2009 Investment predictions discussed

1: A clear focus will emerge on capturing opportunistic beta in the medium term
Fear of redemptions, margin calls, and financing commitments, are all contributing to cash hoarding. Less constrained investors with longer time horizons may find a number of bargains in the market. Investors, however, should be selective about these and target the opportunities which are most attractive. In the current environment these opportunities appear across three groups: 1. Technical-driven pricing opportunities. Exceptional and in some cases anomalous market pricing resulting from forced selling and illiquid markets – most clearly evident in credit markets. 2. Sentiment-driven pricing. A dynamic asset allocation opportunity, driven by short-termism among investors has led to a number of attractively priced asset classes such as investment grade credit and developed equity markets. 3. Capital starved investments. Opportunities caused by difficulties in obtaining financing and/or lack of investor support most apparent in private equity markets. 2: Active managers will continue to be important in adding value to investors’ portfolios
Since the beginning of the financial turmoil, it has been a particularly challenging environment for active managers. A pronounced increase in investor risk aversion has led to negative returns from positions held to capture many fundamental active management risk premia. Flight to safety and deleveraging phenomena have resulted in distorted valuations, and judgements based on economic outlook or extrapolation of trends has been fraught with peril. Adding to the angst are high volatility, low liquidity and a market more focussed on governments’ next pronouncement than on fundamentals. In these circumstances an investor could be tempted to throw in the towel on active management.

However, successful active managers are able to apply unique insights to markets and to dispassionately act on those insights. Mercer does not believe that recent underperformance of these managers means that they have suddenly become incompetent.

When we return to economic and market normality, Mercer believes that high quality active managers will be faced with widespread opportunities to capture added value.

Mercer also believes that the recent lack of rationality in markets allows an opportunity to test active managers in terms of their ability to balance discipline with pragmatism and can provide further evidence as to strengths and weaknesses.