After two years in the top investment job at Mercer Australia, Kylie Willment has revamped the team, expanded her role, handed more power to three of her executives and made the portfolio more resilient in a low-return environment.

By transforming Mercer’s institutional wealth business, Willment joins a small but growing band of chief investment officers who are improving operational efficiency and speeding up decision making.

To that end, she has effectively deputised Gwion Moore, Mercer’s head of strategy, Campbell McCulloch, head of fund implementation and Ronan McCabe, head of portfolio management. Having built a strong leadership team, she is freed-up to spend more time fostering a culture which understands what its clients want.

“In the past, CIOs tended to behave like star manager selectors or bold market commentators who called the shots in the investment team,” she said. She sees investment heads taking a much broader role now. Much of her time is spent coaching and mentoring her team and building sustainability into the investment process. She also keeps stakeholders close. “We could be making the best investment decisions in the world but if we can’t communicate well with stakeholders it all goes for nothing especially when things aren’t going well.”

Willment, who oversees more than $40 billion in funds under management, discussed the  evolving role of the CIO at Investment Magazine’s Fiduciary Investors Symposium held in Victoria last month.

The investment chief said asset allocation decisions – both strategic and dynamic – have become increasingly important in a lower-return world where volatility has ticked up. She has “enhanced” Mercer’s dynamic asset allocation capability, arguing that a solid DAA process and “reasonably high conviction” is critical when making market-sensitive trades or responding to market movements.

The CIO told delegates that exploiting volatility to generate stronger and more sustainable source of excess returns will become more important. She pointed out that in the post-GFC period, the environment didn’t require DAA because strategic allocation was “enough to get you there”.

Fan of liquid alts

Willment has doubled the balanced fund’s allocation to alternatives with a large chunk being invested in asset classes like unlisted property and unlisted infrastructure. Mercer has allocated 17 per cent to unlisted/private markets.

Like most asset owners, Mercer is also building allocations to private debt, as a consequence of the banks stepping away from Aussie companies. “They’re great assets to have in the portfolios for the kind of environment we think we are facing,” she said. “If you can access a high-quality portfolio, they generate nice and well diversified return streams.” She aims to increase the allocation of private debt to about 6 per cent in a typical “balanced” portfolio.

Unlike her counterparts though, Willment has upped the allocation to liquid alternatives. By adding liquid alternatives such as multi-asset and alternative risk premia strategies to the portfolio, Mercer’s exposure to alternatives now totals around 25 per cent. Around 8 per cent is allocated to liquid alts within the broader alternatives asset class. Mercer has five managers in multi-asset and alt risk premia-type strategies, and fund of hedge fund strategies which have many underlying managers. Allocations have been funded from equities and fixed interest.

Around 55 per cent is deployed into equities with the balance going into fixed income.

She is a big fan of liquid alts despite other investors pulling billions of dollars out of these strategies in the first half of 2019. Willment thinks they will start to enjoy a strong run as the market moves into a late cycle and investors seek assets that are uncorrelated to equities and fixed income. “You haven’t needed liquid alts in the portfolio for the past 10 years but as we look forward to a tougher market, these strategies will be a very strong diversifier,” she said. “Moreover, if we see a selloff in the equities market or even just more volatility, we think liquid alts will have their time in the sun.”

Middle-risk asset classes 

The biggest change in the portfolio, however, reflects Willment’s rethink of the defensive nature of fixed income. The portfolio has a limited allocation to traditional defences like government bonds and a sharply higher portion of funds are parked in high-yielding assets like emerging market debt, something that other Australian asset owners have typically avoided. While the investments stories can be scary and monitoring the politics of emerging economies very labour intensive, Willment believes EM debt can add strongly to the portfolios through the cycle.

Accordingly, she has restructured the fixed income portfolio to split the sovereign bond-type assets from growth investments because the risk profile is different. “These are great in a low return environment because they offer strong yields,” she said. “But you can’t treat them like a global or an Australian sovereign allocation as they play a different role in the portfolio.”

Willment is convinced there is a strong role for these so-called middle risk asset classes in the portfolio as she looks to build resilience and diversification. Allocations to growth fixed income assets have mostly been funded by swapping them out of equity holdings. “They are correlated with equities – and they tend to sell off at the same time – but they won’t behave exactly like the equities,” she said.

Outside of asset allocation, the biggest impact from Willment’s overhaul is how investment decisions are being executed which has seen Mercer heavily invest in technology.

“In a low-return environment every basis point starts to matter,” the CIO said. “You can lose money through leakage and efficiency. You can have the best processes in the world but if you don’t have the technology and the data management system to a manage those effectively you won’t get very far especially in a complex environment.”

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