In our current investment and political climate, asset owners face numerous challenges with their investment portfolios. Market volatility and political uncertainty challenge the usual ways of investing and managing risk. These factors have also increased pressure on executives to protect investments while creating real returns. Suboptimal investment arrangements can lead to eroded returns and the failure to capture timely market opportunities. By keeping these trends in mind, particularly related to governance, investment committees can put themselves in an optimal position to generate returns even in a low-yield environment. This article discusses how to navigate these uncertain times. Greater Focus on Governance and It’s Linkage to Better Outcomes Mercer believes improving the investment governance of the asset owner increases the probability of achieving a better investment outcome. We think of this as a journey rather than a single project, built around several aspects: Clearly articulating the asset owner’s beliefs and objectives Objectively reviewing the skills and strength of the decision-making committee and comparing those to governance requirements Ensuring a sensible balance between strategic and manager discussions Building a framework to ensure speed of investment execution (within defined parameters) Committing to ongoing oversight to independently reassess the operating framework Identifying improvements Ensuring sufficient time is apportioned to the management and oversight of the assets Lower Expected Future Returns Until relatively recently, simply being invested in the “market” was sufficient to earn a decent investment return (the context of the return and liabilities varies). Looking forward, the consensus for returns for most assets is significantly lower than it has been for the last 10 years; therefore, clients need a framework or governance structure and exposure to a wider range of investments to improve their future expected returns. This improvement can be achieved in a number of ways, including additional asset classes, more dynamic portfolio management and active management in less efficient segments of the market, such as global small companies. Increased Market Volatility and Uncertainty Many consider increased market volatility a negative. But this ignores the many opportunities available in such an environment. The two significant Western political events of 2016 — Brexit and Donald Trump’s presidential victory — have increased market uncertainty. We encourage our clients to recognize that the corresponding rise in market volatility may present them with opportunities (without losing sight of long-term objectives). Many of our clients have established a governance framework that allows for greater speed in decision-making and execution by delegating responsibility to Mercer. For example, late in 2015 and early in 2016, we saw a very attractive value opportunity in high-yield bonds. Within our discretionary portfolios, we increased our allocation in December 2015 and January 2016, which we have since modestly reduced. Increased Complexity of Investment Options There has been an increased focus on and acceptance of more complex investment solutions to address the challenges of the low-yield environment. Allocations to alternatives, both liquid (such as hedge funds) and less liquid (such as private equity and private debt), have materially increased. Although these allocations are appropriate for some of our clients, they have their own unique challenges, including the need for more in-depth investment as well as operational due diligence and administrative implications (such as dealing with capital calls and distributions for private market investments). Clients that implement this exposure find that their portfolios benefit from this diversification over a number of funds and vintages. Reassessment of Internal Versus External Implementation In an environment of low expected returns, cost and expense management is an increasing focus for many of our clients. A thorough review considers the cost and time expense of internal resources, such as legal and compliance; investment reporting and operational resources; investment and risk; and third-party expenses, such as investment manager fees. Commingling assets provides much greater purchasing power. Combined with an efficient implementation solution, investors can significantly reduce costs, lower volatility and improve the overall investment outcome. Periods of uncertainty and volatility also come with tremendous opportunity. A strong and clear governance framework improves the decision-making process; provides the opportunity to expand the scope and diversify the portfolio; and, most critically, provides the framework for an improved investment outcome and lower volatility.