AQR has updated their estimates of medium-term (5- to 10-year) expected returns for the major asset classes.

Their expected real return for the traditional U.S. 60/40 portfolio (60% Equities / 40% Bonds) is just 2.4%, around half its long-term average of nearly 5% (since 1900).

It is also down from 2.9% estimated last year.

 

AQR conclude that medium term expected returns are “sobering low”. Their return estimates are after inflation (real returns) and are compounded per annum returns.

“They suggest that over the next decade, many investors may struggle to meet return objectives anchored to a rosier past”.

“We again emphasize that our return estimates for all asset classes are highly uncertain. The estimates in this report do not in themselves warrant aggressive tactical allocation responses — but they may warrant other kinds of responses. For example, investment objectives may need to be reassessed, even if this necessitates higher contribution rates and lower expected payouts. And the case for diversifying away from traditional equity and term premia is arguably stronger than ever.”

 

The AQR estimate for a Balance Fund return are similar to those published recently in a CFA Institute article of 3.1%.

 

AQR update their estimates annually.  They manage over US$186 billion in investment assets.

 

Return Estimates

Reflecting the strong returns experienced in 2019 across all markets, particularly US equities, future returns estimates are now lower compared to last year.

This is Highlighted in the Table below.

Medium-Term Expected Real Returns

Market	2019 Estimate	2020 Estimate
US Equities	4.3%	4.0%
Non-US Developed Equities	5.1%	4.7%
Emerging Markets	5.4%	5.1%
US 10-year Government Bonds	0.8%	0.0%
Non US-10 Year Government Bonds	-0.3%	-0.6%
US Investment Grade Credit	1.6%	0.9%

 

Bloomberg have a nice summary of the key results:

• Anticipated returns for U.S. equities dropped to 4% from 4.3% a year earlier.
• U.S. Treasuries tracked the move, with AQR predicting buyers will merely break even.
• Non-U.S. sovereigns slipped deeper into negative territory, with a projected loss of 0.6% a year.
• Emerging-market equities will lead the way, the firm projects, with a return of 5.1%.

 

This article by Institutional Investor also provides a good run down of AQR’s latest return estimates.

More detail of return estimates can be found within the following document, which I accessed from LinkedIn.

 

Lastly, AQR provide the following guidance in relation to the market return estimates:

• For shorter horizons, returns are largely unpredictable and any predictability has tended to mainly reflect momentum and the macro environment.
• Our estimates are intended to assist investors with their strategic allocation and planning decisions, and, in particular, with setting appropriate medium-term expectations.
• They are highly uncertain, and not intended for market timing.

 

In addition to the CFA Article mentioned above, AQRs estimates are consistent with consensus expected returns I covered in a previous Post.

 

Although AQR’s guidance to diversify away from traditional equity and fixed income might be like asking a barber whether you need a haircut, surely from a risk management perspective the diversification away from the traditional asset classes should be considered in line with the prudent management of investment portfolios and consistency with industry best practice?

In my Post, Investing in a Challenging Investment Environment, suggested changes to current investment approaches are covered.

Finally, Global Economic and Market outlook provides a shorter term outlook for those interested.

 

Happy Investing

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Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.