Diversification Is Key Consideration for Institutional Investors Seeking to Manage Current Inflation and Recession Risks 

July 18, 2022

New York, United States 

• 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

More than 350 asset managers and asset owners from around the world say they’re uncertain where the global economy is heading, according to a live poll conducted last month at Mercer’s Global Investment Forum (GIF) US, with the three most likely scenarios identified as being: (1) a potential period of economy-wide overheating (26%), (2) stagflation (24%) and (3) a hard landing (22%).¹ Greater than half of attendees (58%) also said they believed that their equity portfolio structure should be meaningfully different from the market cap weights right now, and more than 75% said their portfolios are currently on a carbon transition path.

Diversification will play a critical role as the economy and markets continue to respond to headwinds including those driven by the Russia-Ukraine conflict and China’s zero-Covid policy, as well as globally tight labor markets and other supply/demand imbalances amidst ongoing reopening from the global pandemic, according to Rich Nuzum, President, Investments & Retirement, Mercer.

“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.

Mick Dempsey, Global Leader of Investment Solutions & Outsourced Chief Investment Officer (OCIO) Services for Mercer, added, “Our clients and the broader market continue to be impacted by increased complexity and the widening range of issues that must be managed across their investment portfolios. With recent market volatility further highlighting these challenges, many of our clients are seeking greater governance and operational support to both design and implement their investment programs.”

Mercer believes in building brighter futures by redefining the world of work, reshaping retirement and investment outcomes, and unlocking real health and well-being. Mercer’s approximately 25,000 employees are based in 43 countries and the firm operates in 130 countries. Mercer is a business of Marsh McLennan (NYSE: MMC), the world’s leading professional services firm in the areas of risk, strategy and people, with 83,000 colleagues and annual revenue of approximately $20 billion. Through its market-leading businesses including Marsh, Guy Carpenter and Oliver Wyman, Marsh McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit mercer.us. Follow Mercer on LinkedIn and Twitter.

^{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.}

^{2. 60/40 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.}