Providence Whitepaper: Lower Longer Term Returns
Our recently published Whitepaper contends that long term investment returns from a traditional balanced portfolio are likely to be structurally lower than has been the experience over the past 30 years. Without adjusting return expectations, a more aggressive investment stance would be required to meet previous aspirational goals. The primary drivers behind this conclusion are due to multiple and parallel global imbalances creating headwinds over the longer term, being:
- Demographic changes
- Income inequality
- Excessive debt levels
These structural headwinds feed into the increasing prospect of a sustained period of low inflation and hence low cash and bond yields. As these factors are all interrelated and key inputs to other asset class valuations, the flow-on effects are likely to result in lower returns from all asset classes going forward.
Investors previously seeking returns of 4.5 – 5.5% above CPI for the purpose of meeting actuarial schedules, contractual liabilities or mandatory annual distributions will have to either adjust aspirational goals and income requirements or take on a higher level of risk to meet investment returns. We have worked closely with our asset consultant, Heuristic Investments, to calculate expected returns and drawn on multiple industry references to form our views. It is important to note that an event that results in sudden revaluation of any of these factors would change the outlook and hence our view on long-term asset class returns. The valuation starting point of assets is paramount in determining long-term returns on the assumption of mean reversion.
Click here to access the complete Whitepaper: Lower Longer Term Returns.