One on one with Mercer Super: making thoughtful shifts

Super Review’s one-on-one series aims to spotlight key investment insights from the superannuation sector.

This week, Darren Spencer, Mercer’s lead investment director, Pacific, highlights the key areas where the super fund is uncovering opportunities, with a focus on Australian government bonds and real estate investments.

What are some key opportunities you foresee in the next year, across asset classes and across global regions?

Our investment team consists of approximately 2,000 investment professionals around the world. This global footprint positions us well to assess investment opportunities across the full spectrum of public and private markets.

In the public markets sphere, given regionally divergent relative valuations and economic outlooks, we are somewhat cautious on the U.S., while Japan presents an interesting mix of improving fundamentals and favourable valuation. Emerging markets also look promising relative to developed markets broadly on account of what we consider to be more attractive valuations and promising economic prospects in certain geographies.

We are also investing in companies whose earnings are likely to be driven by structural trends; such as artificial intelligence, the demand for power and re-shoring of supply chains. These themes are at the intersection of digitisation of the global economy, the rise of AI and de-globalisation which we expect will play out over the coming decades.

The opportunity set across private markets continues to evolve and we are seeing multiple opportunities to execute on. Private Credit is a good example where we are focused on investments that provide embedded structural protections; such as positive and negative covenants, seniority in the capital structure and tighter documentation to help mitigate downside risks. We are also looking at structured lending and specialty finance due to lower levels of competition from banks.

As markets brace for volatility, interest rate cuts, and moderating inflation, how is the fund preparing portfolios for these shifts?

An example of how we are expressing our current portfolio views is through the lens of Australian government bonds. While our international fixed interest portfolio has benefited from falling interest rates and moderating inflation, we think the set up for Australian government bonds is appealing at this time.

Given that underlying economic conditions in Australia remain weak, we expect high interest rates and continued cost-of-living pressures to keep household consumption and economic growth suppressed. As cash rates have now likely peaked for this cycle, we favour Australian government bonds on a relative value basis given their combination of carry and potential for capital gains in a falling rate environment.

The investment landscape has significantly changed in the last few five years. Could you elaborate on how Mercer Super's portfolios have evolved in response during this time? 

We are constantly focused on positioning the portfolio to generate competitive returns for members. 

An example of this is how we repositioned our unlisted Australian property portfolio over the last several years. By leveraging our long-standing global real estate platform, we were able to successfully reposition the composition of the portfolio by reducing office exposure and increasing industrial/logistics exposure. The net impact of these changes has had a positive impact on performance for members. For the 12 months to June 30, 2024, the portfolio has outperformed its benchmark by 6.97 per cent.

Are there any significant changes or adjustments to your investment strategy that you plan to implement for the next year?

We continue to leverage our intellectual capital, and to make portfolio enhancements including thoughtfully expanding our unlisted property portfolio from domestic to global markets.

Today, we are in what we consider to be an attractive cyclical buying opportunity given the valuation reset across commercial real estate which is down 21 per cent since the peak in March 2022, thereby setting the stage for the likelihood of attractive returns. This has been borne out of experience from prior real estate downturns such as the early 90’s recession and the global financial crisis where investors enjoyed attractive returns in the years following the trough in prices. 

We are investing in assets that we believe are supported by structural tailwinds, in markets that have attractive supply/demand dynamics and where operating fundamentals are strong.  It is the combination of these characteristics that we expect to drive net operating income growth over the long-term, therefore helping to deliver better retirement outcomes to members.