Selectively Embracing Risk Can Build Portfolio Resilience

Rapid technological change, economic uncertainty and a warming planet have helped to emphasize the importance of building an “all-weather” portfolio.

Mercer strategists highlighted that investors should consider adopting a top-down approach in their portfolio.

They said:  “While shocks alone may not always lead to investment regime change, the magnitude of recent shocks have delivered significant transformative impacts, particularly when they intersect with slower-moving megatrends like the climate and energy transition.”

The strategists recommended this approach be implemented beyond the total portfolio level to spread across and within each asset class.

In terms of private markets, this approach would involve a multi-sleeve approach to portfolio construction, as opposed to allocating assets to general partners (GPs) on a case-by-case basis.

The multi-sleeve approach is designed to maximize returns while protecting against long-term inflation by incorporating private equity, private debt and real estate and infrastructure investments.

It can also boost portfolio resilience through a multi-manager strategy, according to Mercer strategists.

They said that the multi-sleeve approach is preferable to assessing GPs on an ad hoc basis due to its ability to align with long-term investment objectives.

Mercer strategists also urged investors to consider a variety of engagement models to address margin pressure, rising fixed costs and growing regulatory requirements.

The models include outsourcing, extension of staff, traditional consulting, insourcing and strategic partnerships.

Delegation through outsourcing would allow investors to focus on their specialized areas within a portfolio, according to Mercer strategists.

Several factors influence which models will be most suitable for an investor, including its size and market position.