There is a huge disconnect between official return assumptions and returns institutional investors expect to make, according to participants in the National Strategic Investment Dialogue.
About 90% of participants in the series of three discussions held last year believed that real U.S. stock returns over the next decade would not top 6%, according to a summary of the sessions, sponsored by the Strategic Investment Group, Arlington, Va. Nearly half said real returns would be 4% or less.
However, 95% of participants said their funds' projected returns were 6% or greater. About 40% projected returns of 8% or better over the next 10 years.
For corporate pension funds, it's tough to lower assumed rates because company profits would take a hit under accounting rules, some participants said.
Investment officers said their biggest challenges were managing the expectations of their boards and being "measured against plans that are not truly peers," the summary said. "While this may seem appropriate to many boards, it fails to acknowledge that the primary goal of a plan is to fund the specific liabilities of the plan or to meet the spending needs of the institution."
Board members are often unfamiliar with alternative investments or complex strategies, so they keep asset mixes in line with the pack — 86% of participants said their boards do not understand the risks taken by their funds.
But a traditional 60% equities/40% fixed-income portfolio would likely generate 5% to 6% nominal returns, based on current pricing, the summary said. It suggested that separating alpha from beta may be the key to success.