Mercer Super CIO Kylie Willment says diversification is key to navigating the current challenging market conditions.

The role of an investment professional has never been more challenging these last 18 months to execute strategies that deliver good investment returns in the face of persistently high inflation, rising interest rates and the decarbonisation of the global economy.

Kylie Willment, CIO of the merged $63 billion Mercer Super Trust, believes diversification across asset classes and a more nuanced allocation within asset classes is an effective strategy in the face of the current challenging market environment.

At the time of going to press, the Reserve Bank of Australia hiked the cash rate to 3.85 per cent, the eleventh rise in the last 12 months.

“[Diversification] means building exposures across public market and unlisted asset classes because they can provide very strong diversifying return streams,” she tells Investment Magazine.

We are looking for new opportunity assets. Private debt, for example, has been absolutely an asset class within that private market space that we have been building allocations into because there is an opening up opportunity with a change in the nature of the lending market.”

Echoing the sentiments of some of her peers, Willment says the traditional index-like exposures and the 60/40 equity-bond vanilla portfolio has largely had a good run. “It has been not a bad strategy up until a year-and-a-half ago,” she says.

The fund’s strategic asset allocation is Australian equities (24.5 per cent), global equities (27.5 per cent), property (10 per cent), infrastructure (10.5 per cent), unlisted real assets (1 per cent), alternatives (6 per cent), growth fixed interest (13 per cent), defensive fixed interest (6 per cent) and cash (1.5 per cent).

Picking the best managers

The merger of Mercer Super Trust with BT Super has created a $63 billion fund with 850,000 members who will benefit from the size of Mercer’s US$354 billion global portfolio for scale, investment insights and access.

Willment joined Mercer Super in 2017 after a close to 18-year career at NSW TCorp where she held various senior positions within the investment team. With 61 professionals in Mercer’s local investment team, she is also able to draw on the expertise across the firm’s global expertise with over 2,000 investment professionals across multiple jurisdictions.

She is firmly welded in the external management model and appointing best in class external managers.

“When you internalise decision making, you also internalise risk, so there are trade-offs,” she says.

“The core capability of the internal team is identifying the very best in class external managers and then being a significant enough client for those managers so we can bring a lot of scale for those partnerships.”

She says the price points offered by managers for a sizeable mandate is “very competitive without having all the complexity and the internalisation”.

Building nuanced asset class exposures

Willment advocates what she terms as “getting more nuanced within asset class exposures” as a strategy to maximise returns and minimise the downside risk in the current market conditions.

She explains this would include allocations to growth, fixed interest, emerging market debt, global high yield, sovereign versus credit type exposures that have different type of fixed interest exposures within the portfolio with some that target absolute returns versus others that target duration.

“[We are] a lot more nuanced in terms of portfolio construction [and] target the type of exposure and level of diversification we are building in.”

In the private and unlisted asset space, Mercer is leveraging its relationships with external managers to invest alongside in a co-investment agreement to maximise the upside returns of the investment.

“Part of our model at the moment in the private markets and unlisted assets is we will invest primarily into an external manager vehicle,” she says.

“But more often, we will have alongside in a co-investment type of agreement where we can outsource the management and selection of assets to a manager and partner with them about what type of assets we’d like them to source and bring to us.”

* This article was edited on Wednesday, 3 May 2023, to correct the number of investment professionals globally and the value of the global AUM.

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