An end to 2022

Financial markets finished with a positive fourth quarter which meant our funds achieved good returns in the fourth quarter. However, overall, 2022 was a difficult year for investors. The main drivers were the challenges of higher inflation, higher interest rates, and fears of recessions. Now inflation is beginning to fall and labour markets remain strong and these positive economic developments have driven much of the moves in markets in Q4.

The volatility throughout 2022 means one-year returns were negative on most funds across the industry despite having a highly diversified portfolio. This is because most assets fell in 2022 but we don’t think that well-established investment principle should be thrown out after one year of performance.

View our latest quarterly investment report (PDF)

The year ahead

As we enter 2023, investment market conditions remain difficult with a weakened short-term economic outlook coupled with monetary tightening. We see a period of continued economic and market volatility over the coming months. Support from central banks has reduced as they raise interest rates to tame inflation. Worldwide supply chain and production constraints continue as world economies adjust to the post-pandemic conditions and current geopolitical tensions. However, current conditions create opportunities for us to invest in fixed interest securities (bonds) on more favourable terms and capture good returns for our members.

Despite current volatility the evidence remains that investing in a well-diversified fund that invests in real assets is the best way to save over the long term. We always recommend our members take the long view on investment markets and fund performance. Take our 2040 fund as an example, even allowing for the major market disruption in 2022, the average annualised return over the past ten years This compares very favourably with the low rates that have been available on bank and building society savings accounts over that period. The latest Corporate Adviser Pensions Average (CAPA) data, from Q3 2022, is included in the chart below, which continues to show that Nest’s risk-adjusted returns also compare well across the pensions industry, particularly when compared with the other top 10 defined contribution pension providers.

How we’re designed to cope with volatility

These funds have a sophisticated investment risk management approach which aims to improve the quality and consistency of members’ returns. Our team of in-house experts have constructed diversified global funds with the goal of performing consistently in different economic and market conditions. They’ve done this by ensuring our members’ money is diversified both in different asset classes and geographically.

A sophisticated investment strategy

Our strategy is also becoming more sophisticated with increasing amounts being invested in more illiquid asset classes such as private credit, infrastructure and private equity. The value of these investments is not as impacted by sentiment and uncertainty as publicly quoted investments. In addition, we expect these investments to carry an illiquidity premium, boosting overall returns for our members. The Pensions Policy Institute recently said a member with 10 to 15 per cent of their funds invested in ‘illiquids’ could receive a pension of 2 to 3 per cent higher than if their pension did not invest in any ‘illiquids’. Nest is leading the UK market in bringing the benefit of these investments to defined contribution members, at reasonable cost.

Our responsible investment approach

Nest has a growing reputation for leading the UK defined contribution responsible investment (RI) through our work on addressing climate change risk within our portfolios and our active stewardship and voting activities. The RI team is continuously working on updating and implementing Nest’s responsible investment approach and leading on new topics such as deforestation and impact investing/management.

You can read more about our approach in our latest responsible investment report.

Nest now invests over £26bn on behalf of our 11 million members, making Nest one of the biggest pension schemes in the UK and giving our members access to the kind of investments
that are usually only available to the largest investors, including investments that aren’t listed on the market. Our members also benefit from deals that only large investors get, allowing us to keep our charges low. And by keeping charges low, more of members’ money gets invested, meaning there’s more to grow.

The value of investments may go down as well as up and the return of your investment is not guaranteed. Fluctuations in financial markets, currencies and other risks may cause fluctuations in the value of investments. Any fund objective or target should not be considered as guarantee of performance of any fund. Derivatives may also be used for efficient portfolio management purpose.
This document does not constitute advice on whether to invest in these funds. Neither this document nor any data contained within this document is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. You may wish to consult with an appropriately qualified financial adviser in relation to your investments and any change to them.
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