Investment consultants face challenges as bearers of bad news in assisting asset-owner clients grappling with lower capital market expectations that are pushing them to extend risk exposures to reach assumed returns.
“Unfortunately, there is a conflict between what can be expected from the capital markets and what is desired by many” asset owners, said Jay V. Kloepfer, executive vice president and director of capital markets and alternatives research, Callan Associates Inc., San Francisco.
“Hope isn't a strategy.”
The primary “thing we are helping our clients do is set realistic expectations,” Mr. Kloepfer said. “You can have a rate of return and really want it. ... We need to help our clients understand what is actually achievable given the amount of risk they would like to take on.”
Steven Carlson, Chicago-based head of investment consulting for the Americas, Willis Towers Watson PLC, said pension plan sponsors and other asset owners will be challenged in meeting their return assumptions.
“It really depends on what their assumed return is,” Mr. Carlson said. “If it's in the 7% to 8% range, that's probably going to be much more difficult to achieve. If they are bringing it down to the 5% or 6% range, there is a much greater probability of achieving it. So a lot of it is dependent on the plan sponsor bringing the rate of return down to a level that is more in sync with how they are allocating their assets.”
David Druley, chairman and CEO, Cambridge Associates LLC, Boston, said, “We do think we will continue to be in a low-return environment where global equities and are likely to return no more than 5% or 6% (annualized) over the next 10 years (and) bonds 2%” annualized over the same period.
“We would expect a simple 60% global equities/40% bond portfolio to compound roughly 2-3% real, 4-6% nominal, over the next decade driven by low bond yields and elevated equity valuations,” Mr. Druley said in a follow-up e-mail. “These data suggest that investors are highly unlikely to get returns they need from the market alone in the next 10 years and underscores the continued importance of delivering alpha through active management.”
Mr. Kloepfer said, “The irony is as you lower capital market expectations, it pushes investors to take on more risk. So there is less reward for taking on more risk. Yet they often feel forced into taking on more risk to try to reach for return.''