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leadership series
| market research
July 2013
Capital Market Assumptions:
A Comprehensive Global Approach
for the Next 20 Years
The Asset Allocation Research Team (AART) conducts economic, fundamental, and quantitative
research to produce asset allocation recommendations for Fidelity’s portfolio managers and
investment teams. At any given time, asset price fluctuations are driven by a confluence of various
short-, intermediate-, and long-term factors. For this reason, AART employs a comprehensive
asset allocation framework that analyzes underlying factors and trends across three time horizons:
tactical (one to 12 months), business cycle (six months to five years), and secular (five to 30
years). AART has developed a secular outlook for global economic growth, which is used to derive
estimates of long-term asset market performance. These capital market assumptions (CMAs) are
forward-looking statements but are not presented as investment recommendations or guarantees
of actual future performance.
Lisa Emsbo-Mattingly
General framework
•
Our research-based approach
to long-term capital market
assumptions emphasizes
the principal relationships
between economic trends and
asset class performance.
•
By deriving country-specific
assumptions at each stage of
the process, we can generate
estimates that are forwardlooking, global, and adaptive
across diverse economies and
asset categories.
•
Given slower economic
growth and low starting
bond yields, we expect asset
returns to be somewhat lower
than long-term averages over
the next 20 years—yet still
able to outpace inflation.
•
We expect global equity
returns to be generally in line
with historical results, with
U.S. stocks having the best
risk-adjusted performance and
non-U.S. stocks benefiting
from low starting valuations.
•
Low correlations of stocks
and bonds will likely keep
fixed income a key component for managing risk within
a well diversified global
investment portfolio.
Director of Asset Allocation Research
Jordan Alexiev, CFA
Senior Research Analyst
Irina Tytell, PhD
Senior Research Analyst
Dirk Hofschire, CFA
SVP, Asset Allocation Research
key takeaways
We employ a research-based, multifaceted process to develop long-term capital market assumptions
for our asset allocation strategies. This comprehensive global approach is underpinned by fundamental
analysis of the core drivers and the principal linkages between economic trends and the performance
of various asset classes across all geographies.
The methodology for our approach combines empirical research with foundational principles underlying
the relationships between economic growth and asset performance. The basis for our asset return and
volatility assumptions is our 20-year forecast of each country’s gross domestic product (GDP) growth,
which we describe in the Leadership Series article “Secular Outlook for Global Growth: Challenges and
Opportunities,” June 2013. Whereas some CMA frameworks assume that the connection between
GDP growth and asset returns is either perfect or nonexistent, our approach avoids such simplistic
assumptions and focuses on the specifics of how they are related and how they differ. Our framework
has the following characteristics:
1.We view the economy as the backdrop for equity and bond markets, with clear connections to how
those asset classes may perform.
2.Our forward-looking approach generates 20-year estimates whose underlying assumptions depend
on neither past historical averages nor future infinite time horizons.
3.We employ a multidimensional model that provides a common framework for making direct countryto-country comparisons while still capturing the different characteristics that make economies unique.
4.Our 20-year time horizon strikes an appropriate balance, minimizing the impact of temporary cyclical fluctuations but remaining grounded in current market fundamentals.
The sections that follow describe our methodology for generating estimates of asset class returns, volatility, and correlations, which are the building blocks of portfolio construction.
Real GDP
Real Rates
Reversion after Financial Booms/Busts
Return on Equity
Sovereign Rates
Valuation
Time Value
of Money and
Term Premium
Probability of
Default and
Recovery Rates
Credit Bond
Leverage
Productivity
Composition
Gov’t Bond
Cash
Equity
For illustrative purposes only.
RETURNS
The flowchart above depicts how we derive assumptions of fixed
income and equity returns from our projections of real GDP growth.
Fixed income returns
Government bonds
Real economic growth—as measured by GDP—and real bond
yields are highly correlated. Theoretically, faster growing economies tend to be supported by more productive investment that
justifies higher borrowing costs. Empirically, there have been
deviations from this relationship during financial booms and subsequent busts. But over long time horizons, higher real (inflationadjusted) rates of GDP growth have generally coincided with
higher real interest rates (see Exhibit 1, right).
Therefore, we base our fixed-income return expectations on the
assumption that sovereign—or government—bond yields will gravitate toward the rate of economic growth in the long term. Specifically, we assume that the real yield on 10-year U.S. Treasury bonds
will converge nonlinearly from the current low levels to our real
GDP forecast of 1.9% annually over a 20-year time horizon. The
real total return for government bonds is a combination of bond
price changes, coupon income, and roll down returns that occur
during the 20-year period.1 Starting from today’s extremely low real
yield, we believe falling bond prices will be a drag on future returns
as real yields rise over time. Positive returns from higher coupon
income—in addition to roll down returns achieved as bonds
mature along a steep yield curve—will offset the price depreciation, resulting in our estimate of a relatively meager 0.2% annualized real return for government bonds over the next 20 years.
Corporate bonds
The returns to credit-sensitive bonds are a function of both the
real “risk-free” rate calculated for government bonds and the
2
Bond return expectations
We estimate that the combination of government and corporate
bonds will result in an annualized real return of 0.7% for an
investment-grade bond portfolio over the next 20 years.4 The
current environment of historically low yields and the shift to lower
trend GDP growth will result in price depreciation and diminished
income gains relative to historical averages, so we expect substantially lower real fixed-income returns over the next 20 years than
during recent decades.
Cash
Building on our estimated government bond returns, we use term
premia to derive potential returns to short-maturity government
securities and hence our expectation for cash returns.5 Nominal
cash yields are near zero, and the price depreciation as real
yields move from negative territory today to an expected 0.4%
over time—along with meager income returns—will result in
negative real cash returns of –0.4% annually, which will fail to
outpace inflation over the next 20 years.
Exhibit 1: Real government bond yields and real GDP growth
have been highly correlated over the long term.
government yields and real gdp growth
for major economies
1985–2013
Historical Observations in UK, Australia, Canada, U.S., and Japan
Average Real 10-Year Yield
asset returns framework
additional return potentially generated by the credit spread, which
seeks to compensate investors for the uncertainty and potential
default risk of corporate bonds.2 Based on our expectations for the
probability of default and the recovery rates for corporate bonds,
we estimate the annualized real return to U.S. corporate bonds to
be 1.6% over the next 20 years.3
4%
3%
2%
U.S. 20-Year Forecast
1%
0%
U.S. June 2013
0%
1%
2%
3%
4%
Real GDP Compound Annual Growth Rate
Average real 10-year yield and real GDP compound annual growth rates
are calculated since the inception dates of inflation-adjusted government
securities for the following countries: United Kingdom (Jan. 1985), Australia (Jun. 1985), Canada (Nov. 1991), United States (Apr. 1998), and Japan
(Apr. 2004). Average yields and GDP growth rates also calculated for the
common time period: Apr. 2004 through Jun. 2013. Source: Country statistical organizations, Haver Analytics, Fidelity Investments (AART) through
Jun. 30, 2013.
Equity returns
Return on equity (ROE)
Economic growth has a profound effect on stock market returns
because both are broadly determined by similar factors, including
demographics, productivity, interest rates, and leverage. However,
the return on equity (ROE) may deviate from overall GDP growth
due to three key differences:
Industry composition. The weights of various industries may be
different in the overall economy than in the stock market. For
example, the government sector accounts for roughly 13% of U.S.
GDP, but is obviously not represented directly in the equity market.6
Productivity rates. Because the industry composition is
different, productivity rates tend to be higher in the equity
market than in the overall economy. Again using the U.S.
government as an example, the productivity rate of government
activity is generally assumed to be extremely low or near zero,
which pulls down the average for the entire economy relative to
the equity market. We found that the rate of productivity growth
in the U.S. stock market during the past 24 years was roughly
twice as high as the rate of productivity growth in the U.S.
economy (see Exhibit 2, below).
Exhibit 2: The U.S. equity market has greater weights in more
productive sectors relative to the overall economy.
sector composition and Productivity
Stock Market Weight
18%
Economy Weight
Sector Productivity
14%
16%
10%
12%
Productivity Rate
12%
14%
Our ROE estimates thus begin with our GDP growth assumptions,
which are then adjusted for measures of leverage, sector composition, and corporate market productivity that are different from the
economy-wide averages. Despite our forecast of lower real U.S.
GDP growth over the next 20 years, we expect that the U.S. stock
market’s ROE can still approach historical averages because corporate leverage levels are currently higher than historical averages,
that stock market productivity rates will be near the upper end
of historical ranges, and that much lower interest rates will likely
boost profit margins in the coming years.
Valuations
Actual stock performance depends on not only the earnings
growth that can help generate ROE but also the stock price valuation that is placed on those earnings. As a result, our equity return
assumptions require an adjustment based on movements in
valuations over the next 20 years. Instead of assuming that valuations revert to historical averages, we develop estimates based
on expectations of the key drivers of a country’s price-to-earnings
(P/E) multiples, such as demographics, inflation, and GDP growth.
For instance, the asset accumulation phase that accompanies a
middle-aged population with a high proportion of workers typically
results in higher valuation multiples. Conversely, higher inflation rates tend to increase uncertainty and risk premia, resulting
in lower valuations. In the aggregate, our worldwide valuation
estimates for the next 20 years are generally in line with historical
averages, as we believe lower inflation and other factors will mostly
offset deteriorating demographics.
Stock market weights derived using Global Industry Classification Standard
(GICS) of the 3000 largest U.S. stocks by market capitalization. Productivity
rate = compound annual productivity growth rate in 1987–2011. Government productivity is unavailable but generally assumed to be extremely low
or near zero. Source: Bureau of Labor Statistics, Haver Analytics, Fidelity
Investments (AART) as of Dec. 31, 2011.
The current five-year P/E for the U.S. stock market is roughly consistent with our estimated P/E, implying that the valuation adjustment for the 20-year return expectation is minimal. Outside the
U.S., equity valuations are generally low relative to their estimated
trend P/Es, so upward valuation adjustments boost our expected
Weight
Total Stock Market Productivity = 4.2%
Economy Productivity = 2.1%
Whether a country’s equity market return will be boosted or
hindered by repricing back to this long-term trend will depend
on starting valuations. We define current valuations as today’s
cyclically adjusted P/E ratio, using current stock prices relative
to five-year peak real earnings—the highest level of inflationadjusted profits during the trailing five-year period. This approach
helps to smooth corporate earnings by adjusting for cyclical
extremes, specifically preventing a cyclical trough in earnings
from sending a false signal that valuations are expensive just as
profits might be expected to recover. In addition, the five-year
cyclical adjustment better reflects the average length of a typical
business cycle; periods of 10 years and longer tend to incorporate too much history.
10%
8%
8%
6%
6%
4%
4%
2%
2%
0%
Health
Real
Finance Info Tech
Care
Estate
Lower Productivity
Higher Productivity
Sectors
Sectors
0%
Gov’t
3
Leverage levels. Public companies issue debt at a level that
may differ from that of the overall economy. Because corporate
earnings and ROE are magnified by leverage, a higher level of
corporate leverage will tend to boost stock market ROE above the
rate of economic growth.
returns of both developed-country and emerging-market returns in
the aggregate. With most European countries trading at relatively
low current P/Es, this region’s estimates benefit the most from our
valuation adjustment (see Exhibit 3, below).
Equity return expectations
For U.S. equities, the combination of fair valuations and solid ROE
expectations leads us to estimate a 6.6% annualized real rate of
return over the next 20 years, roughly in line with long-term historical averages. Among non-U.S. developed markets, ROE potential
will likely be lower because of expected slower GDP growth rates
and weaker demographics, although our expected upward adjustment from current inexpensive valuations will contribute positively to
estimated real U.S.-dollar returns of 5.9% annualized over the next
two decades.7 Emerging markets will likely enjoy higher ROE and
significant positive valuation adjustments from today’s low levels,
resulting overall in real U.S.-dollar return estimate of 7.9% annually.
VOLATILITY
The flowchart on the right illustrates our framework for estimating
the volatility of asset returns, the second component of our CMAs.
Exhibit 3: Non-U.S. stock valuations are generally low.
cyclical p/es:
price-to-five year peak earnings
Target Duration
Level of Yield
Credit
Affluence
Composition of Market
Diversity of Market
Fixed
Income Rates
Volatility
Sovereign
Equity Volatility
For illustrative purposes only.
Bond volatility
The volatility of government bonds is a function of both the
overall yield and the target duration of the portfolio.8 Higher bond
yields are generally associated with higher growth, which can
lead to more uncertainty and thus greater volatility in government
bond returns. Similarly, for corporate bonds, changes in credit
spreads tend to be more volatile when credit spreads are high.
Given our forecast for slower GDP growth, and thus lower bond
yields over the next 20 years, we expect that the volatility of U.S.
investment-grade bond returns will be toward the low end of the
historical range.
Equity volatility is generally a function of macroeconomic volatility,
and tends to be lower when affluence—represented by per capita
GDP—is higher. More developed economies often shift to bigger
weights in less volatile sectors, becoming more flexible and better
equipped to withstand shocks. This suggests that stock market
volatility is generally higher in less developed economies and
countries that are more prone to financial crisis.
5x
10x
15x
20x
25x
Price-to-earnings (P/E) ratio (or multiple) = stock price divided by earnings
per share, which indicates how much investors are paying for a company’s
earnings power. Five-year peak earnings are adjusted for inflation. Source:
FactSet, country statistical organizations, Haver Analytics, Fidelity Investments (AART) as of May 31, 2013.
4
Real GDP
Equity volatility
Ireland
Russia
Italy
Spain
Poland
Brazil
United Kingdom
China
South Korea
Developed Europe
Germany
Emerging Markets
Australia
Canada
Japan
India
Developed Markets
Mexico
United States
Switzerland
Philippines
0x
asset volatility framework
Equity volatility is also a function of the market’s sector composition and diversity. Stock markets with a greater representation of
volatile sectors (such as technology) will experience wider fluctuations than markets with more exposure to historically steadier performing sectors (such as utilities). For instance, South Korea has
more than 30% of its market capitalization in the volatile technology sector—a primary reason that we expect the country’s equity
market to have fairly high volatility despite its more advanced
stage of economic development.9 In addition, equity markets that
are concentrated in a smaller number of sectors will generally be
more volatile than those with a more diverse market composition.
For example, we estimate that Peru, with a 71% weight in materials stocks, will have the highest equity volatility among the major
stock markets.10
In general, we anticipate that greater economic and financial market volatility will continue to make emerging-market equities much
Exhibit 4: The 20-year correlation between equities and
Correlation Thought Framework
bonds has varied along with the average annual rate of inflation.
20-year inflation rate vs.
7
6
0.3
5
0.2
4
Correlation coefficient = 0.86
0.1
2
1989 -2009
1993 -2013*
1986 -2006
1980 -2000
1983 -2003
1974 - 1994
1977 - 1997
1971 - 1991
1965 - 1985
1968 - 1988
1959 - 1979
1962 - 1982
1956 - 1976
Stock and Bond Correlation
Inflation
1950 - 1970
0
3
1
Rolling 20-Year Annualized Inflation Rate (%)
0.4
1953 - 1973
Rolling 20-Year Stock & Bond Correlation
stock and bond correlation
*Through Jun. 30, 2013. Past performance is no guarantee of future
results. Correlation coefficient between Inflation and Stock & Bond Correlation from 1950. Inflation = change in Consumer Price Index (CPI).
Stocks represented by S&P 500 Index. Bonds represented by Barclays
U.S. Aggregate Bond Index. Source: Bloomberg, Fidelity Investments
(AART) through Jun. 30, 2013.
more volatile than equity markets in the U.S. and other developed
economies, which is consistent with historical patterns.
CORRELATIONS
Investors generally seek to combine bonds and equities into portfolios that will provide the highest return potential for a given level of
risk. Along with estimates of asset returns and volatility, the correlation between asset classes plays an important role in determining
the optimal portfolio composition for long-term performance.11
Most attempts at portfolio optimization are conducted using
asset correlations that are calculated from past historical returns.
However, our analysis shows that asset correlations can change
dramatically over time. During the past several decades, for
instance, the 20-year correlation between U.S. equities and
investment-grade bonds has ranged from near zero to almost 0.4
(see Exhibit 4, above). As a result, estimating correlations using
forward-looking measures may have a significant impact on portfolio performance over a 20-year time horizon.
Long-term correlations generally depend on the backdrop for
inflation and economic growth. Whether inflation or growth is
more volatile will affect the movement in correlations. When inflation is low and stable, growth has a larger impact on correlations.
Because stock performance is positively tied to changes in growth
expectations, while bond returns are inversely related, investmentgrade bond returns tend to have a low or even negative correlation
5
Asset Correlations with Economic Drivers
∆ GDP
∆ Inflation
Stocks
+
–
Nominal Bonds
–
–
For illustrative purposes only.
with equity returns in a low inflation environment (see Correlation
Thought Framework, above). By contrast, when inflation is higher
and more volatile—as in the 1970s—the correlation between
stocks and bonds increases. Because rising inflation negatively
affects the performance of both stocks and bonds, investmentgrade bonds generally become more risky and equity-like in a
backdrop of high inflation.
Our 20-year forecast for U.S. inflation is around 2%—a lower rate
than historical averages because of the Federal Reserve’s credible
monetary policy with a specific inflation target. Inflation tends to
be lower and more stable in advanced economies with higher per
capita incomes, particularly those that have credible, independent
monetary authorities who can successfully anchor long-term inflation expectations. Given this relatively low expected inflation rate,
we anticipate U.S. equity and investment-grade bond returns will
be uncorrelated on average over the next two decades, at the low
end of the historical range.
CONCLUSIONS
Capital market assumptions
In general, we estimate that asset returns will be somewhat lower
over the next 20 years than their long-term historical averages
(see Exhibit 5 left, page 6). This mostly stems from our expectation that returns for investment-grade bonds will be diminished by
starting from such low yields in the current environment. Overall,
we anticipate that global equity returns will mostly be in line with
historical results. Despite somewhat slower global economic
growth, current low valuations—especially in Europe and certain
emerging markets—and higher corporate ROE in some countries
will likely provide an offsetting boost to equities in the aggregate.
U.S. stocks should benefit from strong corporate productivity, low
interest rates, and relatively high corporate leverage that will help
to make up for slower GDP growth.
On a relative basis, our expectation is for U.S. stocks to have
the best risk-adjusted performance among global equities (see
Exhibit 5 right, page 6). Emerging-market equities may have
the highest absolute returns, but they should also experience
the greatest volatility, leading to the least favorable risk-adjusted
performance of the equity categories. We expect investmentgrade bonds to move from being the asset class with the best
long-term risk-adjusted performance to the laggard over the next
20 years.
Exhibit 5: We expect that asset returns will generally be somewhat lower over the next 20 years than their long-term historical
averages, while risk-adjusted returns for U.S. and other developed country equities may be slightly higher.
sharpe ratios
Total Annualized Real Returns for Major Assets
20-Year Estimate
Historical
U.S. Equity
6.6%
6.8%
Developed Markets Equity
5.9%
5.4%
Emerging Markets Equity
7.9%
9.5%
Investment-Grade Bonds
0.7%
4.0%
–0.4%
0.5%
Cash
0.80
0.60
0.40
0.20
0.00
U.S. Equity
Developed
Markets
Historical
Emerging InvestmentMarkets
Grade Bonds
20-Year Estimate
Sharpe ratio compares portfolio returns above the risk-free rate relative to overall portfolio volatility, with a higher Sharpe ratio implying better risk-adjusted returns.
Past performance is no guarantee of future results. You cannot invest directly in an index. See appendix for important index information. Historical asset returns
include reinvestment of dividends and interest income and are since inception and represented by: U.S. Equity – S&P 500® Index (1926), Developed Markets
Equity – MSCI® EAFE Index (1970), Emerging Markets Equity – MSCI Emerging Market Index (1988), Investment-Grade Bonds – Barclays U.S. Aggregate Bond
Index (1976), Cash – IA SBBI US 30-Day T-Bill Index (1926). Source: Morningstar EnCorr, Fidelity Investments (AART) as of Jun. 30, 2013.
Investment implications
•
Our multidimensional, scalable approach—based on fundamentals like growth, return on equity, and valuation—can be
applied to diverse economies to provide the building blocks for
CMAs at the country, sector, and sub-asset class level.
•
The 20-year time horizon is flexible enough to capture shifts
in the economic and market landscape, but stable enough to
serve as assumptions for long-term investment strategies.
•
By focusing on the specifics of how GDP growth and assets
returns are related—and how they differ—our approach avoids
the overly simplistic assumptions of some CMA frameworks.
•
Rather than relying on historical averages, we emphasize what
history tells us about the drivers of asset returns to generate
fundamentally dynamic and forward-looking estimates.
•
By adapting to today’s global environment, in which developing
countries account for a growing share of the world economy
and the investment universe, our approach avoids the limitations of backward-looking data that can be dominated by the
history of the U.S. and other developed markets.
We expect that the returns to a portfolio diversified across the
major asset classes will likely be lower over the next 20 years than
the historical averages, but this performance should still be able to
outpace inflation.
Given our expectation for more muted gains from bonds and
cash, a healthy allocation to equities may be important in pursuing
return objectives, and opportunities are widely dispersed throughout the world. Investors should keep in mind that bonds and cash
may still have much lower volatility than equities, and the low
correlations of their returns with stock performance will likely continue to make them key asset classes to help manage risk within a
diversified portfolio.
For investors with long time horizons, secular capital market
assumptions may provide a disciplined underpinning for
diversified portfolio construction—but always with the caveat that
these assumptions should be revisited and monitored over time.
As detailed above, we believe that our CMA approach has the
following advantages relative to other frameworks:
6
Authors
Lisa Emsbo-Mattingly
Jordan Alexiev, CFA
Irina Tytell, PhD
Dirk Hofschire, CFA
Director of Asset Allocation Research
Senior Research Analyst
Senior Research Analyst
SVP, Asset Allocation Research
The Asset Allocation Research Team (AART) conducts economic, fundamental, and quantitative research to develop asset allocation
recommendations for Fidelity’s portfolio managers and investment teams. AART is responsible for analyzing and synthesizing
investment perspectives across Fidelity’s asset management unit to generate insights on macroeconomic and financial market trends
and their implications for asset allocation.
Craig Blackwell, CFA; Emil Iantchev; Joshua Lund-Wilde; and Phil Thayer also contributed to this article.
These materials contain statements that are “forward-looking
statements,” which are based upon certain assumptions of future
events. Actual events are difficult to predict and may differ from those
assumed. There can be no assurance that forward-looking statements
will materialize or that actual returns or results will not be materially
different than those presented.
7
Views expressed are as of the date indicated, based on the information
available at that time, and may change based on market and other
conditions. Unless otherwise noted, the opinions provided are those of the
authors and not necessarily those of Fidelity Investments or its affiliates.
Fidelity does not assume any duty to update any of the information.
8
Investment decisions should be based on an individual’s own goals, time
horizon, and tolerance for risk.
Past performance is no guarantee of future results.
All indices are unmanaged. You cannot invest directly in an index.
Diversification/Asset Allocation does not ensure a profit or guarantee
against a loss.
Stock markets are volatile and can decline significantly in response to
adverse issuer, political, regulatory, market, or economic developments.
Foreign markets can be more volatile than U.S. markets due to increased
risks of adverse issuer, political, market, or economic developments—all
of which are magnified in emerging markets. These risks are particularly
significant for funds that focus on a single country or region.
In general the bond market is volatile, and fixed income securities carry
interest rate risk. (As interest rates rise, bond prices usually fall, and vice
versa. This effect is usually more pronounced for longer-term securities.)
Fixed income securities also carry inflation risk, liquidity risk, call risk, and
credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses
caused by price volatility by holding them until maturity is not possible.
Endnotes
1
The roll down return is the capital gain (loss) caused by a falling (rising)
yield when a bond approaches its maturity date. Our long-term outlook is
for a normal, steep yield curve, which means that shorter-term debt has
a lower yield than longer-term debt. Therefore, as bonds approach their
maturity date, they should roll down the yield curve to a lower yield, creating a capital gain.
Treasury securities are considered “risk-free” because they are backed
by the full faith and credit of the U.S. government.
2
The recovery rate is the amount recovered in any settlement of a defaulted security and is expressed as a percentage of the face value of the
security.
3
The composition of the combined investment-grade bond portfolio has a
similar weighting of government and corporate bonds as the Barclays U.S.
Aggregate Bond Index. Investment-grade bonds are bonds rated BBB-/
Baa3/BBB- or higher by Standard & Poor’s/Moody’s/Fitch.
4
The term premium is the excess yield that investors require to commit to
holding a long-term bond instead of a series of shorter-term bonds.
5
Source: Bureau of Economic Analysis, Haver Analytics, Fidelity Investments (AART) as of Dec. 31, 2012.
6
7
International returns are expressed in U.S.-dollar terms, including the
effects of foreign exchange (FX). We believe that FX rates converge to
their fair value over longer time horizons, and our analysis indicates that
the U.S. dollar is fundamentally undervalued relative to most currencies, which suggests that FX returns over the next 20 years will generally
detract modestly from aggregate international returns.
Duration estimates a bond’s change in price given a change in interest
rates, assuming a parallel shift in the yield curve (neither steepening nor
flattening).
9
Source: FactSet, Fidelity Investments (AART) as of Dec. 31, 2012.
10
Source: FactSet, Fidelity Investments (AART) as of Dec. 31, 2012.
Correlation measures interdependencies between two random
variables, with coefficients indicating perfect negative correlation at −1,
absence of correlation at 0, and perfect positive correlation at +1.
11
Index definitions
Consumer Price Index (CPI) is an inflationary indicator that measures the
change in the cost of a fixed basket of products and services, including
housing, electricity, food, and transportation.
MSCI® Europe, Australasia, Far East Index (EAFE) is an unmanaged, market capitalization-weighted index designed to represent the performance
of developed stock markets outside the U.S. and Canada.
MSCI Emerging Markets (EM) Index is an unmanaged, market capitalization-weighted index of over 850 stocks traded in 22 world markets.
S&P 500 ® is an unmanaged, market capitalization-weighted index of
common stocks and a registered service mark of The McGraw-Hill
Companies, Inc., which has been licensed for use by Fidelity Distributors
Corporation and its affiliates.
Barclays® U.S. Aggregate Bond Index is an unmanaged, market valueweighted performance benchmark for investment-grade fixed-rate debt
issues, including government, corporate, asset-backed, and mortgagebacked securities with maturities of at least one year.
IA SBBI 30 Day TBill Total Return Index is an unmanaged index that
reflects the return on the U.S. Treasury Bill maturing in 30 days.
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