Mercer sees the global investment universe entering a second phase, which it calls “tentative normalisation”. Over the next five years, increased market volatility will underpin a challenging environment for generating returns, the firm said.
“The exceptional performance of many asset classes over the past six years has, almost by definition, reduced the prospects for future returns while increasing risks to the downside.
“Returns from manager skill (alpha) might therefore become an increasingly important return driver for investors in the next three-to-five years.”
Among Mercer’s recommendations are long-term strategies with particular attention to “more thoughtful monitoring” of asset managers.
“[A]t the asset manager level, investors should consider strategies that behave more like owners of the businesses in which they invest. Managers running concentrated portfolios, built without any reference to a benchmark, are likely to be less prone to unhelpful short-term behaviours driven by benchmark-relative measures (such as tracking error) and are more likely to be able to engage effectively with portfolio holdings.”
Similarly, a recent survey report by BlackRock polling 169 global institutional investors also found a readjustment of allocation underway as the shift in the macro-environment makes desirable returns more difficult.
Institutional intentions showed “significant moves in their portfolios towards alternative investments and less traditional fixed income strategies”.
In Asia-Pacific, institutional appetites were similar to their developed market counterparts: 64% plan to increase allocations in real assets, 54% to real estate and 43% to private equity.
The appeal of fixed income seems to be waning, with 44% of institutions in the region anticipating moving out of the asset class.
Within fixed income, allocations to high yield and long duration are expected to decrease, with unconstrained (41%), emerging markets (38%) and short duration (32%) gaining favour.
“The moves in fixed income are also significant and highlight the importance of manager selection and mandate flexibility in a time of yield scarcity,” said Mark McCombe, senior managing director and global head of BlackRock’s institutional client business.
BlackRock recommended allocation toward alternative and non-traditional asset classes.
“Mixed economic growth forecasts and shifting monetary policies are significant challenges for our clients. These conditions are testing investors’ ability to generate sufficient returns to meet their long-term liabilities,” McCombe said.