Discover the best performing asset class of 2023: Mercer

2023 proved to be a great year for investors, with all but one asset class delivering a positive return.

International equities (unhedged) led the pack with a positive return of 23.2%, driven by investor enthusiasm for tech and AI-related opportunities.

Mercer said confidence in risky assets increased with the prospect of easing monetary policy in 2024.

In second place, international equities (hedged) posted a 21.7% return.

The hedged returns were slightly lower due to the Federal Reserve raising rates higher than the Reserve Bank of Australia in 2023.

Global small caps (unhedged) achieved a 15.62%, followed by Australian equities at 12.13%, and emerging market debt 12.01%, rounding out the top five asset classes.

"Investors with a technology and growth orientation, particularly those focusing on US markets, generally outperformed investors focused on domestic and traditional industries," Mercer said.

Conversely, Australian direct property declined 7.2% in 2023 because of valuation lags, though this drop was said to be relatively moderate. Interestingly, this asset class was the best performer in 2022, being the only growth asset to deliver positive returns.

Mercer said this serves as a reminder that investment markets are inherently volatile.

"We can never predict with a high degree of confidence what the future will hold over the short to medium-term," Mercer said.

"Therefore, for most individuals, the power of investing may well be harnessed through securing asset class diversification, taking on the risk they can tolerate and adopting a longer-term perspective."