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If the smart-beta folks at Research Affiliates are your idea of wise asset allocation, then you can get a thoroughgoing idea what the Newport Beach, California-based fundamental indexers think of expected returns over the next 10 years in everything from equities, bonds, currencies, commodities and more.
The value-oriented investment strategists known for indexes that weight according to fundamental criteria such as price to book rather the capitalization weight of stocks have unveiled a new “Expected Returns” website this month, laying bare their precise market estimates.
For example, the firm’s Q3 10-year forecast for equities is 2.7% average annual return, volatility of 17% and a yield of 2.2%.
Discouraged by that relatively high-risk, low-return investment?
Then simply cast your eyes upward to the higher end of the real expected returns axis, and see that Research Affiliates expects a 6.3% real average annual return for MSCI’s emerging markets equity index, albeit at the cost of much higher volatility of 23.9%.
Are broad equity indexes not your speed? Like the thrills of the country index investing? The Expected Returns site allows you to drill down and see, for example, that U.S. large equities are forecast to deliver a pathetic 1% over the next decades.
While that beats the negative half-percent average return of cash, the large-cap stocks comes with the wild ride of 17% volatility compared to zero volatility for cash. Far less attractive than large stocks, according to Research Affiilates’ model, are small stocks, set to return 0% over 10 years, but with a roller-coaster ride of nearly 20% volatility.
Russia, in contrast, is forecast to provide annual returns of 13.8%, albeit with white-knuckle volatility of 36.1%. The MSCI UK stock index might be something closer to a sweet spot for more risk-averse investors, with 5.2% expected returns and 18.1% volatility.
But the foregoing represents journalistic fun rolling over website bells and whistles. The serious folks at Research Affiliates introduced their public launch of their asset allocation ideas with a statement of their investment beliefs — perhaps a reminder of why some investors might prefer to pay them to manage their money.
Their core belief is that long-term reversion to the mean is the key driver of investment return — for those willing to bear the emotional costs of owning the sort of value stocks that are typically unloved by most investors.