Diversified portfolios is key to managing today’s risks says Mercer

Institutional investors see a worsening outlook for the global economy, reveals the firm's recent survey

Diversified portfolios is key to managing today’s risks says Mercer

Institutional investors globally need diversification to manage the risks from inflation and recession according to Mercer.

The firm asked 350 asset managers for their views on the global economy with uncertainty about its direction evident.

The top three most likely scenarios that these professional investors see ahead are:

  1. a potential period of economy-wide overheating (26%)
  2. stagflation (24%)
  3. a hard landing (22%).

At Mercer’s Global Investment Forum last month, 58% of institutional investors said they believed that their equity portfolio structure should be meaningfully different from the market cap weights currently.

More than 75% said their portfolios are currently on a carbon transition path.

With headwinds such as the war in Ukraine, China’s Covid-zero policy, the tighter labour market, and supply/demand imbalances, Rich Nuzum, Mercer’s president, Investments & Retirement, says that diversification will play a critical role in portfolio management.

“After one of the best 10-year periods for a 60/40 publicly traded stock-bond portfolio, we’ve had the worst first 6 months of the year for equity markets since 1970,” he said. “Asset owners are revisiting their strategic asset allocations to consider the resilience of their portfolios against increasing inflationary pressures, volatility, and potential disruptions to economic growth. Many are responding to the current environment by seeking to maximize their portfolio diversification within the context of their investment mandate.”

Opportunities ahead

When asked about themes and opportunities that lie ahead for the asset management industry, respondents talked about renewed consideration of hedge funds, ESG policy, design, implementation and governance, and increased allocations to private markets as key areas of focus.

Two thirds of those presented with a model 60/40 portfolio said they would seek to add exposure to private markets in response to current market conditions.

“Asset owners are also revisiting, and in many cases increasing, the active share in their portfolios to pursue outperformance,” added Nuzum. “We believe skilled active management will become more important over the coming years as a means of improving diversification and pursuing overall investment objectives.”

He added that manager selection will become an even more crucial part of the investment process, requiring strong governance and proficiency in evaluating and accessing highly-rated managers and strategies.