Mercer periodic table shows why investing is elementary (but unpredictable)
FEBRUARY 14, 2021
David Scobie: Mercer NZ principal
Investors in most asset classes chalked up positive results during 2020 in a year that saw top-to-bottom returns span an on-trend 29 per cent divide, the latest annual Mercer ‘periodic table’ reveals.
Released last week, the ever-fascinating Mercer analysis (available here in interactive format)https://investmentnews.co.nz/wp-content/uploads/Mercer2020inter.pdf shows 75 per cent of the 16 asset classes on display were in the black last year: only global listed real assets (infrastructure and property), commodities and emerging market debt spoiled the 2020 party, a period described by David Scobie, Mercer NZ head of consulting, as “nothing short of confounding”.
“Aided by exceptionally low interest rates, government fiscal injections and rapid-fire vaccine development, most share markets were able to recover from a first quarter collapse to end the year well in the black,” Scobie says in the analysis.
Despite the generally upbeat outcome for investors last year, the 2020 performance marks a step down from the previous annual period when all asset classes posted positive returns.
In 2020 share assets filled to top six places in the Mercer table, ranging from 14.9 per cent for global private equities to 8.6 per cent for unhedged global equities. (Currency management added a major boost last year with hedged global shares up 11.2 per cent for NZ investors.)
The global private equities space – an asset class typically beyond the orbit of most retail investors – just pipped NZ shares (up 14.6 per cent) for top spot, the Mercer study shows.
International private equities is “an asset class not accessed by many investors but consistently a source of double-digit returns over the past decade, partly reflecting its higher risk and lower liquidity characteristics”, Scobie says.
Global private equities provided the best returns in three of the last 10 years, according to Mercer, with NZ shares earning that accolade twice (including 2019): no other assets class has hit the top more than once over the same period.
“Our Australian cousins fared not quite so well in 2020, notwithstanding an incredible resurgence from deferred-payment company After pay, as a range of travel and energy-related stocks struggled,” Scobie says. “Notably, in a Trans-Tasman slam-dunk, the NZX has now outperformed the ASX for ten years running.”
He says for the 10 years to the end of 2020, emerging markets equities scored the single-highest annual return of 34.6 per cent in 2017.
“However, the sector also had the second-to-lowest annual return, being -18.3% back in 2011 – in itself a clear illustration of how volatile individual asset classes can be,” Scobie says.
Commodities hit the decade-long nadir of -22.8 per cent in 2015 in a difficult 10-year period for the asset class, despite showing some signs of life in 2020.
“A very weak first quarter [for commodities] was not sufficiently offset by a hearty rally over the remainder of the year as investors began to contemplate whether higher inflation lay ahead,” he says.
As per usual, Scobie says that while the ‘periodic table’ of annual returns may flash some alluring, if illusory, patterns, diversification remains the best strategy to weather markets over the long term.
The Mercer table “serves as a reminder to investors to establish their risk tolerances, avoid the temptation to pick winners, allocate to a range of asset types and focus on the longer term”.
Nonetheless, Scobie says investors should consider a wider mix of assets than the traditional blend of shares and bonds.
“With few asset classes standing out as obviously ‘cheap’ at present, the argument for wider diversification is perhaps as strong as ever,” he says. “Exposure to non-traditional asset classes can serve to balance out the path of returns over time, so long as the risks are understood and access is attained on a cost-effective basis.”