• Investors need to challenge existing beliefs, embrace less familiar investment opportunities and less constrained strategies
• Manager skill increasingly important in the hunt for scarce returns
Faced with a challenging environment for return generation with a scarcity of ‘easy beta’, institutional investors need to challenge their existing beliefs and processes and consider a range of less familiar investment opportunities, according to Mercer’s 2015 Themes and Opportunities paper. The consultancy also highlights the importance of considering less constrained mandates in order to maximise the chances of successful alpha generation, which in turn means a closer scrutiny of the skills of investment managers.
“Extraordinary monetary stimulus since the 2008 financial crisis has provided a strong tailwind for asset prices, reducing yields, risk premia and market volatility,” said Deb Clarke, Mercer’s Global Head of Investment Research. “As central bank policy starts to diverge we expect to see more volatility and higher dispersion in markets. This should create a more fertile environment for macro and long-short investors, in particular.”
Mercer’s paper outlines a number of ideas, under five broad headings, which they believe merits investors’ consideration in 2015:
- Consider shifting the balance between “beta” and “alpha” to reflect reduced risk premia and the improving opportunity set for some active strategies.
- Seek to capitalise on a long time horizon at the asset class, asset manager, and the investor levels.
- Review decision-making processes to ensure that the governance structure does not act as a drag on returns by slowing implementation or allocating insufficient time to the consideration of new ideas.
- Evaluate whether private markets may offer a richer opportunity set than many listed markets, given that much of the central bank stimulus has been absorbed by the listed bond and equity markets.
- Consider the potential value that diversification and effective “hedges” may offer in the current environment, especially in light of the fragile economic recovery and the reduced liquidity in many markets.
“To improve their chances of decent levels of return, institutional investors should ensure that portfolios are exposed to a wide range of investment opportunities,” said Ms Clarke. “They should also establish a robust risk management framework that draws on scenario and stress test analysis alongside the more traditional “Value at Risk” analysis. Considered manager selection also remains critical in identifying strategies that are capable of providing a diversifying and sustainable source of return.”
Notes to Editors
About Mercer
Mercer is a global leader in talent, health, retirement, and investments. Mercer helps clients around the world advance the health, wealth, and performance of their most vital asset – their people. Mercer’s more than 20,000 employees are based in 42 countries and the firm operates in more than 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy, and human capital. With over 55,000 employees worldwide and annual revenue exceeding $12 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. For more information, visit www.mercer.com. Follow Mercer on Twitter @MercerInsights. In the UK, Mercer Limited is authorised and regulated by the Financial Conduct Authority.