According to the consultancy, structural changes such as urbanization and the desire for sustainable growth will provide new investment avenues. Mercer suggests investors with excess liquidity and the financial elbow-room explore a number of investment avenues should seek to capitalize on their flexibility.
While a ‘more of the same’ scenario might apply to Europe, and possibly the U.K., there are indications that 2013 will see broader growth, spurred by improving economic conditions in China and the U.S., and activity going from strength to strength in many developing countries.
“Differentiated economic activity between countries will provide good opportunities for bond and currency managers. The corporate sector is awash with liquidity, and, while this may not get spent immediately, it provides a solid foundation for any recovery,” said Divyesh Hindocha, global director of consulting in Mercer’s Investments business. “Some companies will prosper in this environment by making the right decisions, and others will struggle, making for a fertile environment for active management.”
To avoid struggling, Mercer is encouraging clients to:
- Maintain broadly diversified asset portfolios. These will prove robust and resilient in the face of potential volatility, but also capture value arising from the revival of economic growth in the Western world. This tends to favor a variety of growth and real assets including equities, real estate and growth fixed-income opportunities, over safe-haven assets. Exposure to a wide array of different return drivers is preferable to running a narrow spread of positions.
- Hedge against inflation. Starting the process of building some inflation sensitivity into portfolios will protect against the possibility of unconventional central bank policies resulting in an increase in inflation expectations.
- Consider reducing commitment to ‘safe haven’ assets. While government bonds may be held for hedging or liability-driven reasons, investors should be clear on the investment case, given that the prospects for positive returns are limited.
- Improve shareholder engagement. Investors should use ownership rights to ensure that they are receiving a fair share of the returns generated by their capital. Investment managers should be encouraged to undertake meaningful engagement with the companies in which they invest.
- Avoid unnecessary turnover and manage capital efficiently. Any ‘efficiency drive’ ought to include consideration of whether potential returns are being left on the table. Long-term investors might, for example, consider the merits of locking in a portion of their fund to ‘earn’ an illiquidity premium.
- Flexibly manage portfolios. Institutions should have the courage, as well as the governance structures and processes, to manage their portfolios flexibly. Direction should be changed if necessary in response to events.