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Research Philosophy
Mercer has an in-house team of research professionals. Our research activities cover strategic,
capital markets and manager research on a global and local basis. Helping to identify investment
trends and selecting those investment managers most likely to meet performance objectives is a
vital part of the service we provide to our clients.
Strategic Research
The strategic research function investigates a broad range of issues relevant to portfolio structuring.
This may involve analysing new investment opportunities and ideas emerging in other parts of the world
that may be applicable for local investors.
Examples of recent strategic research projects undertaken include:
- Alternative asset classes and strategies such as private equity, infrastructure, hedge funds, global property,
commodities, gold, timber, and agribusiness
- Portfolio construction such as global versus regional, currency hedging, structuring income portfolios,
market-cap indices, benchmarks, value versus growth, alpha versus beta, alpha transfer, long/short investing
and liability benchmarking
- Manager research processes such as decay of information ratio with time and tracking error, prediction power
of past performance
- Market structure changes such as equity market concentration
- Big picture economic issues such as deflation
- Product innovation such as capital guaranteed products, gearing and buy/write strategies.
Capital Markets Research
Accurate capital markets research and assumptions are crucial to create robust asset allocations for a range of
economic scenarios. Mercer has a specialist capital markets research team, which focuses on the expected outcomes and
interactions between available investment opportunities, forming views on long term asset class risk/return expectations,
as well as providing views on relative medium term valuations of capital markets. This team provides inputs for:
Strategic asset allocations
In recommending a strategic asset allocation for model portfolios, Mercer will firstly clarify the desired strategic
outcome, investment objectives and applicable risk tolerance of each portfolio. These objectives may relate to competitive
positioning relative to peers, minimising the chance of negative annual returns, or achieving a particular long term real
return target. After clarifying the strategic outcome, investment objectives and risk tolerance, we apply our strategic
and capital markets research, together with our modelling tools, to determine a long term strategic asset allocation.
Dynamic asset allocations
Dynamic asset allocation (DAA) is intended to bridge the gap between long term strategic asset allocations and the
shorter term horizons over which active investment managers generally operate. The DAA process produces investment
benefits by implementing a different asset allocation to the strategic asset allocation when:
- Near-term expectations for future asset class returns vary significantly from long term assumptions
- Risks associated with specific asset classes vary from long term expectations
- Other specific pricing anomalies or opportunities are identified.
Our approach to forming valuation views is practical. We seek to identify consensus views and then establish
why the consensus view may be too optimistic or pessimistic with the intention of forming views as to the likely
direction of asset class returns relative to cash and their long term equilibrium forecasts.
Manager Research
Mercer’s manager research process is forward-looking and qualitative. Research meetings
with managers focus on identifying:
- Evidence of any sustainable competitive advantages that should give a manager above average prospects
for future out-performance (e.g. superior research resources, a superior approach to investment analysis,
or something superior about the manner in which the research and analytical resources are harnessed in the
investment decision-making process); and,
- Evidence of any significant potential weaknesses which may affect the prospects for future out-performance,
or give rise to an above average risk of future under-performance (e.g. a weakness in any of the areas mentioned
above, poor risk controls, excessive transaction costs due to poor dealing procedures or excessive assets under
management, or broader organisational or business management issues that could potentially detract from
performance in some way).
The manager research team uses a globally consistent framework that focuses on four key
factors as outlined below:
We believe these four factors encompass the qualities that investment managers must possess
in order to have strong prospects for outperforming. Each of these factors is rated as -, =, + or ++. Our overall
strategy ratings are then based on an overall research opinion. They do not represent a weighted average of the
four factor scores.
Mercer’s rating for an investment strategy signifies Mercer’s opinion as to its prospects
for outperforming a suitable benchmark, on a risk-adjusted basis, over a full business cycle. A manager must
generally achieve an “A” or “A-” rating before it can be recommended for inclusion in client portfolios.
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