Alternative Thinking: 2016 Capital Market Assumptions for Major Asset Classes

February 05, 2016
  • Contributors:

    AQR Capital Management
  • Topic:

    Portfolio Management

Alternative Thinking Quarterly

This issue updates our multi-year expected return assumptions for major stock and bond markets, and investigates methods for estimating expected returns for credits and commodities. Compared with historical averages of value metrics, we are still very much in a world of low expected returns.

  • Our current estimate for U.S. stocks’ long-run real return remains near 4%, lower than in European and emerging markets. In the U.S. and several other markets, modest increases in earnings and dividend yields over the past year have been offset by reductions in forecast earnings growth.
  • For 10-year U.S. Treasuries, our long-run real return estimate remains near 0.5%. From a century-long historical perspective, both equity and bond expected returns remain exceptionally low, especially when taken together.
  • This year we include long-run expected returns for credits and commodities, explaining our chosen methodology for each asset class. For U.S. investment grade and high yield credit, we estimate real returns of around 1% and 3%, respectively. For a risk-weighted portfolio of commodities, we estimate a long-run real return of around 3%. We also discuss return expectations for alternative risk premia and cash.

This report again highlights the low expected returns in traditional asset classes. It also expands our menu of assumptions for additional sources of return that may prove valuable in this challenging environment. We believe investors should diversify as much as constraints permit across many sources of expected returns.



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  • 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.
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