02 April, 2020


What’s happened?


  • Cases slowing in Italy, suggesting a peak has been reached.
  • US cases surging.
  • China returning to work, but finding world is not ready for exports.
  • Global markets and economies are being supported by financial packages from governments and central banks.


Focus on alternatives


  • Diversification can spread risk to enhance returns and lower losses.
  • Mercer has been diversifying for years to create robust and resilient portfolios.
  • Inspect what an alternative investment manager promises - and keep checking against peer group.


What’s next?


  • Volatility will remain until Covid-19 is contained.
  • Managers and investors taking a long-term view have the scope to take advantage of market dislocations.



What’s happened?


There are encouraging signs that Italy may have reached the peak in its Covid-19 cases, as containment efforts and lockdown measures take effect. Nothing can be guaranteed, but there is hope the rest of Europe may follow the same pattern, but with a lag of a week or so – depending on the approach to lockdown.


In the US, however, the story is somewhat different, with an alarming surge in new cases. The world’s largest economy was slow to lockdown its population – still failing to do so in some areas – leading to a rapidly rising number of new infections and deaths.


Outlook for the economy and markets:


  • Downturn in Q2 across all regions.
    • Expected to be twice as bad as the financial crisis
  • China is putting it factories back to work, having well-contained the virus:
    • Chinese equities have outperformed.
    • Exports will remain weaker, due to much lower global demand.
  • Central banks and governments have stepped in to provide huge amounts of support:
    • Aim is to freeze much of the global economy until Covid-19 has been contained then reignite, hoping to it has not sustained too much damage.
    • UK and US bond yields have fallen on virtually unlimited QE.
  • High yield and investment grade spreads over government bonds have begun to narrow from pushing out wide as Covid-19 spread:
    • Markets expect government support will prevent mass defaults on bonds and loans.


Focus on alternatives


We believe including alternatives in an institutional, long-term portfolio helps diversify risk factors, or where the returns are being made by your holdings. This can help create a robust portfolio that is more resilient to challenging markets, such as the current one.


We have been diversifying our portfolios for some time, meaning they include a range of alternatives, including hedge funds and private market securities.


Note the following aims with our use of alternatives:


  • Spread risk to cushion losses elsewhere in portfolio.
  • Gain exposure to non-traditional risk and return drivers.
  • Employ tail risk hedging strategies, which perform when risk assets do not.
  • Allocate to bonds linked to natural disaster insurance as a non-correlated return-driver.


Allocating to alternatives does have its challenges, however. Some hedge funds, for example, are not as hedged as they might sound, and are therefore not immune to the type of markets we have seen recently.


It is important to forensically check whether the investment outcome you receive is the one you expected in this or any other scenario, and compare all manager returns to their peers, rather than the general market



What's next?


Market volatility is here to stay, in our view, until the Covid-19 virus is contained globally. But there are opportunities in the dislocations it provides.


We believe managers with a long-term view – including those in private markets – have the opportunity to weather the current storm with a range of diverse holdings to help dampen overall risk.


For more information on any of the above points, please contact your Mercer representative.


Important notices


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