Alternative Thinking

2020 Capital Market Assumptions for Major Asset Classes

Topics - Asset Allocation Portfolio Construction Strategic Asset Allocation

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2020 Capital Market Assumptions for Major Asset Classes

This article updates our estimates of medium-term (5- to 10-year) expected returns for major asset classes. It also introduces a section on estimating expected returns for cash. Selected estimates are summarized below. The year 2019 saw a reverse of 2018’s cheapening, with expected returns falling for both equities and (especially) bonds. The expected real return of the traditional U.S. 60/40 portfolio is just 2.4%, around half its long-term average of nearly 5% (since 1900 1 1 Close Based on historical real yields for U.S. large-cap equities and 10-year Treasuries, using a simplified methodology that allows long-term historical comparisons; methodology and sources described in Appendix. ).

Chart of Expected real returns for liquid asset classes Q1

Source: AQR, Consensus Economics, Bloomberg and Barclays. Estimates as of December 31, 2019. Error bars cover 50% confidence range, based on analysis from Alternative Thinking Q1 2018 and adjusted for current expected volatilities. These are intended to emphasize the uncertainty around any point estimates. Not only are the return forecasts uncertain, but also any measures of forecast uncertainty are debatable. Forecasting requires humility at many levels. Estimates are for illustrative purposes only, are not a guarantee of performance and are subject to change. Not representative of any portfolio that AQR currently manages.

U.S., Non-U.S. Developed and Emerging Market Equities
Source: AQR, Consensus Economics and Bloomberg. Estimates and methodology subject to change and based on data as of December 31, 2019. “Non-U.S. Developed Equities” is cap-weighted average of Euro-5, Japan, U.K., Australia and Canada. “Euro-5” is a cap-weighted average of large-cap indices in Germany, France, Italy, Netherlands and Spain. Each estimate is the average of two approaches, based on earnings and payouts (both dividends and buybacks) respectively. See main article for details. 

U.S. 10Y Treasuries and Non-U.S. 10Y Govt Bonds
Source: Bloomberg, Consensus Economics and AQR. Estimates as of December 31, 2019. Rolldown return is estimated from fitted yield curves and based on annual rebalance. “Non-U.S. 10Y govt. bonds” is GDP-weighted average of Germany, Japan, U.K., Australia, Canada.

U.S. IG Credit and U.S. HY Credit
Source: Barclays, Bloomberg, AQR. Estimates as of December 31, 2019. OAS and duration data is for Barclays U.S. Corporate Investment Grade (IG) Index and Barclays U.S. Corporate High Yield (HY) Index. Index durations are 7.9 years and 3.1 years respectively.

Long-run average return of an equal-dollar-weighted portfolio of commodity futures.

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About the Portfolio Solutions Group

 The Portfolio Solutions Group (PSG) provides thought leadership to the broader investment community and custom analyses to help AQR clients achieve better portfolio outcomes.

We thank Nick McQuinn, Ashwin Thapar and Dan Villalon for their work on this paper. We also thank Gregor Andrade, Matt Chilewich, Jeff Dunn, Jeremy Getson, Antti Ilmanen, Pete Hecht, Kelvin Lee, Thom Maloney, Toby Moskowitz, and Harsha Tummala for their helpful comments, and Rachel Lee, Sarah Schroeder, Nitin Krishna, and Derek Jansma for their excellent research assistance.

This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such.


Past performance is no guarantee of future results.


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. Neither the author nor AQR undertakes to advise you of any changes in the views expressed herein.


Broad-based securities indices are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in an index.


The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation.


Hypothetical performance results (e.g., quantitative backtests) have many inherent limitations, some of which, but not all, are described herein. No representation is being made that any fund or account will or is likely to achieve profits or losses similar to those shown herein. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently realized by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points that can adversely affect actual trading results. The hypothetical performance results contained herein represent the application of the quantitative models as currently in effect on the date first written above and there can be no assurance that the models will remain the same in the future or that an application of the current models in the future will produce similar results because the relevant market and economic conditions that prevailed during the hypothetical performance period will not necessarily recur. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results, all of which can adversely affect actual trading results. Discounting factors may be applied to reduce suspected anomalies. This backtest’s return, for this period, may vary depending on the date it is run. Hypothetical performance results are presented for illustrative purposes only. In addition, our transaction cost assumptions utilized in backtests, where noted, are based on AQR Capital Management, LLC’s, (“AQR”)’s historical realized transaction costs and market data. Certain of the assumptions have been made for modeling purposes and are unlikely to be realized. No representation or warranty is made as to the reasonableness of the assumptions made or that all assumptions used in achieving the returns have been stated or fully considered. Changes in the assumptions may have a material impact on the hypothetical returns presented. Actual advisory fees for products offering this strategy may vary.


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.


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