‘Tis the season to be jolly. Unless you’re an asset consultant. Mercer Investment Consulting has published its predicted top trends for super funds in 2011.

With continued economic uncertainty around the world, Mercer expects continued tight credit markets, a re-evaluation of the equity risk premium, concern about currency risk and further allocations to emerging markets among these major trends:

 

 

1. The ‘two-speed’ world economy will see a flight to emerging markets.
2. Investment strategies will continue to be scrutinised in the context of evolving deflation/inflation risks.
3. Capital imbalances will lead investors to consider the opportunity/risk dynamic.
4. Investors will review their reliance on the equity risk premium and/or home bias.
5. Asset allocation and portfolio structuring will evolve and result in the creation of more robust portfolios.
6. More investors will exploit capital market deviations through medium-term asset allocation ‘tilts’.
7. A weak US dollar will highlight the impact of currency on investment returns.
8. Regulation will continue to evolve in the post- global financial crisis environment.
9. Environmental, Social and Governance (ESG) factors will continue to be integrated into investment decision making.
10. Investors will place greater emphasis on operational variables and investment efficiencies.
11. Demand for better retirement income options will gain momentum.

 

Mercer’s business leader for Australia and New Zealand, Graeme Mather, said emerging markets such as China and India were increasingly attractive to investors. The rise of ETFs made access to them a lot easier.

The traditional bias in equity portfolios towards developed markets and a fund’s home country needed to be assessed for better diversification and improved defensive qualities.

Mather said a weak US dollar highlighted the impact of currency on overall returns. In the past 22 years, the difference between hedged and unhedged international shares had averaged 10 per cent or about 3 per cent of the average balanced fund’s overall returns.

“The management of the medium-term extremes mispricing should be a key part of any fund’s armoury,” Mather said.

And in a low-return world, operational efficiencies would become more important, particularly in areas such as foreign exchange and trading in unlisted assets.

 

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