Diversification Is Key Consideration for Institutional Investors Seeking to Manage Current Inflation and Recession Risks
- Asset managers and owners are increasing allocations to private markets, renewed consideration of hedge funds, and ESG policy design, implementation and governance as areas of focus
- Manager selection and governance increasingly crucial part of the investments process
Diversification will play a critical role as the economy and markets continue to respond to headwinds including those driven by the
“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 1970.2 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,” Nuzum said.
When asked about themes and opportunities that lie ahead for the industry, asset owners and managers cited renewed consideration of hedge funds, ESG policy, design, implementation and governance, and increased allocations to private markets as key areas of focus. According to a live poll of the US GIF participants who were presented with a model 60/40 portfolio and asked what they would add to it in response to current market conditions, 66% would seek to add exposure to private markets.
“Asset owners are also revisiting, and in many cases increasing, the active share in their portfolios to pursue outperformance. We believe skilled active management will become more important over the coming years as a means of improving diversification and pursuing overall investment objectives. Concretely, this means 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,” Nuzum said.
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1 A ‘period of overheating’ refers to runaway economic growth resulting in a prolonged period of inflation; (2) ‘Stagflation’ describes a situation of low or negative growth combined with high inflation; and (3) A ‘hard landing’ typically results from a central bank raising interest rates too fast, in an effort to curb inflation, resulting in an abrupt economic slowdown and recession.
260/40 performance: For the most recent decade (2012 – 2021), the nominal performance of a portfolio of 60% stocks (as represented by the S&P 500) and 40% bonds (as represented by the 10-Year US Treasury) was the 5th best performing decade of all 43 ten year periods since 1970 (i.e. 1970-1979, 1971-1980…2012-2021).
2022 first 6 months performance: S&P 500 performance for first 6 months of each year since 1970.
Past performance is no guarantee of future results. Actual results could differ materially. There is no assurance that investment objectives will be achieved.
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