Portfolio Construction

Capital Market Assumptions for Major Asset Classes

1Q2018

Topics - Portfolio Construction Strategic Asset Allocation Asset Allocation

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

This article updates our estimates of medium-term expected returns for major asset classes, and also includes an analysis exploring the historical accuracy of yield-based return estimates, compared to reasonable alternatives.

How have our return estimates changed since last year?

Most estimates have fallen slightly over the past year
For equities, higher valuations are partly offset by slightly higher growth estimates
Bond return estimates are little changed since last year, with U.S. Treasuries seeing a small reduction due to a flatter yield curve
Credit return estimates are somewhat lower due to tighter spreads

How accurate are yield-based return forecasts?

Using over a century of data, we find that yield-based forecasts have been more accurate than alternative methods for a 10-year horizon. But we also show that 10-year outcomes can stray far from forecasts, and that naïve statistical measures such as correlations may be unreliable guides to predictive power. The results support our view that such estimates are more useful for setting appropriate medium-term expectations than for aggressive tactical allocation decisions.




 

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The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons.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.