Consultants Are Predicting Lower Returns Again

Investment consultants’ performance expectations for their institutional clients are continuing to decline, new data from eVestment shows.

Major industry players’ ten-year return assumptions dropped across nearly every investment strategy on a year-over-year basis, according to the data, which was published on Thursday.

“You do see anticipation of lower returns and then on the flip side of that, because of the uncertainty, you see an increase in volatility,” John Molesphini, global head of insight at eVestment, said by phone.

This is the second year in a row that the consultants have downgraded their intermediate return assumptions, eVestment’s data shows.

The research firm pulled information from public documents that six consulting firms — Aon, Callan, Meketa Investment Group, NEPC, Verus Investments, and Wilshire — provided to their clients between December 2, 2020 and February 10.

According to the report, over 80 percent of the individual revisions made by consulting firms showed reductions in return expectations. Molesphini said institutions are dialing back their return assumptions because of the low-interest-rate environment.

“I don’t want to be a market predictor, but we’ve had a bull market in equities over the past few years,” Molesphini said. “They’re probably trying to make sure their clients are taking a more conservative approach.”

Commodities showed the steepest decline, falling 1.46 percentage points from the previous year. On average, consultants expect the strategy to return 2.21 percent, the report showed.

Fixed-income return expectations also declined across strategies, many by more than 100 basis points, the report showed.

“Specifically on fixed income, you’ve seen rates be at or near the bottom in many countries and regions,” Molesphini said. “There’s an anticipation that when rates start to go up on the fixed income side, the pricing starts to go down.”

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Meanwhile, private equity return assumptions remain higher than most others, as consultants expect an annual 8.38 percent return in the intermediate-term. However, the average expected volatility of these investments was 27.37 percent, a 220 basis point increase from 2020, according to the report.

“As more money gets put in, more money has to be managed, you’ll see more volatility,” Molesphini said of the asset class.

According to Molesphini, this data is a good proxy for predicting institutional investor behavior and where they may be making future allocation changes.

“Everyone wants to see what the experts think is going to happen,” he said.