Time to revise investment forecasts
A US-based hedge fund manager has warned of lower returns from US equities and bonds in the coming years, while also warning Australians against domestic arrogance leading to a lack of global diversification.
Cliff Asness, the managing and founding principal of AQR Capital Management, has added another voice to the argument that “passive returns from stocks and bonds will be lower in the future than in the past”.
Asness’ comments refer to bonds and stocks in the US but support similar comments made by Australians (including van Eyk Research’s Stephen van Eyk) regarding potentially lower returns from Australian equities.
Asness said his forecast for returns was not related to the current financial and real estate crisis in the US, but is purely based on prices. Compared to historical figures, Asness said yields over inflation are now lower and are likely to continue that way.
“The prospective returns from here are not going to match what people have earned over the last 50 to 100 years,” Asness said.
As a result, neither institutions nor individual investors can rely too heavily on the past when planning expected investment returns for retirement, and when doing so, must rely on more conservative figures.
But Asness did add that with investors in the past paying “tremendous costs” for exposure, “it could be that today’s [3 per cent of yield] is as good as yesterday’s 5 [per cent of yield]”.
“It’s being delivered in a much more efficient manner,” Asness said.
“You’ll get paid less for taking risk than you have historically, perhaps for very good reasons, but that’s the deal the markets are offering.”
Asness pointed to global diversification as one strategy for combating lower returns and protecting investors from their country becoming “the next Japan”.
He said both institutional and individual investors around the world are lacking diversification in the number of asset classes they hold, the countries in which these assets originate, and the type of risk held in their portfolio.
“The home bias is gigantic and it’s everywhere,” Asness said.
“But it is an arrogant act to think that your country can’t be the next Japan.”
Asness said this applies to all countries, including the US.
The manager said while many argue that diversification doesn’t protect investors from a global share market crash, it does protect investors in individual countries from domestic disasters.
“That happens to be true over days, weeks, months, and even years; but if you look at decades, every country we’ve looked at has had a far worse decade at some point than a global portfolio has ever had from that country’s perspective.”
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