Taking the long view with strategic asset allocationFeb 1, 2018

Strategic asset allocation

In our previous articles, Stephen Lingard and I have focused more on short-term tactical opportunities. This time, we wanted to change things up. In this article, we’re going to look at strategic asset allocation and identify some opportunities and risks that may affect longer-term portfolio positioning.  


Our long-term return expectations are driven by current valuations, analyst expectations, expected growth rates and expected economic conditions. We use inputs and model techniques specific to each asset class within a process that blends quantitative analysis with fundamental research. We base our capital market expectations (CMEs) on forward-looking assumptions, rather than looking back at the long-term historical average returns for any given asset class. Using forward-looking returns is an important distinction, since past performance should not necessarily be an indication of future returns, especially in times of changing macroeconomic environments.

Opportunities and risks

Against a backdrop of stronger economic activity in many regions of the world and modestly rising inflation levels, we see a few themes worth highlighting:

1.     We believe global stocks have greater performance potential than global bonds in an environment of reform measures and stimulating fiscal policy. A background of improving global growth, a gradual interest-rate-tightening cycle and only moderate inflation over the next 5–10 years supports this view. A better environment for earnings and profitability also favour stocks.

2.     We think global bonds—especially high quality and long-duration issues— appear vulnerable due to the currently low yields and the desire of developed-market central banks to unwind unconventional policies and normalize interest rates. In the following graph, you can see that the current level of nominal yields provides a limited cushion for even modest interest-rate increases.

3.     We think emerging markets are better positioned to outperform domestic markets. The emerging-market economies’ share of global gross domestic product (GDP) has increased consistently since 2009. As their share of GDP increases, the importance of these countries to the pace of global growth has also increased. Fortunately, as they become more important, the stability of these countries has likewise generally improved. We see emerging markets outperforming development markets in both equity and fixed income over the long term.

4.     It is reasonable to expect forward-looking returns will be more muted in certain asset classes. There are still reasonable returns to be had in multi-asset mandates, but these may be muted given the starting point for fixed income markets. The historical returns enjoyed in bond markets in a structurally declining rate market will be difficult to replicate. Fixed income can still be counted on to help reduce volatility and preserve capital, but it will likely contribute less to returns of the overall portfolio.


Having a solid long-term asset allocation plan is key, as it can improve the chances of investors meeting their investment goals. It is also important to have reasonable expectations on the return potential from various markets, especially fixed income, as this will help investors avoid disappointment. On average structurally, we have positioned our portfolios to have more exposure outside North America, where returns are expected to be higher. We feel this should somewhat offset the more challenging return environment in fixed income given the likelihood for interest rates to rise.

Michael Greenberg’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.