A year like no other

2021 investment review provided by Mercer

One year ago, COVID-19 sent financial markets spiralling downwards. It is remarkable to sit back and review what transpired in markets during the 12 months to March 2021 that followed. 

One year on, after a sharp rebound in financial markets, all PSS Fund options are reporting strong positive returns over both short and longer timeframes. There are reasons for this rebound, most notably the huge amount of monetary (low interest rates) and fiscal (government spending) support continuously provided by central banks and governments around the world. More recently, positive developments and the eventual distribution of COVID-19 vaccines has been a huge catalyst for those sectors hurt most by the pandemic to stage a strong recovery. In addition, all PSS Fund options are ahead of their benchmarks over all timeframes. 

While it was a year like no other, each asset class has a unique story to tell. Below is some commentary on how your main asset classes performed over the 2021 financial year.

Global shares

Developed global equities suffered over the first quarter of 2020. However, the following 12 months saw the global equities benchmark index (MSCI All Country World Index, local currency) rise by over 50%. While this rebound in share markets was a very welcome result, it does disguise to an extent what was happening within the sector. The fact is that, up until Q4 2020, a very small part of the market (US information technology) was the main driver of returns. This sector was a direct beneficiary of COVID-19, as the world was forced to move more online. The word ‘Zoom’ went from being a seldom used verb to a household video-conferencing name, and household Netflix subscriptions went through the roof. To give an idea of the magnitude, at the end of September, if you removed the five largest stocks from the S&P500 index (Facebook, Apple, Microsoft, Google and Amazon), the performance of the S&P500 index went from comfortably positive to negative.  

Our investment approach is to diversify your global equity exposure – not only investing in the US, where valuations are currently at extremes, but also in emerging markets like China and Korea. As a result, when the performance of global shares is driven by only a small number of companies, a diversified approach tends to lag. 

However, the landscape has changed and diversification has started to pay dividends. Positive news around COVID-19 vaccinations in Q4 2020 has rewarded those sectors that were hit hardest by the pandemic. COVID-19 losers have started to become COVID-19 winners, especially within smaller sized companies and in emerging markets. This market rotation has contributed to more-favourable peer performance outcomes over Q4 2020 and Q1 2021.

New Zealand shares 

We continue to maintain a lower proportion of assets invested in New Zealand shares than other funds. Instead, our assets are well diversified all over the world. This means the PSS Funds are not overly reliant on any one asset class, fund manager or company. This year, despite still suffering from the market sell-off in the first quarter of 2020, New Zealand shares were more resilient than many of their global counterparts, and it was one of the best markets to invest in to close the 2020 calendar year.

However, in 2021, that picture started to change as vaccine-fuelled investor optimism hit the world. Our local market is more defensive in composition, with less cyclical exposure, meaning that the New Zealand market should participate less (relative to other countries) in a global economic recovery. Combined with some idiosyncratic stock performances (which can have a sizeable effect on a small market), for example, Meridian and Contact Energy’s involvement in Blackrock’s Clean Energy ETF, this has resulted in our market underperforming other developed and emerging markets in 2021, including Australia. Because we are less invested in New Zealand than our peers, this has driven more-favourable peer performance in recent months.

Real assets

2020 was arguably one of the most challenging periods for real assets. Property and infrastructure assets are heavily reliant on functioning global economies and the mobility of people. Amidst global lockdowns and a significant immediate slowdown in economic activity, these sectors were hit very hard. Airport capacity in some regions was hit by up to 95%, and retail shopping malls suffered as the general congregation of people in public places ceased very quickly. These assets have become (and continue to be) sensitive to the re-emergence of COVID-19 and its variants, and performance has ebbed and flowed. We expect these asset classes to perform once the world returns to some semblance of normality, with successful COVID-19 vaccines and distributions being a catalyst here. 

It’s not just that successful vaccines should eventually allow overseas travel, which benefits the likes of airports and hotels. We are also entering the beginning of a market expansion where governments around the world are rolling out infrastructure spending packages. This should benefit both property and infrastructure assets. Global vaccination rollout programmes have significantly increased investor optimism that global economies will once again be functioning normally. The ‘reopening trade’ is strong in this sector, and we have already begun to see a rebound in performance, most notably upon the COVID-19 vaccination announcements in November 2020. Importantly, as these assets become less restricted by COVID-19, they should resume their primary defensive characteristics and resume their role as a traditional diversifier to equities. 

Other main asset classes

While our assets are diversified across a range of asset classes, investments in international shares and bonds are the mainstay of our portfolio. Here is a brief overview of how the other asset classes performed.


The global government bond market generated a negative return for the year. Bond yields trended lower over the first three quarters and then saw a sharp spike in Q1 2021 as investors reacted to positive vaccine news, positive economic data and increased inflation expectations, whereas credit markets had a strong year, recovering from the significant sell-off experienced in March 2020. Central bank support through bond purchase programmes combined with demand for yield in a low yielding environment saw credit spreads tighten back to pre-COVID levels.


To help diversify our portfolios, we have an allocation to commodities, which includes oil, grains and precious metals. Over longer timeframes, this allocation has generally been a detractor as the basket of commodities has struggled to perform. Furthermore, COVID-19 wreaked havoc in the sector. But despite the turmoil and uncertainty, strong growth was seen over the 12 months to March 2021. Oil prices have recovered significantly from their lows, which at one point was negative for the first time in history. COVID-19 caused supply constraints in transporting goods from country to country, like slowing coffee bean exports from Brazil, creating upward pressure on prices. Many commodities are also cyclical in nature, for example, industrial metals like copper and aluminium, given their widespread use in manufacturing processes, which pick up as economies restart again. Commodities will also benefit from the simultaneous impact of stimulus and infrastructure programmes in most major economies as regions build out both traditional infrastructure (roads and other facilities) and the new green economy (electric vehicles, windmills and solar panels).

After a remarkable period of volatility with unprecedented market movements, we are now entering a period of global economic recovery. We believe the Pandemic is still far from over and while the outlook has turned more positive, volatility can be expected. Our diversified portfolios remain well placed to navigate and capitalise on the market opportunities as they arise.

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