The Nest Sharia Fund has today moved from a 100 per cent equity strategy, and will now allocate 30 per cent to sukuk bonds.
According to Nest, incorporating sukuk – interest-free, asset-backed Islamic bonds – into its Sharia Fund aims to increase stability and improve the risk-return profile. Nest, which is the UK’s largest master trust in terms of membership, says this diversification will mitigate the risk of a concentrated equity portfolio and support long-term pension growth, while maintaining an investment strategy that adheres to Islamic principles.
Nest projects around a 4 per cent reduction in fund volatility, although this will come with an anticipated slight decrease in expected real returns.
However not all members are happy with this change, with some expressing concerns online and asking why a separate fund that includes sukuk was not created, leaving the 100 per cent equities fund unchanged. Sharia equity funds have delivered relatively high returns in recent years, with some of these outperforming standard default options.
The lack of a 100 per cent Sharia equity fund at Nest has led to some members considering transferring to a Self-Invested Personal Pension (Sipp) which could potentially allow them to create a similar investment profile, though this would have to be actively managed, and as a result savers would not receive employer contributions on their retirement savings.
Nest said it may consider offering a 100 per cent equities fund in the future. Nest also said that members can switch to other Nest funds offered through the master trust for free via their online account.
Nest chief investment officer Elizabeth Fernando says: “The addition of 30 per cent sukuk weighting into our Sharia fund went live on 1 November 2024. Our projections show that a small reduction in the expected real return of the Sharia Fund is expected following the addition of sukuk.
“We anticipate fund volatility to decrease. Nest’s investment strategy to add sukuk is aimed at introducing diversification as a tool to help drive more consistent and strong returns over the long term, in all market conditions.
“However, we expect a projected reduction in fund volatility of almost 4 per cent – an annualised reduction rate from 14 our cent to 10.9 per cent. With this long-term strategic approach, we anticipate some short-term variability in the value of members’ investments but significantly improved risk and return profile of these investments in the longer term.”
Fernando adds: “We recognise that some members have chosen Nest’s Sharia fund in order to invest their savings in 100 per cent equities. However, this fund was set up for members who feel it is important to their day-to-day life for their pension savings to be invested in accordance with Sharia principles.
“We believe it’s important for members to have access to a pension fund that delivers reliable returns while minimising exposure to unnecessary risks wherever possible. We don’t believe that members should miss out on the benefits of a diversified pension pot because they choose to invest in line with their faith.”
She adds that Nest welcomes member feedback and will continue to review its investment offerings.
Fernandos clarifies that HSBC selects the bonds for sukuk, overseen by their Board of scholars. In January 2023, HSBC launched the Global Sukuk UCITS ETF, which Nest has now added to its Sharia Fund options.
“We have partnered with HSBC, the biggest underwriter in the market, to invest in their Global Sukuk Fund. This has allowed us to keep costs low for our members while ensuring we are successfully diversifying our Sharia offering. There are no additional costs to members associated with sukuk.
“We think this is now one of the most sophisticated low-cost Sharia pension funds available for UK savers who wish to invest in line with their faith.”