AQR expected returns - Don't expect much return

Long-term asset return forecasts help temper changes in asset allocation and portfolio return expectations. After a strong return year, there is often return extrapolation. This extrapolation is not usually one for one, but a good year will give investors the view that it will continue into the next year; however, a close look at long-term expectations suggests that 2019 returns are unlikely to be repeated.

The AQR 5-10-year expected returns show a decline over all asset classes from the prior year. For equities, the higher valuations point to lower future returns. For bonds, lower current yields, the best indicator of future returns, point to lower fixed income returns. Inflation expectations may be lower, but real yields are not expected to receive a boost. Credit spreads are tight and will not provide significant return gains for investors. Long-term average returns for commodities will stay low without the threat of a supply shock.

Traditional assets in any simple asset allocation will not generate real returns even near 4%. The only way to gain higher returns is through alternative investment which will subject investors to liquidity issues or different risk premia. The challenge is to find the alternatives that can produce higher real portfolio returns while adding diversification. It can be done, but it requires active decisions and greater monitoring.