The next five years will likely result in lower portfolio returns thanks to slow growth, inflation and related tightened monetary policy, according to investment strategists at Northern Trust Asset Management.

Having a good understanding of what's influencing these trends will go a long way toward helping advisors help clients set their expectations, they added.

Michael Hunstad, the firm's chief investment officer of global equities, said he thinks U.S. equities returns will be “lower, but still acceptable,” with total returns over the next five years at 6.0%. Fixed income, meanwhile will settle at 3.7%, he said, adding that a 60/40 portfolio should yield 5.1%. Some real assets, however, can offer a boost, with natural resources predicted at a five-year return of 7.3%, he said.

Hunstad, who was speaking at Schwab Impact 2022 in Denver, said his investment team has two timeframes through which they view the investment landscape. 

First, Northern Trust has a five-year outlook that is revised annually to reflect long-term asset class forecasts and strategic portfolio recommendations.

“Every summer we update the economic and financial market outlook across all major asset classes globally,” Hunstad said, adding that the team uses both qualitative and quantitative inputs. “We think that gives us a better end result, because sometime quant models can be really instructive but sometimes we want a fundamental overlay at the asset allocation level because history doesn’t always repeat itself.”

In addition, the investment firm and wealth manager employs a 12-month tactical outlook that is revised weekly or monthly and addresses interest rates, credit spreads and asset class forecasts to provide tactical portfolio recommendations. The firm uses these analyses to tweak the five-year strategy.

Currently, there are six key themes the investment team is focused on—what they’re calling “slow growth transitions,” “inflation recalibration,” “monetary drought,” “regional rebuilding blocs,” “the green transition still a go” and “not so negative,” Hunstad said.

Advisors could benefit by using these themes to frame expectations for clients, he said.

“I think these can be really useful in helping you navigate all of the information flow we get bombarded with on a daily basis. So if you have a good intermediate to long-term view on growth and inflation and monetary policy, and on ESG, then you can communicate that to clients,” he said. “You can help filter out the noise from the markets, and you can explain why portfolios are behaving the way they are and why you have clients positioned that way. If you keep coming back to consistent messaging on these key fundamentals, I think it can be really helpful.”

The first theme, Hunstad said, is the easiest to recognize. Whereas annualized real GDP growth has been at 2.6% over the last five years, Northern Trust forecasts it to be 1.9% over the next five year as the U.S. goes through several important transitions—from pandemic to endemic, from globalization to regionalization, and from carbon-based energy to green energy.

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