- Treasury yields. For the fiscal year ending 6/30/19, 30-year yields fell over 50 basis points, while 10-year yields fell over 80 basis points. With lower Treasury yields, expected fixed income returns fall.
- Inflation. CPI has tracked slightly below expectations, and break-even inflation is noticeably lower than a year ago. Lower inflation expectations directly translate to lower expected nominal returns.
- Equity valuations. Pressure on forward-looking returns appeared to have subsided with a late 2018 selloff, which made valuations more attractive. But fiscal 2019 turned into another strong year for equity returns, with the S&P 500® up just over 10%. When equities grind higher, they often look more expensive in long-term valuation models, and an expectation for multiple compression reduces forward-looking returns.
To avoid this, plan sponsors may be tempted to further tilt the portfolio toward return-seeking assets, but there are more options than simply adding to the equity allocation and shouldering additional volatility. Instead, consider increasing the equity allocation while decreasing beta. One market segment worth evaluating is options-based equity, which provides equity-like returns with the added benefit of tail risk management. This solution strikes a nice balance, by reducing pressure on long-term baseline return assumptions while helping to manage downside outcomes.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.
All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
Natixis Distribution, L.P. is a limited purpose broker-dealer and the distributor of various registered investment companies for which advisory services are provided by affiliates of Natixis Investment Managers.