Asset Allocation

2015 Capital Market Assumptions for Major Asset Classes

Topics - Asset Allocation Strategic Asset Allocation Portfolio Construction

Read Time - 30 mins

${ numberSection } ${ text }
2015 Capital Market Assumptions for Major Asset Classes

We review our framework for constructing estimates of long-term expected returns for major asset classes. We focus on the forward-looking real returns on stock markets and government bonds, but also discuss expectations for long-only smart beta and long/short style premia portfolios.

Besides updating our estimates, we review our methodology, highlighting the limited predictability of future yield curve changes and analyzing mean-reversion tendencies in U.S. asset class valuations. Despite some evidence of multiyear mean reversion, our base case assumes no change in real bond or equity yields.

Our current estimate for U.S. stocks’ long-run real return is near 4%, lower than in European and emerging markets. Our current estimate for U.S. 10-year government bonds’ long-run real return is near 0.5%, higher than in other major bond markets. From a historical perspective, these expected returns are among the lowest seen in the past century, especially when taken together.

AQR Capital Management, LLC, (“AQR”) provide links to third-party websites only as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by us of any content or information contained within or accessible from the linked sites. If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which AQR.com has no control. In no event will AQR be responsible for any information or content within the linked sites or your use of the linked sites.

 

The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.

 

Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. Hypothetical performance results are presented for illustrative purposes only.

 

Diversification does not eliminate the risk of experiencing investment loss.

 

Certain publications may have been written prior to the author being an employee of AQR.

This material is intended for informational purposes only and should not be construed as legal or tax advice, nor is it intended to replace the advice of a qualified attorney or tax advisor.