DECEMBER 2012

IN THIS ISSUE:
Whole of Life – Challenging the Status Quo
Managing Portfolio Risk Through Hedge Funds
Not All Yield Strategies Are Created Equal
Gaining Good Governance Through Diversity
Warning! Fiscal Cliff Ahead
Market Update
Portfolio Viewpoint

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FEATURE ARTICLES

Whole of Life – Challenging the Status Quo

Mercer believes that a whole-of-life investment approach within a default superannuation fund provides members with a framework to create adequate and sustainable incomes to and throughout retirement. However, current default funds in Australia typically end at retirement, with a static "set-and-forget" asset allocation of approximately 70% growth assets/30% defensive assets throughout their duration. We believe we can do more for Australia's superannuation members to ensure that they have an adequate income both leading to retirement and during the retirement years.

Managing portfolio risk through hedge funds

In Mercer's opinion, hedge funds have a critical role to play in the portfolios of institutional investors because they provide exposure to non-traditional return drivers, thereby diversifying those risks (especially equity risks) that dominate traditional portfolios. But what is the optimal role for hedge funds in a portfolio? To answer this question, we need to start by looking at risk factor diversity, consider a number of key risk factors and highlight the many common pitfalls to hedge fund investing.

Not all yield strategies are created equal

Over the long term, dividends have significantly contributed to long-term returns from equities. Empirical evidence would suggest that high-yielding stocks outperform over the long term. However, such a "naive" approach tends to lump all yield strategies together and fails to consider the key drivers of return within each strategy.

Gaining good governance through diversity

The benefits of diversification in nature are well known. For example genetic diversity we know that diversity is key in creating better disease resistance. It is a also a principle recognised by investors to help withstand capital market volatlity. So it's not a big stretch to imagine that diversity is also a key tennant in achieving highly effective decision-making at Board level and also in committees and teams throughout an organization. Is your Board meeting the diversity equation?

WARNING! FISCAL CLIFF AHEAD

The United States is fast approaching a year-end "fiscal cliff" of tax hikes and spending cuts that is threatening to tip its economy back into recession. Newly re-elected President Obama would prefer to defer or cancel many of these increases and cuts, but is reliant on support from a Republican-controlled House of Representatives. If all of the fiscal cliff measures come into force, equity investment would be marginally less attractive for US taxpayers and could have a particular impact on high-dividend stocks. However, this effect may already be partly priced into the market. We believe that whatever happens from now until 31 December, we will likely see the US come up against the "debt ceiling" during the first quarter of 2013, adding a further potential source of political uncertainty and market volatility.

MARKET UPDATE

Simon Calder of Mercer's DAA team reports that 2013 is "shaping up as another year of below-trend global growth", though the risks of a major "financial accident" have been curtailed largely due to actions taken by European policymakers and the US Federal Reserve in the third quarter of this year. He points out that global equities, particularly emerging market equities, are the most attractively valued of the growth assets, while global sovereign bonds are becoming less attractive as a result of an apparent decline in global tail risks.

PORTFOLIO VIEWPOINT

What a difference a quarter makes. Andrew Howard, Mercer's Chief Investment Officer, Asia Pacific, looks back at the three months to the end of September 2012 and reiterates the danger of succumbing to investor panic and making investment changes at the point of maximum market distress.

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Mercer has a team of investment specialists committed to providing clients with leading edge advice and solutions. For further information on Mercer's Investment services in the Asia Pacific region, please connect with us.

IMPORTANT NOTICES

©2012 Mercer LLC. All rights reserved.

This contains confidential and proprietary information of Mercer and is intended for the exclusive use of the parties to whom it was provided by Mercer. Its content may not be modified, sold or otherwise provided, in whole or in part, to any other person or entity, without Mercer's prior written permission.

The findings, ratings and/or opinions expressed herein are the intellectual property of Mercer and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the investment products, asset classes or capital markets discussed. Past performance does not guarantee future results. Mercer's ratings do not constitute individualized investment advice.

This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances.

Information contained herein has been obtained from a range of third party sources. While the information is believed to be reliable, Mercer has not sought to verify it independently. As such, Mercer makes no representations or warranties as to the accuracy of the information presented and takes no responsibility or liability (including for indirect, consequential or incidental damages), for any error, omission or inaccuracy in the data supplied by any third party.