Balancing alpha and sustainability
Peter Signer is responsible for the fund selection process at Nest Sammelstiftung, a collective pension fund for SME businesses in Switzerland, which currently manages about CHF2.1bn (€1.92bn) of assets on behalf of approximately 3,000 businesses in Switzerland.
Nest distinguishes itself from other pension funds because of its focus on sustainability, since its inception in the early 1980’s it has exclusively focused on sustainable investments. “We like to see ourselves as a pioneer when it comes to sustainable investing, for now more than 30 years, we have never invested in the oil or coal industry” he explains.
While the definition of sustainability can be ambiguous, Nest aims to pursue a best in service, rather than a best in class approach. As such, it applies relatively
stringent exclusion criteria, with sectors such as financials, the automotive industry, commodities and even US Treasuries being excluded – the latter due to the persistence of the death penalty in the US.
In terms of asset allocation, Nest currently has about 30% invested in equities, 30% in fixed income, of which a significant proportion is in Swiss sovereign debt. The remainder is allocated to cash and alternative investments. With commodities and hedge funds excluded, Nest has a significant percentage of its portfolio invested in real estate and private equity funds. When taking into account all the exclusion factors, the group’s investment universe is only about 40% that of a conventional fund selector.
Due to the specificity of its requirements, Nest invests in a combination of funds and mandates. “Where volume permits, we aim to invest through mandates, in order to ensure that the portfolio meets our requirements. However, we do invest in funds, such as emerging market debt or equities,” Signer says.
By definition, Nest only invests in active funds, as passive funds tend to include blacklisted sectors. While strategy also restricts the application of derivatives, fund managers are only allowed to use them to secure a position, not to establish a new position.
“A couple of years ago, we did contemplate whether it would be possible to invest in a sustainable hedge fund which, so to speak, would go long on the good guys, and short on the bad guys. I’ve back tested this approach with a number of sample companies and the performance would have been quite good. However, in the end we dropped the idea due to the poor general performance and reputational challenges for hedge funds. It would require a lot of explaining to our clients but we do remain open to the idea.”
AN ETHICAL PROFILE
When it comes to sustainability, advocates and opponents of sustainable investing dispute whether an ethical investment profile also leads to better performance. For Signer, the moral decisions should be seen as fundamentally separate from the performance aspect.
“We are not trying to achieve performance through sustainability, but there are also no direct disadvantages. The initial fund screening process takes places through databases, we then filter about 10-15 funds which we approach with an RFP questionnaire. We then also analyse their portfolios in more detail based on sustainability and apply back tests excluding assets which would be blacklisted. Finally, we invite about three asset managers to present their products,” Signer explains.
Yet despite his thorough screening process, it is always possible that Nest holds small positions in companies which do not match its sustainability requirements. “There are always grey areas. It is important that we communicate this with our clients; for example, we once were invested in a high yield fund which held a 1.4% position in a transport firm which turned out to deliver weapons to prisons in Iraq. We responded by first trying to convince the fund manager to divest, when we didn’t succeed, we decided to sell the fund,” Signer explains.
Has he noticed much of a growing trend towards sustainability? “The interest has certainly increased. Within the last five years, there has been a tremendous change, particularly on the provider side – we now have much more choice. We were dismissed as maniacs decades ago, but with the emerging debate around climate change strategies, which for example, exclude fossil fuels, we have become increasingly accepted,” he argues.