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Future Long-Term Returns: The Inconvenient Truth

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Long-term return forecasts / long-term returns - the best white papers

It is important for investors to understand an inconvenient, unpalatable truth: investment returns will almost certainly be lower going forward than they have been over the prior decades. If investors don't take this on board, they risk mis-pricing risk and recklessly chasing yield. That is the advice of the first paper listed below, released earlier this month by MFS.

Fund Management Wordle

Most of the other papers listed below make predictions about the long-term returns from major asset classes, and discuss the methodology for these forecasts. Many of these papers have been exceptionally popular with our members:

Debt, Growth and Investment Returns: The Inconvenient Truth (MFS, July 2016)
High government debt ratios make it very difficult for countries around the world to loosen fiscal policy and stimulate growth. Yields will remain low for years to come and investors are encouraged to rein back their expectations to reflect the current economic conditions. MFS encourage investors to focus on real rates of return (rather than nominal assumptions) and to beware of chasing yield  - and consequently mis-pricing risk.

Expected Future Asset Class Returns for 2016-2020 (Robeco)
In this comprehensive paper, Robeco present their forecasts for expected returns for major asset classes during 2016-2020. They also set out in detail the building blocks underlying these forecasts. 

How to Calculate Expected Returns on Major Asset Classes (Antti Ilmanen, CFA)
This important paper by Antti Ilmanen examines whether investment management - its art and science - can be reduced to a collection of patterns that markets generally follow in apparent contravention of the efficient market hypothesis. 

BlackRock's Methodology for Long-Term Return Forecasts (2016)
What long-term investment returns can we expect across asset classes? Such assumptions are a vital component of asset allocation decisions for financial advisors, individual retirees and institutions. This paper authored by BlackRock provides the methodology used to calculate the company's long-term equilibrium capital market assumptions.

BlackRock Capital Market Assumptions (April 2016)
This document examines two time horizons for capital market assumptions - five-year assumptions that take into account how they think current economic and market conditions will play out in the medium term, and long-term equilibrium assumptions that can be used as key inputs for strategic asset allocation.

Predicting Stock Market Returns using the Shiller CAPE (StarCapital, 2016)
This excellent paper by StarCapital discusses whether predicting stock market returns using the Shiller CAPE is an improvement towards traditional value indicators. The paper is split into different sections covering current literature on CAPE, criticism on the CAPE approach and empirical analysis current returns estimates based on CAPE and PB.

Diminishing Returns: Why investors may need to lower their expectations (McKinsey, 2016)
This paper suggests that it may be time for investors to lower their exceptional investment return expectations because the forces that drove them over the last three decades are weakening.

2016 Long Term Capital Market Assumptions (JP Morgan)
This paper by JP Morgan explains the thinking behind JP Morgan's long-term outlook for all major asset classes including alternative strategy classes. 

Rethinking the Equity Risk Premium - CFA Institute Research Foundation (2011)
This important document is the result of discussions between industry experts and academics on the equity risk premium. The result is a rich set of papers that practitioners may find useful in developing their own approach to the subject.

Long run asset class performance: 30-year return forecasts 2016–45 (Schroders)
Each year, ​Schroders produces 30-year return forecasts for a range of asset classes. Here, the authors explain the methodology used and the key conclusions from their analysis.