The sobering world of future returns

Tracking expectations of future returns by major wealth managers provide base information on what may be possible over different horizons. Looking at forward returns should help with forming the right asset allocation blend. Over the post-GFC period, the best blend was for risk-on passive equity investing with some fixed income offset. Strong liquidity made it pay to just hold equity indices. The stable environment with negative also made holding bonds the best hedge. Of course, we may not have known that this was best 10 years ago, but traditional passive worked.

Now the numbers should give investors pause. For example, forecasts from UBS Wealth Management tell a sobering tale. UBS is not an exception but the norm. In all cases, fixed income assets are expected to be negative. Equity returns will be modest at best with 4% expected in a growth scenario, but 1% as a base. 

The answer to these low returns is moving to alternative assets. This helps explain the strong growth in private equity. There has been flow into less liquid higher risk assets. The other move will should be to active management that can move between assets. Market efficiency suggests successful active management is difficult to achieve. The number of managers that outperform benchmarks is limited, but in a low return environment it may one of the few ways to achieve excess return.