Asset Allocation and TAA

How to calculate expected returns on major asset classes

How to calculate expected returns on major asset classes

Asset allocation is the most important contributor to investment returns, and a reliable framework for timing the market is the "holy grail" of investment analysis. To what extent is market timing possible? How useful are risk premia and measures of market valuation? Can they be used to harvest alpha over the long-term?

The following papers seek to answer these questions and more. Many of the authors argue that it is possible to derive alpha using TAA techniques - not necessarily consistently, but with a good chance of long-term success.


How to Calculate Expected Returns on Major Asset Classes (Antti Ilmanen)
This classic paper, published by the CFA Institute Research Foundation, runs contrary to the theory of efficient markets. In it, Antti Ilmanen explains how forward-looking expected return estimations can be calculated, across a range of different assets, and shows how these can be used to generate alpha.

Expected Future Asset Class Returns for 2016-2020 (Robeco)
An excellent document from Robeco. The authors present their expected return forecasts for major asset classes for the period 2016-2020 and explain in detail the building blocks underlying these forecasts.

2016 Long Term Capital Market Assumptions (JP Morgan)
This comprehensive 80-page document from JP Morgan presents the thinking behind the firm’s long-term outlook for all major asset classes and alternative strategy classes. The document is divided into 3 sections: i) thematic trends and issues, ii) rationale and methodology, and iii) numerical assumptions.

Future Equity Patterns and Baby Boomer Retirements (SOA, 2015)
How will changing demographics impact asset prices? The general consensus appears to be that the retirement of the baby boomer generation will slowly but surely depress equity valuations and asset prices over time. This detailed paper from the Society of Actuaries reviews the evidence from sixty different papers and covers asset classes from equities, fixed income and property.

Structural Trends in Equity Market Valuation (Absolute Return Partners, 2015)
This Absolute Return Partners paper looks at the structural factors that drive equity prices, including: demographics and share buy-backs, Corporate Profits (as a % of GDP), interest rates and valuations.

Trend-following Methodologies

The Trend is Our Friend: Momentum, Risk Parity and Trend in Global Asset Allocation (2014)
The authors of this paper examine the effects of trend application methodologies when applied to global asset allocations amongst real estate, bonds and commodities.

A Quantitative Approach to TAA (Mebane Faber, 2013)
This seminal paper is an update to Meb Faber's 2006 version. It incorporates new data from 2008-2012 and investigates how well the original work has held up since publication. Confirming his original thesis in the 2006 paper, Faber finds that overall, the models achieve equity-like returns alongside bond-like volatility and drawdowns.

The Real-Life Performance of Market Timing with Moving Average and Time-Series Momentum Rules (2014)
The authors of this paper take a contrary view regarding the superior performance of market timing strategies (such as Meb Faber's, for example) based on moving average and time-series momentum rules. While investors find these active timing strategies appealing because of their extraordinary simplicity, the authors suggest that the results are “too good to be true”; they suggest that results indicating the apparent performance of market timing strategies are often guilty of a considerable data-mining bias, ignoring key market frictions.

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