In the post-Covid world, politics and pensions are overlapping in ways never seen before.

In Australia, the Albanese Government has tried to push superannuation funds to invest in nation-building projects such as affordable housing and renewable energy; in the UK, the (admittedly voluntary) Mansion House Accord has seen 17 pension funds agree to invest at least five per cent of their private asset allocations domestically; and in the US, ESG has become heavily politicised.

All of that means the prevailing view among investors – that political events, and even wars, don’t impact markets for long – might need a rethink, Hooman Kaveh, global chief investment officer at Mercer, and Kylie Willment, Mercer Pacific CIO, tell Investment Magazine in a joint interview. 

“The core premise in our team is that political events generally don’t impact on investment returns over the long term. I accept that – but they tend to be events of a timeframe, and I’m worried about politics dominating investments,” Kaveh says.

“You would expect that a government’s role is to manage the country’s welfare, society, economy, education, healthcare – so on. But to maybe think a lot about whether corporates should report six monthly versus quarterly – that may be sensible, but it’s not something you might do on the fly. You might set up a working group and have a conversation around what that means for transparency and governance in corporates. So I do worry about it.”

Willment says it’s “quite natural” and “sensible” for the Australian government to cast its eyes over the country’s enormous pool of superannuation assets and ponder what role they could play in powering the domestic economy.

“[But] I think we’d rather it happen through having good opportunities in the market and incentives to drive investment there rather than it be through either compulsion or having targets in place which could potentially bring you into position that’s in contrast, perhaps, with your fiduciary obligation and best financial interests of members here in Australia, or that maybe restricts the ability to have the diversification that you need within your global portfolio.”

Politics is, to some extent, part of the rationale for a “slow, gradual decline” in confidence in US exceptionalism and the capital markets that exceptionalism has animated for decades, Kaveh says.

“And it’s continuing to grind away, because the Federal Reserve is being politicised, individuals are being replaced, and there’s concerns around governance.

“The US dollar – I don’t know that it’s going to lose its reserve status, but why has gold gone up 30 per cent in the last six months? It’s not because of inflation expectations. Inflation has stayed relatively stable in terms of future expectations. And so people are diversifying from dollars, and then US Treasury bonds are the risk-free asset, and I think there will be continued questions about that.”

Separate of the political dimension, the US equity market is “pretty fully valued”; The Magnificent Seven now accounts for around 40 per cent of the value of the S&P500, while the US equity market itself accounts for 70 per cent of the MSCI World index. Willment says those stretched valuations – and the market’s blasé reaction to Trump’s tariffs –  are why Mercer Super is running a “modest underweight” to global equities.

“We would expect some kind of retracement from here, and then longer-term, strategically, I think you will see that diversification away from the US, but it’s driven by a number of different things,” she says.

“It’s not just a view on the US. It’s the flows from public to private markets. It’s the broader diversification arguments. I think, in a portfolio sense, you’re likely to see, on average, the dominance of those US holdings diversify somewhat, but it will always remain a very major part of a global investor’s portfolio.”

While they used to preside over stock-level investment decisions, CIOs are now managers of teams and investment processes in a move that reflects the continuing maturity of asset owners.

“I spend a lot of time thinking about the risks in the portfolio and what could happen,” Kaveh says. “I don’t want to colour the team’s decision making in the sense that, as you get older, you get more cautious as well, but you don’t want people to be afraid to make decisions. 
 
“You encourage that and don’t interfere, but you are also keeping an eye on the guardrails and what possible downside scenarios could look like. So I personally look a lot more at our risk outputs and portfolio positionings rather than second guessing anybody’s decision making.”  
 
Those risks are heightened by the fact that, because of higher levels of automation and algorithmic trading, markets move a lot faster than they did when most CIOs started in the job. But that’s also resulted in investors building more guardrails into their portfolios.  
 
“I mean, 20 to 25 years ago, the clients I work with would not have allocated to gold, would not have had any sort of tail-risk hedging strategies in their portfolios,” Kaveh says. 
 
“It’s definitely a much more sophisticated world – sometimes I scratch my head when I hear about some hedge fund strategies – but I think if you focus on governance, decision making and risk management, that has kept a lot of institutional investors from getting into trouble.” 
 
Willment also pointed to the findings of Mercer’s annual Large Asset Owner Barometer, which showed that institutional investors are investing more heavily in risk systems, data management, compliance and talent.  
 
“And I think that the drivers for that are, in part… that the world is more uncertain, portfolios are getting more complex as you build out diversification and private market assets and all of those things, you do need to improve the tools and capability that you have to support the best decision making into a future world that, let’s face it, is inherently uncertain,” she says.