Higher-risk investments might be pricing themselves out of the market.
Investment consultants are telling clients to reduce risk in 2007 because big gains from emerging stock markets, high-yield bonds and real estate have made valuations in those areas unattractive.
A surge of money into big private equity and hedge funds is also causing concern and encouraging some consultants to recommend different managers.
"I don't see any asset class that's a compelling buy at this point," said Louis Finney, a senior consultant at Mercer Investment Consulting, Chicago, which advises U.S. clients with almost $700 billion in assets. "There are such low risk premiums across the board."
High-yield bonds look especially stretched, prompting Mercer to cut its long-term return forecast for this asset class by 40 basis points to 5.8% recently, Mr. Finney noted in an interview. Large-cap, domestic, growth stocks could be one of the few attractive areas, after lagging value stocks for several years, he added.
"We'd certainly concur," said Carl Hess, director of investment consulting in North America at Watson Wyatt Worldwide, New York, which has about $1.9 trillion in assets under advisement. "Risk premiums look very low in a number of areas. Caution is the word," he said in an interview.
A liquidity glut, sparked by record low interest rates earlier this decade, washed over global markets in 2006, depressing fixed-income yields and sending investors off in search of higher returns from riskier assets.