‘No One Should Expect Returns of 5%’: Research Affiliates

The numbers don’t lie, according to experts at Research Affiliates, and that means it’s time to scale back expectations when it comes to real returns in the coming decade.

“We’ve plotted it – there’s nothing above 5%,” said Chris Brightman, chief investment officer of Research Associates, at a symposium the group hosted in San Francisco on Wednesday. “And there’s really no combination of asset classes that will get us [even] to 5% real returns.”

And that means investment professionals need to have the tough talks with investors. “Have the conversations you need to with boards, trustees, clients and those you advise and suggest that their expectations have to be adjusted down,” Brightman explained.

Yes, we’ve had a boom in bonds for 30 years and strong gains for stocks. “But today – no one should expect returns of 5%, because we’re not starting from historic average yields [of 5% or higher]. It’s a simple approach.”

The “simple” the Research Affiliates expert is referring to involves a model of analysis that has factored in returns for the past 100 years. That data is then displayed in a classic scatter-plot graph, which looks at volatility and expected returns over the next 10 years.

“Yes, emerging-market equity has expected 7% real returns,” Brightman said. “But recognize, it comes at extraordinarily high volatility of 22%, meaning it can move 50% at times.”

The same goes for Russia. “There may be low prices today, but there’s off-the-chart risk and huge opportunities for volatility in returns.”

Shiller Stats

The Research Affiliates managing director describes the Yale economist Robert Shiller’s latest price-to-earnings (P/E) ratios.

Shiller, who introduced cyclical tweaks to historic asset analysis, says that with a U.S. equity ratio of 27, we should expect lower future returns ahead.