Funds must rethink global equities, says consultant

Mercer Investment Consulting has undertaken a review of global equities and is about to roll out to clients a paper which questions traditional cap-weighted benchmarks.

Andrew Kirton, global head of investment consulting for Mercer in London, said the work would be presented to clients within the next few weeks. He was speaking during the three-city Mercer Asia Pacific Investment Forum – in Sydney, Beijing and Hong Kong between April 20-26 – although he was unable to attend the Sydney event because of the airline delays.

“We have questioned all the assumptions in our clients’ global equity portfolios,” Kirton said. “They are mostly invested in developed markets with a home-country bias and big US component ” But the emerging markets are under-represented and arguably have better prospects than the West. Funds may be limiting themselves.”

The problem for investors in the West, however, is that the big emerging markets such as China and India still have very volatile listed markets where access is not as easy as in the developed markets. There are also different risks associated with some emerging markets, including political risks.

Kirton said that Mercer was looking to provide some more “frontier thinking” about global portfolios, not just in allocations between developed and developing markets.

He said, for instance, there was now a fair body of evidence to suggest that low-volatility stocks tended to provide a better risk/return profile over time than high-volatility stocks.

Mercer revamped its investment consulting research last year with the addition of several “boutiques” within the firm, which also resulted in increased research resources for alternative asset classes.

The move was in response to the growth of specialist asset consulting firms as well as the changing relationship between consultants and funds, whereby many funds are increasing their in-house investment teams.