Europe, and can make a compelling case for why that geography deserves to be a focus. We’ve divided the procurement into three lots so we can better compare managers with different asset type and geographic emphases on a like-for-like basis.