Rich Nuzum

Name: Rich Nuzum
Title: President, Wealth
Firm: Mercer
Assets under advisement: $12.9 trillion; AUM $282 billion
Type of clients: State and corporate pension plans, sovereign wealth funds, health care corporations, insurance companies, non-profit endowments and foundations, family offices

Rich Nuzum is the president and global business leader for Mercer’s retirements and investments business, and has been at the firm for over 28 years in positions based in the United States and Asia. He focuses mostly on objective setting, governance, and strategic asset allocation for large institutional investors, including sovereign wealth funds and multinational plan sponsors.

He’s a key witness to the changing macroeconomic environment over the last few years, being responsible for hundreds of billions of dollars under management as part of Mercer’s outsourced chief investment officer (OCIO) business, and trillions under consultation by Mercer’s investment consulting business.

In his role, Nuzum cites that far and away one of the largest concerns for investors in today’s environment is low interest rates. Such examples are Germany’s auctioning off of 30-year debt at a negative yield for the first time in its history, and the US’ newest settings for interest rate levels.  “The US recently set an all-time low for 30-year Treasury yields, going below 2% for the first time in history,” Nuzum tells CIO.

“For most of our clients—their boards of directors, their actuaries, their stakeholders more broadly—still expect them to deliver a reasonably high expected return,” he says. “A high single digit expected return, something like 8%, frankly was really easy to get 20 years ago. But as we look forward for the next 20 years, we believe dollar-denominated investment-grade bonds are likely to only give us 3.3%, and we project global developed market large capitalization stocks will only give us 6.4%  So, whatever return number stakeholders have come to believe is normal, based on their historical experience, is going to be much more challenging to achieve going forward.”

This subsequently leads to investors piling into alternative investments, such as real estate, private equity, infrastructure, private debt, and even hedge funds.

“Asset owners are striving achieve a higher return while diversifying their risk,” Nuzum says. “Low interest rates and low expected returns are not a transient challenge—the yield curves are projecting that this will be the new normal state of the world for a long time to come. The low prevailing yields are driving money out of publicly traded investments and into alternative asset classes.”

ESG a Big Economic Concern

Some of the largest concerns Nuzum believes are influencing the economy and investments are environmental, social, and governance (ESG) concerns, and climate change in particular. “As the economy transitions from high-carbon intensity to low-carbon intensity, the oil, natural gas, and other carbon-based resources still in the ground, which are funding many of the world’s largest sovereign funds, may become less valuable,” he says. “Also, for any traditional investment portfolio, if carbon emissions become taxed, or the economy otherwise shifts away from carbon-intensive energy sources without a gradual transition due to shifts in consumer preferences or because voters force governments to take regulatory action, there is likely to be a stagflationary shock. If carbon gets a price, stock markets and bond markets will likely correct sharply, because a large un-priced externality will get priced into all sorts of assets.”

Nuzum illustrates that some clients who are strictly concerned about economic transitions and profits are wary of society’s carbon transition, and have been reducing their weights in carbon-intensive assets or divesting completely in anticipation of a carbon price. Other investors have been hedging this risk by investing in renewable energy or clean technology, so that they have holdings that will outperform if carbon gets a price or consumers and voters otherwise demand a shift away from carbon-intensive economic activity.

And So Is Politics

“Besides low interest rates and ESG, the third major challenge that asset owners are grappling with, is a question around the path of populism and nationalism in all of its flavors, and the volatility that’s created in the past few years. For example, as it relates to the China-US trade war, is the likely impact only transitory as a source of short-term volatility, or is the long-term global trend towards capitalism, free trade, and deregulation under threat? More broadly, looking at Brexit and other issues, is the trend towards globalization, and a more globally integrated economy and capital markets, likely to progress more slowly or even get reversed?”

“If you believe that nation states are going to view foreign investors as somehow bad, and that some nation states may even expropriate local investments by foreign investors—if you believe there’s a high risk of outright expropriation or even a subtle change in the rules that disadvantages an investor after they’ve put their capital to work, then as a prudent asset owner, you probably won’t make those long-term investments in local ventures, infrastructure, of other development assets. You won’t lock that money up.”

Outside of these three major concerns, Nuzum says that the outside world will be quick to point out what is wrong with the world and share a bearish view.

“It’s easy to get pessimistic with the trade war, Brexit, and the general US election cycle kicking off,” he says. In the US alone, we’re going to see hundreds of millions of dollars spent on explicit media advertising, and a few trillion dollars’ worth of free media, especially social media, all trying to convince us that the world is going over a cliff and only one particular politician or another can save us. Against that, the stock market is near an all-time high, volatility indices are trading below their long-term historical averages, and labor force participation and employment are near post-war record highs across the developed markets. Institutional investors whose job it is to forecast these things don’t believe the world is about to come to an end, but our politicians are going to do their best to convince us otherwise. Unfortunately, since consumer and business sentiment matter, a lot, there is a danger the talking heads will succeed in talking us into a recession.”

By Steffan Navedo-Perez