Capital Market Assumptions for Major Asset Classes
February 2, 2018
Topics - Portfolio Construction Strategic Asset Allocation Asset Allocation
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.
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This material is not research and should not be treated as research. This paper does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of AQR. The views expressed reflect the current views as of the date hereof and neither the author nor AQR undertakes to advise you of any changes in the views expressed herein.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for illustrative purposes only. The information in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, neither AQR nor the author guarantees the accuracy, adequacy or completeness of such information. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such.
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