Boeing CIO Liz Tulach
As the Chief Investment Officer (CIO) at Boeing, Liz Tulach is partly responsible for the retirements of tens of thousands of past and present employees.
When stocks are marching to new highs on a regular basis, a diversified investment portfolio may sometimes feel boring.
The last few months have shown just how important that diversification can be.
As the chief investment officer of Nest, the UK’s government-backed workplace pension scheme, Mark Fawcett oversees more than $10 billion in retirement assets for the more than 700,000 UK employers that have enrolled their employees into a Nest pension. The investment strategy of Nest focuses on the long term, with geographic and asset-class diversification, helping most members ride out shorter-term market gyrations such as what global markets have experienced in 2020.
Fawcett believes Nest’s investment approach is well-suited not just for times of volatility, but also for the long haul. PGIM recently spoke with him to get his thoughts on the turbulent markets, the important role of ESG in today’s investment climate, and diversity within the asset management ranks, among other topics.
Let’s start by talking about the market volatility we’re seeing as a result of the global coronavirus outbreak. What’s your message to Nest members?
My first message to our nine million Nest members is one of support, and that I hope they remain safe. Coronavirus is affecting lives and livelihoods, and at Nest we want to play our part in continuing to help people be in the best position for their retirement.
In terms of how we’re managing their pension pots, we’ve always taken an approach to diversify portfolios as much as is sensible. We only run a risk budget that is appropriate to delivering on our objectives, rather than just going all out in equities, which is often the case in DC schemes. For our younger members we have something called our Foundation Phase for those in their early to mid-20s. It brings slightly lower risk and is designed to get those members who are very new to saving comfortable with investing without excessive volatility. So even in this downturn, the impact has been cushioned. And we have the ability to up the risk as things like equities get cheaper. We are actively rebalancing to make sure we keep equities at a sensible level, while also looking to potentially take advantage of weakness as it arises.
We try to emphasize to our members that pension saving is for the long term. There will be short-term volatility, but as you get close to retirement, we’ll protect the value of your savings and we’ll try to cushion you through the sharpest shocks. There will be ups and downs but continuing to save is important.
Can you touch briefly on how Nest is incorporating illiquid assets into its platform?
As I mentioned, we are long-term investors. We do think there is an illiquidity premium, and therefore we try to take advantage of it. We have been able to invest in commercial real estate, and we’ve started investing in private credit – loans, infrastructure debt and real estate debt - and we’re currently looking for an infrastructure equity manager. We have our own platform so we can manage the cash flows, and we’re finding managers who are prepared to charge reasonable, low-cost fees to access illiquid assets so we can indeed invest for the long-term and reap that illiquidity premium.
Some parts of the world are clearly much further along than others, but ESG is increasingly becoming a driver of investment decisions around the globe. How does Nest view the role of ESG in its investment process?
Integrating ESG has always been one of our core investment beliefs, and we’ve been top-rated for our ESG integration. Our members expect us to invest responsibly, and we look at it in a number of ways. When we do manager selection, how they integrate ESG is a core criterion on which we select them; we test them very thoroughly. We have a climate-aware equity fund which has equity tilts underweighting heavy carbon emitters, for example, and overweighting renewables and companies transitioning to the low-carbon economy. We have a sustainable property fund, and in infrastructure we are looking to invest in renewables. So, across the portfolio we are looking for opportunities to invest not only in managing ESG risk but also looking for ESG opportunities. ESG-aware investing is part of our DNA, and when you’re investing for the long term, managing these long-term risks is vital.
Diversity within the ranks of asset management is an important consideration at PGIM, and throughout the industry overall. Can you offer your views on the role diversity plays at Nest?
We think it’s vitally important, and all evidence suggests that better decisions are made by diverse teams. For us, as well as aiming for diversity within our own team, that flows through to when we select our managers; we look at their diversity based on gender and other characteristics. Anecdotally, I can tell you we were once doing due diligence on a manager where there were two women on the team. One male executive started talking over one of the females somewhat disrespectfully, and to us that was a red flag. When we later asked them about their diversity initiatives, one of the executives actually laughed. That was another huge mark against them. In terms of the companies we invest in, our equity managers will vote against boards where there is no gender diversity, or no institutional diversity. We think diversity is important at every level of the investment process.
Do you believe that auto-enrollment has achieved its original objectives, and are you surprised about the levels of continued membership, allowing for the recent increase in member contributions?
Nest was set up by the government to ensure every employer has access to a high-quality workplace pension scheme, and auto-enrollment has been one of the most successful examples of behavioral economics in practice. I believe there is something along the lines of 12 million to 14 million people enrolled in the UK. What we’ve been very pleased with is the low level of opt-outs, and the low level of cessations. In particular, younger members have the lowest opt-out. And the contribution rate is now about 8% of salary combined between employee and employer contributions. It’s just fantastic that we have more and more people actually saving for retirement.
What strategies do you see for supporting lifetime income for the decumulation phase? Is there a role of both guaranteed and non-guaranteed solutions?
This is a subject very close to my heart. Up until 2015, people in UK DC schemes when they retired pretty much had to buy an annuity. Those rules were removed, and people could then do what they wanted to with their money. There was a concern that, first, people would just spend it all and, second, they might not know what to do with it and might possibly not spend it, or not spend enough of it. So, we designed something we called a blueprint for a retirement income strategy. It was a combination of investment and drawdowns in the early years, followed by a late-life annuity. So, a combination of non- guaranteed and guaranteed income, and it was a design that was well received and, in fact, copied by other providers. Unfortunately, we were not allowed to deliver it; the UK government decided that Nest shouldn’t be allowed to act in the decumulation phase. But we have just launched our Nest Guided Retirement Fund which allows members to access some of their savings while still benefitting from investment growth, without locking themselves into any decision. Nest doesn’t provide annuities or flexi-access drawdown, but if someone decides they’d like to use their Nest pot to buy an annuity, we help arrange it once they’ve chosen a provider.
You were previously on the asset management side of the industry? What attracted you to the Nest role?
It was serendipity. I was working for a hedge fund group prior to joining Nest, running Japanese equity money. When Lehman collapsed, we realized it was going to be tough to raise enough capital. A friend of mine was involved in setting up Nest, and at the time they were looking for someone to start thinking about the investment approach. Ultimately, a short-term contract turned into 11 years now. I was at the right place at the right time, and while I didn’t know what I was getting into at the time, I’m very grateful that it has worked out as it has.
What’s the biggest challenge in your role?
We take in about five billion pounds of new money a year. Putting that to work - especially in markets that are still not necessarily cheap - and trying to generate consistent returns over the long term is a challenge. Fees are also challenging; we’re a low-cost scheme, but we need to have a best-practice investment approach and be a sophisticated investor that looks beyond just an equity index tracker. Doing that within the cost constraints we have is challenging. At the same time, because we do have so much money coming in, it’s an enticing number for asset managers to look at and see some of that cash going to them. And we don’t hire and fire managers willy-nilly, so we are able to get more reasonable fees.
As the CIO of a firm with more than $10 billion under management, there’s probably not too much time for relaxation. What do you do to unwind outside of the office?
It’s a long list, but I will give you the short list: family, skiing, good food and good wine, croquet and keeping fit.
PGIM’s Vantage Point Series is written for C-level executives and is intended to offer a glimpse into the issues that are important to these decision makers. The articles look at the challenges facing CIOs and the industry trends they see as most vital, along with a broader range of topics relevant to institutional investors. For more information about the series, or to be featured in an upcoming installment, please contact IRG.