By Niall O’Sullivan, CIO EMEA & ASIA, Investment Solutions
Since the Covid-19 pandemic spread across the globe, every country, economic sector and even our own day-to-day activity has altered beyond what we could have reasonably thought was possible – or at least the speed with which it happened.
But while we are adjusting to this “new normal” at home and work, as investors, we need to understand what this means for our portfolios.
As with any storm, the subsequent calm gives us pause to reflect and assess any damage. It also gives us time to plot a course ahead, fully armed with recent experience.
At Mercer, we have been gathering this experience over many previous crises and use it to construct portfolios that are better prepared for the next one we know we are (unfortunately) bound to face.
While no two crises are ever the same, our research teams – spanning capital markets to specific asset managers – tease out the similarities and work with our strategists to create more robust asset allocation techniques to prepare our clients’ portfolios for the future.
Back to basics
Recently, I was lucky enough to be invited to share my reflections, alongside an esteemed panel of investors, at the FT's live digital Global Boardroom. Speaking to investors with different views, backgrounds and objectives gave me lots of food for thought.
While we all had different views on where, how and when the global economy might get back on its feet, we were all agreed on one thing: revaluation of portfolios starts now.
Peter Pereira Gray, CEO of the Investment Division at healthcare foundation The Wellcome Trust, said the investment committee for the almost £27bn fund1 was going “back to basics”. For him, this meant reviewing how to make money, given the current environment, and constructing a robust portfolio in case of further upsets.
Essentially, however, he said the committee needed to keep focused on why they were investing at all.
This is something we, at Mercer, have constantly at the front of mind. As a trusted adviser to thousands of institutional investors with trillions of assets to protect and grow, it is our job to keep our clients looking ahead with the confidence they will get where they need to be.
There was an interesting exchange between Kerstin Hessius, CEO of the €37bn2 Third Swedish National Pension Fund AP3 and Eoin Murray, CIO International at Federated Hermes, that highlighted the potential dichotomy of outcomes from here.
Kerstin pointed to the resilience of human nature and drew lessons from the experience to draw some positive conclusions, while Eoin highlighted the solvency risks that remained as corporations begin to face the reality of the falls in economic growth.
This made me reflect on a few of the rubrics we use for portfolio construction in Mercer.
The first lesson in every crisis is that diversification is key. By allocating across a spread of sectors, securities and markets, we can not only help to dampen volatility but shield investors from experiencing too heavy losses in any one part of their portfolio that upsets the rest of it.
Understanding markets – and our relation to them – is also vital. While we have no clarity on how markets will perform in the short term, whether there will be a vaccine in the near future or a second wave, we do know there will be opportunities.
Being alert and responsive to these opportunities can both help repair damage and build on the defensive stance that diversification baked into a portfolio.
We see significant opportunities in corporate credit, as markets priced in a default rate above anything we have ever experienced in recent times, along with the monetary and fiscal authorities taking a very active approach.
Some of these opportunities may be best be accessed through private market or credit dislocation funds.
At Mercer, we enable our clients to have the agility and nimbleness to benefit from spotting this dislocation and get their capital working again, even while other investors may be floundering.
As Kerstin at AP3 pointed out, investors cannot stay out of the game forever.
New questions, new lessons…
Some investors may be looking at stock market rebounds or short-term movements to restart their investment campaigns, but for Mercer this is too simplistic. While we do not think equities are showing particularly good value, there is another reason why we are neutral on the asset class.
Instead of asking if we will ever get back to the February stock market highs, we ask what else can work in a portfolio to insulate our clients as they seek returns in a low return world.
We are facing new questions, so need new answers. Our world has changed, potentially forever, and we must use this opportunity to re-evaluate and change, too.
As we don’t know the future, we do understand how to learn from the past – and at Mercer, it is our mission to help prepare our clients’ portfolios for what happens next.
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