Navigating the challenges and opportunities to deliver long-term, sustainable outcomes
Global Investment Insights
with Kylie Willment, Chief Investment Officer Pacific, Mercer
Kylie is the Chief Investment Officer Pacific at Mercer. In this role, Kylie’s focus is always on delivering long-term, sustainable outcomes for superannuation members and institutional clients, first and foremost. Right now, there is challenge and opportunity in achieving this, Kylie highlighted.
“The challenge comes from a forward-looking return environment that is likely to generate lower returns than we have been used to over the past decade or so. And potentially those returns will come with more volatility and uncertainty as we navigate a post-COVID future.
The opportunity comes through a number of seismic shifts playing out in front of our eyes, including the increased focus on sustainable investing, technological evolution and the future of work.
We are navigating these challenges and opportunities through upping our focus in three main areas – portfolio diversification, active management and sustainable investment”, Kylie explained.
*****
We are upping our focus in three main areas – portfolio diversification, active management and sustainable investment.
*****
Mercer has recently partnered with the World Economic Forum to help define global systemic risks and trends. The resulting report, Trendsetters: Transformational Investment Practices of Advanced Investors, identified climate change, interest rates, technological evolution, demographic shifts, geopolitics, and water security as the global systemic trends that matter most to investors.
While there are some significant risks in that list, the exciting thing for investors is that every risk or trend brings opportunity.
The low return environment makes it even more important that investors actively seek out and respond to every major opportunity in front of them.
“To capitalise on these trends, we need to have diversity of thought, an ability to assess and quantify implications, strategic vision, fit-for-purpose governance and a culture of innovation”, Kylie remarked.
*****
We are increasing allocations to “middle risk” asset classes in favour of traditional fixed interest allocations, including assets such as credit, high yield, emerging market debt, private debt and unlisted real assets.
*****
Kylie and her team are thinking deeply about delivering sustainable returns in a low return environment with many major systemic trends playing out before our eyes. At an asset allocation level, this translates into a few key areas of change or focus, as Kylie explained below:
1. Increased diversification – specifically increasing allocations to what I would describe as the “middle risk” asset classes. In favour of traditional fixed interest allocations, which are offering little in the way of return, we are building allocations to the higher yielding fixed interest asset classes, such as credit, high yield, emerging market debt, private debt and increased allocations to unlisted real assets.
2. Focus on active management and dynamic asset allocation – with much uncertainty remaining around the post COVID normal, seismic shifts underway and pockets of mispricing starting to emerge, there is likely to be much more dispersion across asset performance over the next few years than we have had for many years up to the onset of the pandemic. It should be a rich environment for alpha and a more opportunistic environment for DAA.
3. Focus on sustainability broadly and climate change specifically – the link between ESG factors and financial performance is getting stronger every day. Strong integration of ESG into investment decision-making is now an imperative for long-term return generation; and indeed to manage short-term risk. We have recently committed to net zero emissions for the Mercer Australia funds by 2050. What does this mean at an asset allocation level? In the first instance, it’s higher allocations to sustainability-focused equities and shifts in the way we think about accessing highly carbon intensive asset classes like listed infrastructure. Our thinking on what else we need to do at an SAA level to deliver long term sustainable returns, and navigate to a lower carbon future, will only evolve over time.
*****
With much uncertainty about the post COVID normal, there is likely to be much more dispersion across asset performance, making for an alpha rich environment.
*****
In terms of structural factors taking place across our industry, Kylie is closely watching the Your Future, Your Super reforms, and particularly the performance test.
“While I agree with the spirit of the reforms and that the introduction of a performance test will help improve the overall standard of the superannuation industry, the test needs to aligned with the delivery of optimal retirement outcomes to members. I fear the design of the current test (the fact that it is SAA-relative and therefore does not measure overall outcomes to members, and the limited nature of the benchmark indices at an asset class level) has the potential to create a situation where managing risk against the performance test (a business risk) will be at odds with making recommendations to the Trustee that deliver the best expected return for risk outcomes to members (a fiduciary obligation).
I would urge the policy makers to listen to the feedback from the industry on the design of the test to ensure alignment with the best interests of members”, Kylie explained.
*****
Strong integration of ESG into investment decision-making is now an imperative for long-term return generation; and indeed to manage short-term risk.
*****
Kylie left us with some personal reflections, highlighting the growing acceptance globally on the importance of building diverse teams and a culture of inclusion as a very encouraging development.
“The evidence is now incontrovertible that diverse teams are better performing teams and that companies that have strong DEI practices are also more resilient businesses.
My view is that unconscious bias is the biggest hurdle to improving diversity. I have certainly been subject to unconscious bias over the course of my career, but I also know that I am guilty of unconscious bias myself – actually, we all are.
I told a story to my Mercer colleagues recently about how I know unconscious bias is alive and well because my kids still ask me where their school uniforms are or what’s for dinner, even though my husband has been the primary carer for many years. They still think of those jobs as “mum” jobs. It’s funny but it’s also dismaying.
We need to actively get more diverse role models across all the different roles in society – work and home – I think it’s the only way to break down some of these entrenched stereotypes”, Kylie concluded.
*****
Growing acceptance globally on the importance of building diverse teams and a culture of inclusion is a very encouraging development.
*****
Disclaimer
The views expressed in this publication are solely those of the individual and do not reflect those of their employer organisation.
All information contained within this publication is general advice only, as the knowledge levels and needs of all individual and corporate investors vary greatly this publication should not be used solely as a decision-making tool, further opinions and information should be sought before making an investment decision. It is the recommendation of Global Investment Institute (GII) that you seek the opinions of a fee-for-service, independent investment adviser before making any investment decision.
The authors, directors or guest writers may have a financial interest as investors, trustees or directors in investments discussed or recommended in this document. It has been assessed by the editors that these financial interests have not had an impact on the material contained here within.
All material appearing in GII’s Global Investment Insights is copyright, reproduction in whole or part is not permitted without written permission from the Publisher, GII.
If you have enjoyed reading this article, please subscribe to GII Insights, delivered monthly, direct to your inbox and it is FREE!