Asset Allocation: Capital Market Assumptions For 2015

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Asset Allocation: Capital Market Assumptions For 2015

Asset Allocation: Capital Market Assumptions For 2015 by Beth Vanney, Jeffrey Knight, ColumbiaManagement

  • We retain very modest expectations for total returns from fixed-income assets based on the low level of yields combined with the expectation that interest rate policy will normalize within the next five years.
  • We believe equities offer returns only slightly below their long-term averages based on expectations of ongoing economic growth and worldwide equity valuations that are not extremely expensive.
  • We find that portfolios designed to rely more upon equity risk than fixed-income risk are more likely to succeed, on average, across the next five years.

For asset allocation decisions, we find great value in maintaining a long-term outlook for major asset classes. Twice a year, in fact, we conduct an extensive update of our five-year return forecasts for several asset classes. The purpose of this exercise is two-fold. First, taking a longer term perspective helps us to set strategic asset allocations and design portfolios for diverse investment goals. Just as important though is that maintaining long-term forecasts provides context for responding thoughtfully to daily swings in market.

Our capital market assumptions begin with our economic and interest-rate outlook. Since the specific timing and duration of economic expansion is difficult to forecast, we develop a central thesis along with strong and weaker potential recovery scenarios:

  • Our central thesis is for real U.S. gross domestic product (GDP) growth rising in 2015 to 3%, a continued slow recovery in Europe with sagging growth in emerging mark