In a rare alignment of stars, investment markets conformed almost exactly in line with theory last year, according to Russell Garrett, Mercer NZ head of institutional wealth.
Garrett said asset class returns in 2017 – as measured across the group’s recently published annual ‘Periodic Table’ – followed “orthodox” risk/return expectations.
“Emerging markets equities was the top-performing asset class with property somewhere in the middle and bonds/cash down the bottom,” he said. “You don’t see that every year.”
Last year also marked the second year in succession where every one of the 16 asset classes in the Mercer table ended the period in the black.
“It’s unusual for all assets to have positive returns in one year, let alone two years in a row,” Garrett said. “That probably reflects the low-volatility conditions of the last two years where central bank policies have underwritten the entire investment market.”
But the Mercer analysis – authored by principal, David Scobie – says the importance of diversification should remain top of mind for investors rather than picking the best-performing asset class in any one year, particularly given the return to higher volatility levels in 2018.
“While a ‘three-peat’ of a full set of positive asset class returns is perhaps a brave bet for the year ahead, of more consequence is structuring portfolios to withstand a variety of market conditions,” the Mercer study says.
After an “exceptionally tight range” of just 11 per cent between the best- and worst-performing asset classes in 2016, last year saw a more normal spread of 33 per cent between the top (35 per cent for emerging market equities) and bottom (NZ cash at 2 per cent).
Over the last 10 years the average range between best and worst asset returns stood at 37 per cent while the greatest difference (65 per cent) was recorded in 2008 at the peak of the global financial crisis.
Mercer included global private equity for the first time in this year’s Periodic Table with the asset class racking up a respectable 16.3 per cent return in 2017. Private equity returns were generally in the top third looking back over the previous 10 years, the Mercer report shows, slumping only in 2009 to near bottom with a -7.8 per cent performance.
Scobie said the private equity and fund-of-hedge fund figures were net of fees while all other asset classes in the Mercer table were reported in gross terms.
The Mercer study also shows hedging global equities has generally been a winning strategy for NZ investors over the 10 years to the end of 2017. Unadulterated offshore shares outperformed the currency-hedged version in just two years: 2008 and 2016.
However, last year the gap between hedged and unhedged international equities was a paltry 0.2 per cent.
Meanwhile, Mercer has added a new offshore shares manager to its Socially Responsible Investment (SRI) Global Equities Fund, Garrett said.
He said the Wellington Global Impact Fund joins other SRI-focused strategies offered by Stewart Investors (owned by Colonial First State Global Asset Management), Acadian and Schroders in the Mercer multi-manager product.
“The Wellington fund invests along ‘impact themes’ such as education, health, affordable housing and the environment,” Garrett said.
Despite the ‘impact’ focus, the Wellington fund invests via global equities rather than directly into social projects as per pure ‘impact investment’ approaches.
Garrett said both Wellington and Stewart Investors follow focused SRI strategies while Acadian and Schroders “are more broader-based, quant style investors”.
While the Mercer SRI product does not specifically target carbon reduction he said overall the fund had about “half the carbon footprint” of the broad MSCI global equities index.
“The Mercer team measures the carbon exposure and has conversations with the underlying managers about it,” Garrett said.
He said there was increasing demand for SRI strategies in the NZ wholesale investor market.
