Since 2009, investors and markets have been highly sensitive to risk — and markets have offered high risk premiums. As these risks have gradually diminished, all asset classes have benefited. Equities have risen, bonds have rallied and, generally speaking, long-only investors have benefited. There's a strong case to be made that this cycle is at or nearing completion. The good news is that the U.S. economy is largely back on track and the global economy is improving.
There is, however, a divergence in monetary policy across the developed markets. The U.S. Federal Reserve and the Bank of England likely will raise interest rates and continue to do so over the next three years, while the European Central Bank and the Bank of Japan will extend accommodative monetary policies and we don't expect these central banks to start raising rates for some time.
With this backdrop, according to our latest 2015 long-term capital market assumptions, we believe that expected risk-adjusted returns will be lower than historical averages for most asset classes. In particular, public equities, which offered 11-year compound annualized returns of 8.8% from 2004 will return closer to 8% in the next 10 to 15 years.