MERCER INVESTMENTS BELIEFS
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OBJECTIVES
Every investor has unique objectives. Our proprietary
tools, breadth of expertise, global scale, and decades of
experience will help you towards yours.
After over 40 years in the business, Mercer now advises
clients who collectively have over $7 trillion in assets
worldwide.* That makes us one of the largest investment
advisors in the world. It also allows us to offer a comprehensive
menu of investment tools, advice, and solutions to help you
navigate complex capital markets.
But like anything, effective investment strategy comes
down to smart thinking. Here are our beliefs that underpin
our approach and drive investment success.
* As of December 31, 2013
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1. The client comes first, and we will work in partnership to deliver
tailored solutions.
2. All clients are different, and their investment objectives vary. Client beliefs,
time horizon, liability structure, and broader stakeholder objectives are all
important factors in defining investment objectives and, hence, the risk
relevant to particular circumstances.
3. A fund exists to meet its obligations, so obligations should be forefront in
the development of any strategy. An investor’s true risk is not being able
to meet his/her objectives.
4. The robustness and quality of the governance process are critical to
success, particularly in times of crisis.
5. We believe that a strong flow of intellectual capital can help address our
clients’ objectives. Continual intellectual capital generation seeks to
develop innovative approaches and ways to address the constantly
changing nature of markets and the different issues faced by our clients.
6. It is important to clearly identify environmental, social, and governance
(ESG) motivations. Whether an investor is addressing ESG factors for
financial reasons, or because they seek to achieve consistency with an
organisation’s values or beliefs, will influence the appropriate approach.
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1.Asset allocation is the most important decision an investor can make.
This is the primary driver of investment risk and return.
2.Risk and return are related. To obtain higher returns, some amount of risk
must be taken. However, higher risk does not always lead to higher
returns. In other words, risk taking does not guarantee that an additional
return will be achieved, even over long periods. We believe that clients
will be successful if they seek to minimise their exposure to risk that is less
well-rewarded and focus on risks where the expected return is
commensurate with the risk taken.
3.We believe in the merits of genuine diversification (at the asset allocation,
“factor exposures,” and underlying investment manager levels). Clients
can benefit from building efficiently diversified portfolios. Diversification
across different sources of risk and return improves investment efficiency
and may help achieve the same level of expected return with a lower level
of risk. It should also limit adverse investment outcomes stemming from
tail risk events. Diversification is more than a mathematical exercise, and
history demonstrates that correlations vary over time and in response to
differing market conditions.
4.Risk is a multi-dimensional concept. Thoroughly understanding all of the
risks attached to an asset will frequently be difficult (but necessary).
Standard deviation is important to some investors as a measure of risk,
but it is not a total measure of risk. Not all risks apply evenly to all
investors. For example, liquidity risk is less of a risk to the investor who
does not need access to his/her capital for many years than to one who
needs access in the near term. Investment success can come from
understanding and exploiting an investor’s risk tolerances.
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1.We believe that active management is a skill and, as evidenced by our
value-add analysis, our manager research process can improve the
likelihood of identifying skilful managers. There is no single right way to
manage money successfully. Skilled managers demonstrate observable
characteristics and follow approaches that set them apart from the average.
These attributes may include: a better understanding of behavioural factors
than a typical market participant, a willingness and ability to take a longerterm view (where relevant), superior insight, or an ability to “join the dots”.
Different markets exhibit varying degrees of efficiency, and it is important to
recognise which markets offer sufficient potential for alpha generation.
Skilled managers are more likely to add value in less efficient markets.
2.High conviction managers have a better likelihood of delivering
meaningful alpha after fees. A willingness to be “different” is a prerequisite for successful active management. The structuring of a portfolio
comprising a number of high conviction managers is one route to
achieving superior risk-adjusted returns.
3.Even the most skilful of managers will experience periods of
underperformance. This can be amplified with high conviction managers.
It follows that past performance is frequently a poor guide to future
performance. Care should be taken in appointing or retaining managers
following a strong period of performance.
4.Tailoring of mandates too far away from a manager’s standard approach
is undesirable, as it creates the risk of diluting or curtailing his or her ability
to exercise skill. Excessive customisation may also increase
implementation and operational risks.
5.An appropriate benchmark or measure should be agreed upon and used
to assess the performance of the manager, with an appropriate timeframe
commensurate with the nature of the strategy.
6.There are many different types of asset management organisations, but
those most likely to be successful will have portfolio managers whose
rewards are aligned with those of their clients and where the culture is
investment-led and demonstrates a high degree of integrity. Investment
management organisations frequently develop, change, and mature over
time, in the manner of a lifecycle. Large organisations benefit from deeper
and broader research, but they may also face the headwinds of not being
able to implement investment views in a timely manner.
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1.We believe that DAA can add value. While strategic asset allocation is
key to clients achieving their long-term objectives, a static strategy is
unlikely to be sufficiently robust or able to capture all the available
return-seeking/risk-mitigation opportunities.
2.Markets are behavioural in nature, and “animal spirits” can move asset
prices away from “fair value” for significant periods of time. Inefficiencies
between markets are frequently larger than inefficiencies within markets,
so dynamic asset allocation is a valuable resource for improving risk/return
outcomes. Irrationality of markets creates opportunities for the long-term
and/or contrarian investors.
3.Many valuation variables in investment markets are mean-reverting in the
very long run. This allows long-term investors to obtain better risk/reward
outcomes than those with shorter-time horizons. The length of time over
which some investment views play out means that good investment
decisions are rarely comfortable and comfortable investment decisions are
rarely good.
4.Implementing medium-term asset allocation views can add value, but it
can also mitigate downside risk in a portfolio. Success in dynamic asset
allocation is more likely within a structured framework. Strong investment
governance should improve investment decision making, particularly in
times of crisis.
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1.All investors should assess the quality of their investment operations and
investment implementation, regardless of their size or complexity.
Operational inefficiencies, poor implementation, and lapses of internal
controls within any of the participants in the process could erode returns
and expose investors to unwanted risks and potential losses.
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2.We believe that clients should look to achieve the highest value for money
spent. Investors should consider both financial costs and non-financial
elements (such as regulation, governance, reputation, etc.) As to financial
costs, the effect of less obvious factors implicit in transacting business
(such as spreads and market impact) should be considered alongside
those that are directly observable and explicitly agreed (such as
management charges).
3.The overall investment returns can be enhanced by having a monitoring
and governance framework that focuses on evaluating and quantifying
investment efficiency.
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1.ESG risks and opportunities, along with the exercise of active ownership
(voting and engagement), can have a material impact on long-term risk
and return outcomes. Consequently, a sustainable investment approach,
which considers such risks and opportunities, is preferred.
2.Taking a sustainable investment view is more likely to create and preserve
long-term investment capital.
We distinguish between:
• Financial implications (such as risks and costs) associated with ESG
factors, where there is often shifting public sentiment and regulation.
• Growth opportunities in industries most directly affected by sustainability
challenges (such as the growing population and natural resource
constraints).
3.Active ownership helps the realisation of long-term shareholder value.
In companies with inactive/disengaged shareholders, the chances are
greater that company management will act in ways detrimental to
shareholders’ interests. Active ownership — exercised through voting
and engagement — provides diversified investors with an opportunity to
enhance the value of companies and markets.
4.Accessing long-term streams of returns and long-term themes, rather than
focusing on short-term price movements, can add value. We seek to
identify managers and strategies that are structured this way.
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IMPORTANT
NOTICES
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This contains confidential and proprietary information of Mercer and is
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The findings, ratings and/or opinions expressed herein are the intellectual
property of Mercer and are subject to change without notice. They are not
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