Domestic and international equities, private equity and real estate likely will be the best performers over the next 10 to 15 years, if annual capital market assumptions by a number of consulting firms hit their mark.
The consensus among some of the country's largest consultants also said fixed income will continue to struggle. But, projecting 15 years out, one consultant saw smaller returns in most categories.
Executives at Wurts & Associates, Seattle, seemed the most upbeat, predicting positive performance across most asset classes for the next decade, with domestic and international equities — including emerging markets and private equity — doing particularly well.
They forecast private equity to see 10-year annualized returns of 12.25%; international equity, between 9% and 9.5%; and emerging markets, 10.5%.
On the domestic side, Wurts executives predicted large-capitalization U.S. stocks will return 9.25%, and small-cap U.S. stocks, 8.25%.
Although Wurts officials expect high-yield bonds to return 12%, they lowered their predictions for core fixed income to 3.9% from the 5% forecast in 2008.
They increased slightly their prediction for Treasury inflation-protected securities to 5% from 4.8%. U.S. Treasuries were forecast to return 2.25%, a class not studied last year.
Eric J. Petroff, Wurts' director of research, said officials at the firm believe “implied inflation expectations are too low given all the inflationary pressures mounting from fiscal and monetary stimulus.” And, Mr. Petroff warned investors to avoid Treasury bonds, saying they “appear to be valued at bubble-ish levels as a result of the recent flight to safety.”
Mr. Petroff said while he expects a broad re-examination of asset allocations by many institutional investors this year, “we are by no means recommending wholesale changes in asset allocation policy. Instead we believe marginal shifts should be made as conditions warrant and it's prudent for any investor to identify and act upon a fundamentally different capital markets landscape that has resulted from massive capital dislocations over the last year.”
“As capital markets conditions change, marginal shifts should be considered with a 10-year return horizon in mind.”
Executives at Callan Associates Inc., San Francisco, also are on the upbeat trail in equities and some other investment categories. For the next 10 years, Callan forecast 9.5% annualized returns for broad domestic equity, 9.2% for large cap and 10% for small cap.
Callan also predicted international equity will return 9.25%; private equity, 11.6%; real estate, 7.6%; domestic fixed income, 5.25%; and non-U.S. fixed income, 4.85%.
Jay Kloepfer, Callan's director of capital market and alternative research, said in light of the challenging capital markets he expects many investors will take a close look at their asset allocation in the coming year as well as their implementation — active, passive, specific managers and strategies.
But he doesn't anticipate most Callan clients to be making substantial shifts from one category to another. “Corporate defined benefit plans will continue to evaluate whether LDI (liability-driven investment) strategies make sense for their situation, and we expect more plans to adopt such strategies. Public defined benefit plans as well as corporate plans will continue to evaluate diversifying strategies outside of traditional stock and bond investments, such as hedge funds, private equity, commodities, real estate and other real assets,” Mr. Kloepfer said. “All plans will re-evaluate whether their overall risk posture as characterized by their stock/bond split is still appropriate, or do they wish to either reach for more return or take market risk off the table.”
“Endowments and foundations, many of which have moved much more aggressively into the illiquid alternative strategies than pensions, have more fully discovered both the investment risks and the illiquidity risks these substantial positions bring to their financial condition. We expect E&F investors will evaluate whether the current positions are still reasonable for their situations going forward.”
“The period immediately after a cataclysm in the markets may not be the best time to decide on a radical change of course in an investment strategy,” Mr. Kloepfer said, and this is a key consideration behind all of Callan executives' discussions with clients.