Australia’s Mercer Super Trust is shifting money to alpha-generating sectors this year and is keeping an eagle eye on global economic growth and growing trade frictions to gauge their impact on investments.

That’s according to the chief investment officer for the Pacific region for Mercer, which manages the superannuation fund.

“After a number of years of strong returns, Mercer is reallocating towards alpha-generating sectors over those with market (beta) exposure," Sydney-based Kylie Willment told AsianInvestor after the group released its annual results. “This includes increasing allocations across unlisted assets (both equity and debt) and absolute return target sectors, such as unlisted property and infrastructure, private debt and absolute return bonds."

She said that in one of the Super's flagship diversified funds, allocations to alternative assets were raised by around 8% in he group's financial year to June-end, funded largely by reducing exposure to traditional fixed interest and, to a small extent, by cutting back on listed equities.

Investments in infrastructure via Mercer’s own global unlisted infrastructure fund delivered an 11.9% return in the 12-month period, while property investments via the group's Australian direct property fund generated delivered a 14% return.

Kylie Willment

She did not provide a breakdown of how much was invested across different asset classes. 

Mercer Super Trust comprises a corporate superannuation division, a personal superannuation division, an allocated pension division, and a retail division.

Funds under management (FUM) for Mercer Super Trust grew by 7.1% to A$24.1 billion ($17.7 billion) over the financial year, with investment returns generating all the increase amid some net business contraction, Willment said.

The fund is ranked 244 in AsianInvestor’s latest list of the top 300 asset owners in the region.

Along with infrastructure and property, Willment noted that listed equities also put in a strong showing, in particular small caps and emerging market stocks. Investments in global small caps returned 21.5% over the year, higher than the MSCI Small Cap index gain of 19%, while its investments in emerging markets also beat their benchmark with a 13% return.

Cash and fixed income were the worst-performing asset classes, although Mercer did not provide a detailed breakdown.

GROWTH WORRIES

Despite the hunt for alpha through real assets there remains a mood of caution at Mercer Super.

“While we currently hold a neutral view on growth assets, we have become more cautious in recent months,” Willment said.

While growing trade tensions are one factor, others include signs that the global economy may be slowing and uncertainty in Europe, she said, noting how the European Central Bank is slowing down its bond purchasing programme even though Europe’s economy remains shaky.

With a trade war looming with the US and populists capturing power in Italy, the worry is that there could be a renewed threat to the euro as economic growth cools -- and that's even before the uncertainties around Brexit are thrown into the mix.

In the meantime, Willment said a focus on responsible investment remains a priority for Mercer Super.

“We believe that environmental, social and governance (ESG) factors have the potential to impact long-term returns,” she said, noting how Mercer has already implemented some responsible investing practices within its own funds. 

However, best practices in this area are evolving rapidly, she added.

“Some of our focus areas include undertaking climate-change scenario analysis, engaging with our investment managers to encourage greater consideration of ESG in their investment processes and increasing the way we use our influence as shareholders to drive better corporate behaviours,” Willment said.

“We are also implementing a fund-wide exclusion of tobacco and controversial weapon manufacturers,” she said.