Nest’s natcap allocation takes shape

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Nest’s investment team is getting on with a potential investment in timberland, as its chief investment officer and head of private markets have returned from a due diligence trip to North America.

The master trust’s chief investment officer, Elizabeth Fernando, revealed at the Pensions and Lifetime Savings Association’s annual conference last year that the fund had started looking at timber as an investment area.

That investment is now taking shape. Speaking at a webinar on Tuesday, Fernando said: “We recently came back from a due diligence trip from North America where we looked at timberland.”

Nest’s head of private markets Stephen O’Neill explained that the defined contribution scheme has been on a path of developing its private markets exposure, starting with private credit in 2019, infrastructure in 2021 and private equity in 2022.

“The next big one we have been exploring for a few years now is natural capital, which boils down to timberland and agriculture. We see timberland as particularly attractive within natural capital,” O’Neill said.

This is because of the long-term tailwinds and trends that will drive it, he explained, such as a move to more sustainable building using less concrete, and a move away from plastic packaging.

“These are all trends that help timber. But also, looking back, it delivered strong, stable returns correlated to inflation, because you are also invested in the land that the woods grow on," he added.

In addition to these underlying trends, he said growing timber means taking carbon out of the atmosphere and storing it in wood.

Being a very large investor, Nest has been able to access private market assets without paying the high fees often associated with these.

“Nest uses its scale and long-term investment horizon to build long-term partnerships, whether public or private. We have been able to build solutions with a much lower management fee, and we don’t pay performance fees,” O’Neill said.

The master trust is now looking to fund a thematic equity mandate with Lombard Odier that was announced earlier this year.

“That thematic portfolio is going to focus on natural capital,” said Fernando. It will also look at climate change mitigation and adaptation as well as social factors.

“That’s the most immediate thing. Next is a recommendation on timberland to the investment committee and hopefully securing their agreement on that.”

Nest will also be busy onboarding BlackRock’s Aladdin portfolio management software, which Fernando said is due to happen in early May.

“That should help us with that whole portfolio construction,” she noted.

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