Download 2016 Capital Market Projections

2016 Capital Market Projections
Each year, Callan develops long-term capital market projections, detailing expected return, standard deviation, and correlations for major asset classes. These projections are the cornerstone for strategic planning.
This charticle summarizes key figures from Callan’s 2016 capital market projections.
Callan’s 10-Year Expectations
10-Year Return and Risk Projections
Projected Return
(standard deviation)
Small/Mid Cap
Global
ex-U.S. Equity
7.6%
Developed
Non-U.S. Equity
7.3%
Emerging
Market Equity
7.6%
support nominal returns.
U.S. Fixed Income 3.0%: We expect interest
rates to rise, especially if the economy continues
to expand and the Fed executes on its stated monetary policy. Bonds will suffer capital losses before
27.9%
higher yields kick in. We expect 10-year Treasury
3.8%
sion to mean, but lower than
20
11.4%
9.2%
9.9%
6.0%
the long run average.
15
Number of Years
10.5%
4.6%
2015
2011
2007
10
5.3%
Hedge Funds
2014
2012
2010
2006
Inflation
2.3%
1.5%
downward pressure on income returns at 4%-5% with
2013
vestment.
5
0
Hedge Funds 5.3%: Steady
relative to last year (T-bills
2008
-50%– -40%– -30%– -20%– -10%– 0%–
-40% -30% -20% -10% 0%
10%
10%–
20%
20%– 30%–
30% 40%
40%–
50%
Over
50%
plus 3%).
Source: Standard & Poor’s
Interest Rates Expected to Rise From Historic Lows
32.8%
12%
Federal Funds
10-year Treasury
30-year mortgage
BAA corporate
Projected
9.3%
10%
18.5%
2.3%
0.9%
2009
16.5%
2.8%
Cash Equivalents
Real Estate 6.0%: Reflects
increased competition for in-
8.2%
Private Equity
ten-year projection—a rever-
88 Years of Stock Market Returns
1.4%
Real Estate
growth is falling but still high; inflation expectations
yields to reach 3.3% over the
5.0%
Emerging
Market Debt
late into equity returns. Emerging market economic
20.1%
3.0%
5.3%
Non-U.S. Fixed
non-U.S. market economic performance will trans-
21.3%
3.7%
High Yield
Global ex-U.S. Equity 7.6%: Improved developed
22.8%
2.6%
Short Duration
2.3%
Long Duration
besides dividends.
18.0%
7.6%
3.0%
something more from the return on free cash flow,
18.7%
7.3%
Large Cap
Commodities
muted, fundamentals remain reasonable. Expect
7.4%
Broad U.S. Equity
TIPS
in 2015. While the U.S. economic outlook is more
Projected Risk
(10-year geometric)
U.S. Fixed
U.S. Equity 7.4%: U.S. markets went sideways
8%
6%
4%
2%
Source: Callan
0%
1990
Projected Risk and Return of Different Asset Mixes
1995
2000
2005
2010
This exhibit uses Callan’s projections to create a range of efficient portfolios on a spectrum from
conservative to aggressive.
Private Equity
Hedge Funds
14.8%
11.0%
9.2%
7.4%
5.2%
3%
7%
5%
6%
4%
8%
7%
6%
54%
44%
U.S. Fixed Income
Global ex-U.S. Equity
Broad U.S. Equity
Source: Callan
11%
14%
<<< Conservative
14%
17%
6.9%
6.5%
6.1%
5.7%
5%
8%
8%
5%
Real Estate
High Yield
2018
12.8%
10-year projected return
10-year projected
standard deviation
2015
Source: IHS Inc.
35%
17%
22%
Moderate
6%
9%
7%
9%
10%
5%
11%
25%
20%
25%
5%
15%
24%
29%
Aggressive >>>
About These Projections
Callan’s projections consist of three primary figures for each asset class: a mean rate Multiple elements of the capital markets influence the projections: returns relative
of return, a corresponding range defined by standard deviation, and the correlations to to inflation, equity valuations, risk premiums, GDP growth, and many other factors.
other asset classes. These figures represent our best thinking for long-term expecta- These projections incorporate advanced quantitative modeling as well as qualitative
tions and establish a mid-point within a wider range of potential outcomes. We use the feedback and the economic expertise of Callan’s consulting professionals. Our 2016
projections to model portfolios for our clients.
numbers reflect our optimism for the economy, for inflation, and for the capital markets.
Correlation Expectations (10 Years)
Relationships between asset classes are as important as
standard deviations. In the past, particularly in stressed
Broad U.S. Equity
1.000
Large Cap
0.997
1.000
Small/Mid Cap
0.965
0.940
1.000
Global ex-U.S. Equity
0.882
0.879
0.853
1.000
Dev. Non-U.S. Equity
0.852
0.850
0.820
0.986
1.000
Emerging Market Equity
0.861
0.855
0.840
0.933
0.860
1.000
Short Duration -0.240
-0.230
-0.260
-0.254
-0.230
-0.280
1.000
U.S. Fixed -0.108
-0.100
-0.130
-0.123
-0.105
-0.150
0.870
1.000
0.136
0.138
0.121
0.106
0.119
0.069
0.729
0.925
1.000
TIPS -0.050
-0.045
-0.065
-0.053
-0.045
-0.065
0.530
0.580
0.527
1.000
High Yield
0.640
0.640
0.610
0.629
0.610
0.610
-0.170
0.020
0.220
0.060
1.000
Non-U.S. Fixed
0.014
0.050
-0.100
0.013
0.060
-0.090
0.480
0.510
0.542
0.340
0.120
1.000
Emerging Market Debt
0.579
0.580
0.550
0.550
0.530
0.540
-0.120
0.030
0.159
0.150
0.600
0.010
1.000
Real Estate
0.735
0.730
0.715
0.669
0.650
0.645
-0.140
-0.020
0.190
0.005
0.560
-0.050
0.450
1.000
Private Equity
0.948
0.945
0.915
0.934
0.905
0.905
-0.240
-0.190
0.062
-0.100
0.640
-0.060
0.560
0.710
1.000
Hedge Funds
0.797
0.795
0.765
0.760
0.735
0.740
-0.120
0.080
0.303
0.055
0.570
-0.080
0.540
0.600
0.770
1.000
Commodities
0.167
0.165
0.165
0.177
0.170
0.175
-0.220
-0.120
-0.042
0.100
0.100
0.050
0.190
0.200
0.180
0.210
1.000
Cash Equivalents -0.043
-0.030
-0.080
-0.040
-0.010
-0.100
0.300
0.100
-0.049
0.070
-0.110
-0.090
-0.070
-0.060
0.000
-0.070
0.070
1.000
Inflation
-0.020
0.020
0.010
0.000
0.030
-0.200
-0.280
-0.284
0.180
0.070
-0.150
0.000
0.100
0.000
0.200
0.400
0.000
1.000
Global
ex-U.S.
Dev.
Non-U.S.
EM
Equity
Short
Duration
U.S.
Fixed
Long
Duration
TIPS
High
Yield
Non-U.S.
Fixed
EM
Debt
Real
Estate
Private
Equity
Hedge
Funds
Comm.
Cash
Equiv.
Inflation
Long Duration
Source: Callan
-0.011
markets, correlations between asset classes have risen.
Broad Large Cap Sm/Mid
Cap
Callan revisits and adjusts our correlation expectations
annually. Among the risky asset classes, correlations
are high and will remain high. Interestingly, stocks and
bonds have exhibited tremendous negative correlation
over time. Other uncorrelated asset classes have been
commodities, TIPS, and to some extent many absolute
return strategies. We believe real estate will maintain a
diversification benefit, but it is harder to measure given
the valuation process.
Then and Now: Comparing Historical Returns to Historical Projections
Annualized Returns
How Callan’s 10-Year Return Projections Have Changed Since 1996
10 Years
15 Years
25 Years
7.35%
5.39%
10.03%
7.31%
5.00%
9.82%
7.56%
8.08%
11.72%
MSCI World ex USA
2.92%
3.58%
5.47%
MSCI Emerging Markets
3.95%
8.87%
8.63%
Barclays Aggregate
4.51%
4.97%
6.15%
Barclays Glbl Agg. ex-USD
3.10%
4.59%
4.59%
Barclays Long Gov/Credit
6.45%
7.07%
5.37%
Broad U.S. Stock Market
Russell 3000
Large Cap U.S. Stocks
S&P 500
Small/Mid Cap U.S. Stocks
Russell 2500
Non-U.S. Stock Markets
Fixed Income
7.77%
8.97%
8.05%
4.97%
5.95%
–
U.S. fixed income
Non-U.S. fixed income Cash equivalents
Real estate
Inflation (CPI-U)
15%
12%
9%
6%
3%
0%
Real Estate
NCREIF
Broad U.S. equity
Non-U.S. equity
Private equity
Projected 10-Year Return
for periods ended 12/31/2015
96
98
00
02
Source: Callan
04
06
08
10
12
14
16
Year
Hedge Funds
Credit Suisse Hedge Fund
Founded in 1973, Callan Associates Inc. is one of the largest independently owned
Private Equity
Cambridge Private Equity*
11.80%*
7.51%*
15.74%*
-7.49%
-2.49%
–
1.24%
1.61%
2.93%
Inflation
CPI-U**
firm provides research, education, decision support, and advice to a broad array of
For more information, please contact your Callan consultant.
San Francisco | 800.227.3288
Cash Market
90-Day T-Bill
investment consulting firms in the country. Headquartered in San Francisco, CA, the
institutional investors.
Commodities
Bloomberg Commodity
About Callan
1.91%
1.95%
2.30%
* Private equity data is time-weighted return series for periods ended 9/30/2015 rather than 12/31/2015
due to a reporting lag.
** CPI-U data are measured as year-over-year change through 12/31/2015.
Sources: Barclays, Bloomberg, Bureau of Labor Statistics, Callan, Cambridge, Credit Suisse, MSCI,
NCREIF, Russell, and Standard & Poor’s.
Atlanta | 800.522.9782
Published February 2016
Chicago | 800.999.3536
© 2016 Callan Associates Inc.
Denver | 855.864.3377
New Jersey | 800.274.5878
This report is for informational purposes only and
should not be construed as legal or tax advice on
any matter. Any investment decision you make on
www.callan.com
the basis of this report is your sole responsibility.
Investing has Become More Complex
…Risk is a Constant
This chart articulates the asset mix and associated risk needed in order to achieve an
expected 7.5% return at different points in history.
● Over time, achieving a 7.5% return has necessitated the assumption of three times
the risk (standard deviation)
● Reality is that investors have had to make a key decision – reduce return
expectations or increase risk
● There is no “free lunch”
● New asset classes and strategies have allowed asset owners to diversify into
increasingly smaller slices, but each “slice” of the allocation pie chart requires its own
expert monitoring and measuring
● Diversification is helpful, but investors must be aware whether diversification
is actually improving returns or is simply another “risk” in disguise
Source: Callan Associates