“The most common question we hear is: ‘Can this continue?’” said Masturzo. “I don’t know, but history tells us that it is unlikely.”
During the webcast, Masturzo used Research Affiliates’ newly updated Asset Allocation Interactive (AAI) tool to visually demonstrate the firm’s projections for future returns across asset classes, geographies and factors.
Research Affiliates predicts that there is a less than 1 percent chance that a traditional 60-40 portfolio will be able to post real returns of 5 percent or more over the next decade. The company assumes that the portfolio will generate a 2.4 percent average annual net yield, but an average annual valuation change of 1.9 percent.
A portfolio offering a 5 percent average annualized return is still possible, said Masturzo, but advisors would be better off optimizing returns through diversification and rebalancing than by adding risk.
Masturzo said that advisors and investors will have to think beyond traditional investments to generate yield and growth.
“Opportunities do exist beyond mainstream stocks and bonds to take advantage of asset classes with lower valuations or attractive cash flows,” Masturzo said. Yet most advisors are diversifying within highly correlated areas of the market and not across asset classes. Higher returns might be found in credit markets, commodities, REITs and private investment opportunities, and within non-U.S. markets.
Investors might also consider active strategies to produce differentiated returns, said Masturzo.
“Alpha is an important part of this discussion, especially when you’re talking about expensive asset classes,” he said. “We’re big believers in adding value through contrarian trading.”
At the heart of the tool is a scatterplot of risk and return demonstrating historical data or expectations from Research Affiliates projecting an efficient frontier defining a normal distribution around a portfolio’s probable returns.