In our current investment and political climate, asset owners face numerous challenges with their investment portfolios and governance. Market volatility and political uncertainty challenge the usual ways of investing and managing risk. These factors have also increased pressure on executives to protect investments while creating real returns. Suboptimal investment arrangements can lead to eroded returns and the failure to capture timely market opportunities. By keeping these trends in mind, particularly related to governance, investment committees can put themselves in an optimal position to generate returns even in a low-yield environment. This article discusses how to navigate these uncertain times.
1. Greater Focus on Governance and Its Linkage to Better Outcomes
Mercer believes improving the investment governance of the asset owner increases the probability of achieving a better investment outcome. We think of this as a journey rather than a single project, built around several aspects:
- Clearly articulating the asset owner’s beliefs and objectives
- Objectively reviewing the skills and strength of the decision-making committee and comparing those to governance requirements
- Ensuring a sensible balance between strategic and manager discussions
- Building a framework to ensure speed of investment execution (within defined parameters)
- Committing to ongoing oversight to independently reassess the operating framework
- Identifying improvements
- Ensuring sufficient time is apportioned to the management and oversight of the assets
2. Lower Expected Future Returns
Until relatively recently, simply being invested in the “market” was sufficient to earn a decent investment return (the context of the return/liabilities varies). Looking forward, the consensus for returns for most assets is significantly lower than it has been for the last 10 years; therefore, clients need a framework or governance structure and exposure to a wider range of investments to improve their future expected returns. This improvement can be achieved in a number of ways, including additional asset classes, more dynamic portfolio management and active management in less efficient segments of the market, such as global small companies.
3. Increased Market Volatility and Uncertainty
Many consider increased market volatility a negative. But this ignores the many opportunities available in such an environment. The two significant Western political events of 2016 — Brexit and Donald Trump’s presidential victory — have increased market uncertainty. We encourage our clients to recognize that the corresponding rise in market volatility may present them with opportunities (without losing sight of long-term objectives).
“The consensus for returns for most assets is significantly lower than it has been for the last 10 years; therefore, clients need a framework or governance structure and exposure to a wider range of investments to improve their future expected returns.”