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Long Term Return Forecasts - by asset class

  • ,  Chief Executive |
  • 05 Nov 2018
  • Updated 03 May 2019

Long Term Expected Returns and how to derive them

What returns will global equity markets generate over the next five years, and how should investors derive these expectations?  Man Group details four separate methodologies for forecasting equity returns, PineBridge's CML highlights a disparity between higher EM equity expectations and lower forecasts for developed markets, while AQR Capital Management explores the big picture market assumptions for major asset classes.
There are some real blockbuster papers in this list, representing some of the most insightful investment content published recently.
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5-year Expected Returns 2019-2023: Patience is a virtue (Robeco)

This 116-page publication contains Robeco's 5-year investment outlook for all major asset classes. Also, five special features peer into some of the concerns facing professional investors today.

Capital Market Assumptions Q1 2019 (Invesco)

Invesco updates their quarterly return estimates and explains methodologies behind their 10-year capital market assumptions.

Medium-Term Asset Allocation Views (BNP Paribas AM, Oct 2018)

In addition to supplying medium-term return expectations, this update aims to provide guidance for institutional investors and asset allocators looking down the barrel of low yields, increased competition, and regulatory pressure.

Multi-Asset Outlook 4Q2018 — How late in the cycle are we? (Wellington Management)

Multi-asset strategists from Wellington Management discuss the late stage of the current economic cycle, along with expectations for interest rates and asset class returns.

2019 Long-Term Capital Market Assumptions (JP Morgan AM)

J.P. Morgan Asset Management provides 10 to 15-year risk/return projections for over 50 asset classes/strategies and several thematic articles relevant to long-term investors.

Investing for the long term (UBS AM, Feb 2019)

This paper explores key global trends and macroeconomic topics that truly long-term investors such as Sovereign Wealth Funds should prioritize in their investment framework.

Forecasting Long-Term Equity Trends: A Comparison of Popular Methodologies (PGIM Institutional Advisory & Solutions, 2018)

In this 16-page paper by PGIM, the authors examine the empirical performance of two different approaches to forecasting future ten-year equity returns: a regression methodology using CAPE and a more traditional “building block” approach.

Unconventional policy in the next downturn (LGIM, May 2018)

With less room to engage in additional quantitative easing, what sort of unconventional responses could central banks turn to when the next recession arrives?

Forecasting Investment Returns and Expected Return Assumptions for Pension Actuaries (2019)

This 38-page report by the American Academy of Actuaries Pension Practice Council explains how pension actuaries select or recommend an expected investment return assumption or assess capital market models from an outside party, and may also facilitate discussion with investment professionals to better understand the basis for their assumptions.

2019 Capital Market Assumptions (QMA, Mar 2019)

QMA’s CMAs underpin the long-run outlook for strategic allocations in our individual strategies and multi-asset portfolios. They provide 10-year forward-looking expectations for the most widely held equity, fixed income and nontraditional asset classes, measuring both return and risk.

Capital Market Line: Why Today’s Economic Green Shoots Are Strongly Rooted (PineBridge, Apr 2019)

Strategists at PineBridge Investments argue that markets this year will show that global growth is now more robust and less fragile. Their latest Capital Market Line document explains how they're assessing the opportunities in their five-year, forward-looking view of risk and returns.

Capital Market Assumptions for Major Asset Classes, 1Q19 (AQR Capital Management)

This article updates AQR Capital Management's estimates of medium-term (5- to 10-year) expected returns for major asset classes. It also includes a section on estimating expected returns for private equity and real estate.

The enduring link between demography and inflation (BIS, 2018)

This BIS paper examines the level of influence that demographic trends such as population ageing have upon global inflation expectations, finding evidence that a strong relationship exists.

Estimating Strategic Returns (Man Group, 2018)

Man Group looks at four approaches to determining strategic return expectations for an asset class. These strategic expectations can then be used to inform tactical decision-making processes.

Asset Class Views: Medium and long term expected returns (Amundi AM, Feb 2019)

This document includes Amundi’s view on asset returns used to build reference portfolios for our institutional clients. The edition published in February covers major macro and financial foundations, while on a quarterly basis it will provide table updates.

Five-Year Capital Market Outlook - 2019 (Willis Towers Watson)

This report by Willis Towers Watson examines the five-year capital market outlooks for different regions around the world including Australia, North America and Asia.

Long-Term Return Expectations - H1 2019 (Baillie Gifford)

This paper sets out the Multi Asset Team’s views, as at 31 December 2018, on what different asset classes are likely to deliver over the next 10 years and in the long run beyond 10 years.


Derivation of long-term return assumptions


Long-term expected market returns (sometimes referred to as Capital Market Assumptions) are of particular importance for asset allocators and investment consultants who are setting, or recommending, the Strategic Asset Allocation benchmark for a portfolio. When combined with estimates for the standard deviation of returns (risk) and the correlation between the returns from different asset classes, these long-term forecasts allow investors to fine-tune their strategic benchmarks to enhance the implied risk/return profile of a multi-asset portfolio.

Long-term return expectations can be derived in a number of different ways, and it can be argued that long-term returns can be forecast with more certainty than short-term returns. Short-term returns are dominated by random volatility, dependent upon political upheaval or the vagaries of the economic cycle. Long-term forecasts, on the other hand, can to a certain degree be derived mathematically. 

Government bonds are the obvious starting point for this. If an investor purchases a 10 year government bond today with a redemption yield of 2% and holds it to redemption, they are guaranteed to receive a return of 2% pa (assuming that the government doesn’t default).

For equity markets, it's rather less certain, but still possible to express mathematically. The simplest way of expressing the long-term return from equities is to use the following formula:

Long-term return from equities = Dividend Yield plus Inflation plus Real Earnings Growth (a proxy for real dividend growth)

Let's assume, then, that the current dividend yield is 2.5%, that inflation will average 2% pa and that earnings will grow a little below long-run GDP expectations (say 1% pa). This will then give us a formula as follows:

Long-term return from equities = 2.5% + 2.0% + 1.0% = 5.5% pa

Of course, this involves some simplifying assumptions. We've used real earnings growth as a proxy for real dividend growth, to overcome the complexity of determining the impact of buybacks upon returns.

Furthermore, we've made no attempt to consider whether the profit share of GDP will change over the period and no attempt to question whether economic growth will continue in the face of the battle against climate change. In practice, there will be a variety of secular trends at work, including demographic change, which may weigh heavily on investment returns over the long-run (for better or worse).

To consider these, you may wish to visit our recent post on "Investment Megatrends"