Mercer broadens asset allocation process

Mercer has developed a more sophisticated classification process for investment risk that recognises the mix of growth and defensive qualities within each asset class.

An investment review Mercer conducted last year pointed to the need for an improved method of risk classification, since traditional industry asset classifications for multi-asset structures are too limited and overly simplistic, said chief investment officer of Mercer’s investment management business, Russell Clarke.

“The traditional ‘growth’ and ‘defensive’ classifications have failed to fully capture the intrinsic risk of such structures,” he said.

Mercer’s new Growth Defensive Enhanced process, however, now recognises the mix of growth and defensive qualities within each asset class.

The aim of the investment risk review was to reduce exposure to equity risk, achieve a more truly diversified portfolio to deliver better risk-adjusted returns, and provide fund structures that allow greater flexibility.

“We set about achieving these aims by redefining the traditional classification of risk. This allowed us to gauge the levels of growth and defensive characteristics within each of the various asset classes more accurately,” said Clarke. “We then looked for ways to better diversify our multi-asset structures to reduce the impact of future periods of downside.”

Other outcomes of the review include the need for greater allocation to more tangible assets, including direct property, infrastructure and natural resources; the separation of sovereign bonds, credit and inflation-linked bonds within the fixed interest sector to better control risk; a more focused approach to alternative assets; greater inflation protection; and increased exposure to emerging markets.