SYDNEY — Mercer Global Investments will follow its dramatic review of Australian equities with some changes to the strategic asset allocation of its A$14 billion (US$11.6 billion) fund.
According Investment & Technology, a monthly publication based in Sydney that is written for professional investors in Australia, Russell Clarke, Mercer chief investment officer, said the review of strategic asset allocation will likely result in a significant increase in alternatives, with a “small amount” coming out of Australian equities.
The Australian equities review, announced earlier this month, has given a massive boost to concentrated equities managers, and put another nail in the coffins of traditional core active managers.
The restructuring of the A$4 billion Australian equities component of the fund has gone against the multimanager trend by dramatically reducing the number of managers handling the portfolio.
Prior to the review, Mercer’s Aussie equities portfolio was managed by 10 firms. However, only 10% of the assets under management from the Mercer mandates was considered “higher-return seeking,” while 85% was considered “low to medium risk.” The final, unchanged, 5% is in small caps.
Under the new structure, only five managers are being used — four existing managers and one new firm — but they represent an increase to 70% of the portfolio being classified as “higher-return seeking.”
According to Mercer, the low-to-medium risk managers generally have targets of one to three percentage points above benchmark, while the higher-return seekers have targets of three to five percentage points above benchmark.
Mr. Clarke said the absolute volatility of the portfolio was unlikely to change following the review but the relative volatility (tracking error) would increase to 1.7% from about 1.3%.
“We think the tracking error got down to levels which were too low,” he said.
The other advantage of the new structure is that it forces Mercer to be more focused on its manager selection and allocation too.
“If you have 10 or 15 managers in a portfolio it’s easier to take no action,” he said. “Now, we can’t fence sit. … In a practical sense, it comes down to how much conviction you have in the strategies.”
The new manager is BlackRock Inc., which has been awarded A$1 billion to be managed by its quant unit in a tax-efficient style.
The four existing managers — Alleron, Ausbil Dexia, Perennial and Tyndall Investment — have been given increased mandates of about A$700 million each.
The Alleron and Tyndall mandates are specifically for the managers’ concentrated portfolios, while the Perennial mandate includes a ‘high-yield portion’ that also tends to be more concentrated.
Managers terminated by Mercer are: AXA Rosenberg, Barclays, BT Funds Management, Lazard, Schroder and Wallara Asset Management.
Mr. Clarke said that over time Mercer had become increasingly confident with the long-term ability of return-seeking managers to deliver higher returns than traditional managers.
“As this degree of conviction has increased, the expected benefits of including a higher weighting to return-seeking strategies in a multimanager mix have become more demonstrable.”
Mr. Clarke said the reduction in managers and focus on higher-return seekers were in contrast to a multimanager industry trend of adding more managers to control risk.
He said Mercer believed this trend could be at the detriment of returns.
“The rationale for the new structure is based on the premise that fewer investment managers can increase the ability of each to add meaningfully to the performance of the asset class as a whole.”
