In a world of ever-greater investment choice, how do you keep the returns rolling in while being able to dampen down costs and risks? To discuss that I'm joined now by Michael Dempsey. He is European Head of Investment Solutions here at Mercer. So, Michael, what are the main trends and developments you’re seeing right now?
There’s a number of high-level trends that continue to play out in the marketplace — certainly risk is very prominent, in terms of de-risking and particularly around diversification. Linked to diversification is many institutional investors looking to bring in new investment strategies.
For example, in the fixed income space, we’ve seen multi-asset credit, absolute return fixed income, come into play over recent times, alongside higher allocations towards private markets. We’re also seeing themes becoming more mainstream — like sustainability and ESG, and regulation and costs continue to be very prominent as well.
You’ve outlined a lot of change and development there. How is this impacting on the institutional market overall?
Well, one overarching theme is that institutional investors today are dealing with greater complexity. So how can they govern their investment portfolios given that they're more complex, more diverse, more sophisticated and, in many cases, higher cost? With that is the emergence of a number of governance models coming into the marketplace to allow institutional investors to balance the time, resources, cost and commitments that are needed in that space.
And we’ve seen at the small to medium size end of the market, under $1 billion, really support delegation across the wider portfolio, which allows investors to get more done, particularly at a strategic level, and more agility in terms of decision-making and better outcomes. At the larger end of the market, where they have internal teams and expertise, they might look to add to those teams additional skillsets or expertise, and they might look towards delegation more in a discrete or specific asset class. But overall, the attachment of governance to the outcome is really important because, ultimately, better governance leads to better outcomes.
So how has Mercer responded to all this change?
Well, in response to these trends and to support our clients, we’ve looked at expanding our range of services to include both advice and implementation. As part of that expansion, we’ve built out an implementation platform that has all the operational and technology requirements connected to it — but ultimately has the full range of investment solutions covering equity, fixed income and alternative asset classes, to be able to cover the broader market and give clients the ability to be able to leverage those in a very efficient form.
Globally we’ve gone through to 240 billion of assets, which illustrates the demand at a global level. In Europe, we have over 370 clients and have just gone through 100 billion in assets. They are services that we are providing today that clients hadn’t received options around accessing in the past. And why is that scale important?
First, that allows us to leverage better fee deals, with underlying investment managers, and pass those savings on to clients — so that helps clients address the cost issue.
Second, by leveraging Mercer’s research and utilising Mercer for manager selection services within our solutions, that allows clients to get more done. It allows them to elevate to more strategic decision-making and speed up their investment decision-making process by utilising those solutions around implementation.
And the third point is really around flexibility. Having a range of solutions, both multi-asset class — also including blending managers — but also having single manager solutions for the large end of the market, allows clients to be able to customise and tailor their governance requirements based on the platform. And that’s really led to better outcomes, better choice and really a great range of options for clients to be able to consider as part of addressing this challenge.
You mentioned delegation there. Isn’t it a genuine concern for organisations to hand over responsibility to a third party?
Well, it’s important to highlight that at Mercer, we provide a range or a continuum of services to clients, from accessing tools and research through to advice and, ultimately, through to implementation as well. So from that, clients can decide what’s the right service or governance model based on their specific requirements.
But specific to delegation, it’s important to recognise that delegation does not mean the loss of control. It does not mean a lack of decision-making or oversight. In fact, many of our clients continue to lead around decision-making with that regard. Also, it’s important to connect that “what is the benefit of delegation?” Well, it’s really to implement decisions in a risk-controlled governance, effective cost-control manner to the benefit of clients that don’t have the time resources, expertise or budgets on a standalone basis to be able to manage complex investment portfolios on their own. It also provides greater choice, and it also allows decision makers to elevate towards more strategic decision-making.
Have you got an example of what that strategic decision-making might be?
Sure. In the context of pension funds, for example, that would allow them to address key strategic aspects or decisions like designing de-risking plans — like constructing LDI mandates, assessing cashflow considerations or introducing alternatives into their portfolio.
And when you move away from pension funds towards the wider institutional market, looking at insurance companies or wealth managers or private banks that might operate in that more commercial space, it allows them to access high-quality investment managers at low cost. All of that gives a wide range of choice and really allows the marketplace to address and look at solutions to a lot of these complex trends that we’re seeing emerging.
Michael, we've talked through a lot in the last few minutes. If you could condense that down to a single message, what would it be?
I think the overarching message is that better governance ultimately leads to better outcomes. So our suggestion would be for institutional investors — for clients to be able to take a step back and review their governance framework and structure. Many clients, in doing that, have been surprised by both the strategic value and the operational efficiencies that come from that. And, of course, at any stage we’re delighted to help clients in terms of undertaking that exercise to help them along the journey.
We have to leave it there. Michael Dempsey, thank you. If you would like to find out more about Mercer solutions in this area, please do click on the link below.
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