As part of our implementation of a successful, informed process to best serve our clients, we periodically review the underlying assumptions underpinning our investment strategies and allocations. This allows our portfolios to best reflect consensus growth forecasts across numerous asset classes. Doing so helps to generate realistic, actionable information vital to the planning, review, and implementation of our clients’ portfolios. In light of what is proving to be a period of transition in global markets, it is vital to incorporate key market themes into our short and long-term modeling.
The process of setting portfolio-wide return forecast assumptions involves looking at each distinct equity, credit, and alternative and real asset classes and considering historical and forward-looking return drivers for each class.
The pertinent asset classes considered:
For these sixteen asset classes, we utilized a survey of the capital market assumptions released by thirty-four leading institutions to create a consensus set of assumptions. Broadly, amongst these advisors, the consensus is that returns are expected to be lower in the short-term compared to the long-term, particularly for domestic assets. This is important to consider in order to mitigate any upward biases from the preceding decade, where we have seen consistently high returns above historical norms.
The consensus capital market assumptions are outlined below:
These assumptions are across our portfolio construction processes and planning models. From a portfolio construction standpoint, as we adjust our portfolio allocations periodically, we will look to increase allocations to asset classes expected to outperform (and vice versa). In our review and planning processes, the expected returns are utilized in creating the Monte Carlo simulation models which forecast the future value and probability of success of our proposed investment plan. Given the long-term nature of the simulation, and its importance in illustrating the results of a given asset allocation (and subsequently signaling when changes may be necessary), having a set of realistic set of assumptions is vital.
We are continuously researching new information regarding asset forecasts, particularly as we move through the latter phases of the business cycle, and will revisit this data in the event conditions change meaningfully. We believe quality inputs will help us provide better advice and lead to successful planning outcomes.