Brick by brick: Building portfolios with Mercer’s CIOs

Mercer’s chief investment officers from around the world are excited to bring you the first iteration of what will be a fortnightly download from the team. Every two weeks, we’ll be taking you under the hood of portfolio challenges, both across the portfolios we run directly and those we manage in partnership with clients. We will be drawing on our experience, practice and perspective to ‘deconstruct’ portfolio construction.

Download 1 – Global Solutions Chief Investment Officer

by Niall OSullivan

The baseball field is not always my go-to source of guidance for building portfolios. But Yogi Berra’s iconic words provide a great lesson about the gap between the theory and practice when it comes to building portfolios.

“In theory there is no difference between theory and practice ? in practice there is."

The reality of putting portfolios together – portfolios that will prove resilient today and for the long-term – is worlds away from mapping out a theoretical ‘plan on a page’.

My role, and indeed the role of our chief investment officer team across global regions, is to help bridge that gap for institutional investors of all kinds. We’re committed to putting the theory to work in practice ? and deliver solutions tailored to clients’ unique needs, scale and level of delegation, across public and/or private implementation.

What are we doing in practice? In the past week alone, we have:

• Advised a chief financial officer of a major global corporate on the future state of their long-term strategy
• Discussed how best to implement emerging market equity exposure in portfolios
• Finalized recommendations for our private markets’ allocations for the next 12 months
• Evaluated the solution to allow individual countries to secure capital to support their adaptation to climate change
• Debated how to evolve private markets’ modelling assumptions

Of course, honing your practice doesn’t mean you can do away with theory entirely. In fact, through exploring the practice of portfolio building, we’ll also be putting our four guiding principles to the test:

-????????? The benefits of a consulting heritage: Curiosity and the discipline of an inquisitive approach is what ultimately leads to innovative solutions.

-????????? Current circumstances are the source of outperformance: Each investor’s individual circumstances are key to unlocking the ‘right’ portfolio solutions. There is no solution without circumstance.

-????????? Strong governance bridges the gap between theory and practice: Good ideas poorly implemented are ultimately bad ideas. Strong governance allows you minimize potential implementation drags and trading costs across portfolio strategy, and enables a fuller understanding of risk, both qualitative and quantitative.

-????????? Finding the best managers is only the start: Finding and accessing the best managers for portfolios provides an advantage from the outset, but it’s not enough on its own. Building portfolios is about access, blending and securing exposure on the best possible terms, combined with a willingness to make adjustments over time.

We’ll be back in a fortnight to explore how our reference portfolios evolve to implemented strategies in real time.

Niall O’Sullivan

Ring Niall’s bell on LinkedIn to keep up with his insights and thought leadership.

How are large asset owners adjusting their approach to private markets?

Niall is hosting our next LinkedIn Live June 13 featuring special guest Timo L?yttyniemi , CEO of VER, the State Pension Fund of Finland. He’ll be joined by Olaolu Aganga , US CIO and Andrew McDougall, CFA, CAIA , Global Head of Multi-Asset to discuss the current state of private markets and how VER is positioning their portfolio to deliver against the fund’s long-term objective of supporting its members.

?? Sign up here: https://www.dhirubhai.net/events/7201644158636204032/comments/

Keeping the correct diversification timeline

Diversification can be difficult at times when one asset class or region is outperforming all others. When all returns seem to be coming from one part of the portfolio, it’s common to want to double down to maximize returns.

However, it’s critical to maintain perspective. Sources of return can change quickly, and diversification is needed to protect portfolios over the long term. Investors must keep the correct timeline in mind to manage risk.

Niall recently sat down with Rich Nuzum, CFA to discuss diversification and how he’s helping guide clients in market cap concentration in equity markets:

Thanks for reading our inaugural, bi-weekly newsletter. Please let us know in the comments what topics you'd like our CIOs to cover in the next edition.

Important Notices and Disclosure ??