Mercer has dished out another lesson in asset class dramatics with a winning performance by global equities and a riches-to-rags story for commodities as seen in the group’s much-anticipated annual investment returns recap.
The 2023 edition of the Mercer ‘periodic table’ of asset class performance reveals unhedged global equities stole the show for NZ investors last year, returning 23.7 per cent while the understudy hedged international shares index (23 per cent) almost matched the feat.
It was a return to form for the marquee risk asset class, which finished near-bottom of the pack during the dreary 2022 episode where NZ dollar-hedged global shares fell -17.6 per cent (and -11.4 per cent on an unhedged basis).
Mercer NZ senior investment consultant, David Scobie, who made his own surprising comeback last year, says in the summary report that last year also saw a reverse-diverge for growth and value stocks.
“Aided by the strength of the technology sector, there was a return difference of 25% in favour of global growth companies,” Scobie says. “This was a complete turnaround from 2022 when value outperformed growth by the same percentage. Mean reversion at work!”
While international listed shares enjoyed a first top-of-the-table result for the 10-year period covered by the Mercer analysis, commodities ended 2023 as dead last (-8.2 per cent) again after winning the award for best-performing asset class in 2022.
Commodities has been a wooden-spooner more than any other asset over the decade, coming last four times since the 2014 calendar year and among the worst-performers most other times bar another first place in 2016 and fourth in 2021.
Unsurprisingly, commodities is also the worst-performing asset class over the 10 years to the end of 2023, returning -1 per cent (the only long-term negative result in the Mercer table).
By contrast, global private equity retains the 10-year prize with annualised returns of 14.9 per cent despite a relatively poor 2023 where its 3.8 per cent return was a bottom-quartile performance.
International private equity has emerged atop the Mercer table in three out of the last 10 years – ahead of commodities and NZ shares, both two-time champions – including the record return of 48.4 per cent in 2021.
Given few NZ investors have exposure to offshore private equity the result may be moot but both global (unhedged) and local listed shares delivered annualised returns of 11.5 per cent during the 10-year period, sharing second place.
Various other sub-genres of listed equities filled out most of the other 10 best-performing asset classes for the decade with the exception of NZ direct property (9 per cent), which finished in sixth.
Aside from commodities, the bottom-dwelling asset classes over the 10-year period feature bonds, cash and ‘defensive’ hedge funds.
During 2023 NZ equities (3.5 per cent) finished among the worst five performers along with global listed infrastructure and defensive hedge funds – both ending the year just above water – and local direct property (-2.1 per cent).
“In ‘risk-on’ phases as we saw for much of last year, most asset classes other than Equities looked rather groggy,” Scobie says. “And while relatively high Cash rates held their attraction as a low-risk option (+5%), money in the bank remained not very effective as a hedge against elevated inflation.”
The annual asset class awards season, however, with the usual warnings about the “challenge of discerning patterns and forecasting what may eventuate in the periods ahead” and a call-out to diversification.
“All in all, 2023 serves to teach us that financial markets rarely deliver, on a year-to-year basis, quite what we expect. Anything can happen during the course of one round,” Scobie says. “While at times it may feel like your investments are on the canvas, the strength of a diversified portfolio enables you to set your sights on staying the distance.”
The 2023 Mercer periodic table is available here in both interactive and static formats.