Investment returns have undoubtedly been harder to come by in recent years. Interest rates have been way down in Europe, the US and other markets since the 2008 crisis, and the concept of decent risk-free performance is long gone.
But it seems many investors had been denial, taking the view that they simply needed to move into riskier assets to boost performance. That, of course, is easier said than done.
It seems that realisation has dawned.
Will asset owners reduce their annual return targets this year?
The consensus view among more conservative, long-term-orientated institutions and their consultants is that the global economy will not support returns for the next five to 10 years that it managed in the recent past.
That puts strain on current targets, which were set back when investments could be expected to hit double figures consistently on an annualised basis. The lower projected likelihood of returns leaves institutional investors with two options: increase the risk in their portfolios to raise the likelihood of higher returns, or reduce their annual return target.
Pension funds and other liability-driven investors have been reviewing their objectives for the last year or so and many have already reduced their targets by around 0.5% in 2016. Institutions including Australia's Future Fund and Singapore's GIC said last year that returns are set to fall in the coming few years.
However, while returns will likely be subdued in the short-term, the longer-term environment is not as gloomy. The objectives of default pension fund investors have remained broadly the same, given that they only require net returns of 3% or 4% to meet many members’ retirement goals. At a portfolio level, the potential end to record low interest rates is impacting bond holdings and infrastructure valuations (effective proxies for fixed interest).
The expected volatility in investment markets, particularly equities, is likely to result in a greater dispersion of returns in 2017. That has implications for the capital market assumptions that underpin forward-looking asset risk/return forecasts.
While some institutions have dialled back their risk exposures in line with the conservative and cautious investment policy, others see opportunity in the uncertainty that surrounds markets in 2017. Any disappointment in what US president Trump delivers on the growth and deregulation front would exacerbate market swings. This will present buying opportunities for those brave enough and with cash on hand at the right time.
Other predictions for the Year of the Rooster: