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Mercer's David Scobie examines the 'confounding' strong investment returns made in the past year

Mercer's David Scobie examines the 'confounding' strong investment returns made in the past year

By David Scobie*

To the average investor, 2020 was nothing short of confounding. Had one received magical insight at the start of the year that the world would become engulfed by a devastating pandemic, surely they would have reduced risk and missed out on some strong returns from equity assets. Aided by exceptionally low interest rates, government fiscal injections and rapid-fire vaccine development, most share markets were able to recover from a first quarter collapse to end the year well in the black. Indeed, who would have thought!

However, not all asset classes delivered the goods, as highlighted by Mercer’s ‘Periodic Table’ of investment returns. Produced annually, the Table colour-codes 16 major asset classes and ranks how each performed, on an annual basis, over the last ten years. An interactive version of the Table can be found here.

A quick glance at the Table shows how one year’s winners can quickly become next year’s losers, and vice versa. Predicting what may happen next poses a big challenge to even the most avid market followers.

Key Observations

Looking across 2020 and the past decade, a number of observations can be made from the Table:

  • 12 of the 16 asset classes generated a positive return last year – a healthy proportion albeit beneath the 100% level achieved in 2019. 
  • Leading the way in 2020 was Global Private Equity (+14.9%) – an asset class not accessed by many investors but consistently a source of double-digit returns over the past decade, partly reflecting its higher risk and lower liquidity characteristics. 
  • Also high on the leader board last year was New Zealand Equities (+14.6%). As was the case for all share markets, February and March proved highly challenging as the reality of the spread of COVID-19 kicked in. However, the presence of Fisher and Paykel Healthcare and a range of utilities in the large cap space saw the NZX recover well by year-end. 
  • Our Australian cousins fared not quite so well in 2020, notwithstanding an incredible resurgence from deferred-payment company Afterpay, as a range of travel and energy-related stocks struggled. Notably, in a Trans-Tasman slam-dunk, the NZX has now outperformed the ASX for ten years running. 
  • Further afield, global share markets generally delivered pleasing outcomes in 2020, including Developed Market, Emerging Market and Small Cap Equities. However, certain segments were an exception. Global Listed Property (-13.6%) and Global Listed Infrastructure & Utilities (-6.5%) feature at the bottom of the Table. The pandemic proved particularly troublesome for the profitability of businesses in the hotel and retail sectors.  
  • New Zealand and Global Fixed Interest (with the exception of Emerging Markets) delivered solid returns of +5.4% last year alongside a general fall in interest rates.  Meagre yields on bonds were enhanced by capital gains. While it couldn’t compete with the riskier asset classes, fixed interest exposure gave a helpful boost for conservative investors. 
  • An aversion to risk was often prevalent during the year, but overall Cash proved an unattractive place to be as central banks pressured interest rates lower. The asset class generated a historically low return of +0.6% - a safe haven but not a path to riches!
  • Mid-table returns in 2020 were generated by the mid-risk asset classes of NZ Direct Property and Defensive Hedge Funds. Meanwhile, a frequent laggard in the Periodic Table, Commodities, again could not catch a trick (-5.6%). A very weak first quarter was not sufficiently offset by a hearty rally over the remainder of the year as investors began to contemplate whether higher inflation lay ahead. 
  • Across the decade, the award for single highest annual return remains with Emerging Market Equities (+34.6% in 2017). However, the sector also had the second-to-lowest annual return, being -18.3% back in 2011 – in itself a clear illustration of how volatile individual asset classes can be. 
  • As a group, last year’s asset class returns comprised a top-to-bottom range of 29% – similar to the prior three years and to the average for the decade as a whole (32%). 

Takeaways for Investors

For investors in diversified funds including KiwiSaver, a relatively narrow portfolio emphasising Shares and Bonds, with something of a domestic bias, proved hard to beat in 2020. However, it is too easy to conclude that simple is superior. With few asset classes standing out as obviously ‘cheap’ at present, the argument for wider diversification is perhaps as strong as ever. Exposure to non-traditional asset classes can serve to balance out the path of returns over time, so long as the risks are understood and access is attained on a cost-effective basis. 

In sum, one can while away the hours making additional observations on the Periodic Table, and perhaps identify patterns. But are they real or illusory? The unpredictable nature of capital markets is unavoidable. The Table serves as a reminder to investors to establish their risk tolerances, avoid the temptation to pick winners, allocate to a range of asset types and focus on the longer term. In that way, there is a greater chance that periods of market disruption such as we saw in 2020 can be tolerated, rather than spark a panic reaction. 

With a well-constructed portfolio in place, for all but the most skilled investors, the best advice during episodes of heightened volatility is often: Don’t just do something, stand there!

*David Scobie is Head of Consulting (NZ) at Mercer Investments, a global wealth advisory and investment solutions business.

This article 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.

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I think REITs with greater exposures to residential investments will continue to do well in the coming years and the building industries are worth investigating.

CWBW... Freddie Mac and Fanny May sell the best REITs. But get in quick before they over subscribe. As you said the residential mortgage investment tranches are the best.

Nah mate, NZ has some of the best performing REITs in the world.

Money makes money unless your stupid with it. Some people here still made bad decisions because no one could have predicted that this government would prop up the housing market to the extent it has.

Some of us didn't have much choice in the matter.

Would it make any sense to still hold any significant amount of bonds ? The risks are now pretty much one-sided, as there is only one way interest rates are going to go, in NZ and internationally: up.
I see bleak short and medium term prospects for bond prices. The Reserve Banks in many countries have pretty much killed the bond market, and I can't see the situation improving in the fixed interest markets, at least not in the foreseeable future.

The risks are now pretty much one-sided, as there is only one way interest rates are going to go, in NZ and internationally: up.

How can you be so sure? The Japanese scenario suggests you might be wrong.

Going to be the curmudgeon here. Bitcoin monstered all other classes in 2020 and has done so for the past decade. But I don't want to harp on about that.

Also, the gold price in AUD and NZD is almost flat over P12M, despite the massive money printing happening in the U.S. and in most of the Western countries. We know that the gold price is heavily manipulated by the likes of JPM (with the consent of the govts and the central banks). TBH, the spectacular gains of funds, etc in 2020 and past decade to provide for the boomers in developed countries are actually a sign of future trouble to come.

Mercer like everyone else will be forced to acknowledge BTC, as they get more questions from customers about why they are not investing in the top performing asset class from 2020, 2019, 2017, 2016, 2015, 2013, 2012, and 2011.

So Printed money / QE / massive deficit spending led to lots of Paper wealth gains ... despite the world teetering on the abyss

In other words there is no market discovery

Something like that. But as I alluded to above, the ruling elite actually suppressed the price of some assets via paper. When those asset prices are gold and silver, I think it's important to take notice. People will say 'it's been going on for years' and that's true. But 2020 was stark for anyone paying any attention.

How about explaining these returns are actually the either side of the theft from the non asset owning classes. No if, buts or maybe’s...this is where it is coming from.
Than banksters know it...the politicians haven’t a clue.

Interesting conversation with a rello I haven't seen in a while. He is a leader in the Kiwisaver / investment industry and everyone on this site would likely recognize his name.
Personally he pulled out of sharemarket a few months ago as he sees trouble ahead, while professionally his firm takes kiwisaver contributions and invests in the sharemarket. He said they really have no other choice.

Australia doesnt effectively prevent its citizens from buying overseas shares, so they have more options. Unlike NZers who are hit with a wealth tax if they invest in overseas sharemarkets, so just like the housing market, they are all forced to pay stupid prices for a tiny pool of local shares, forcing prices up. Remove the FIF tax and allow New Zealanders to invest in other sharemarkets and then see how well the local one does.

No mention of residential property? I assume he only sells financial products?