Feb 10, 2020 Multi Asset

DWS Long View

The dawn of a new decade

Francesco Curto

Francesco Curto

Global Head of Research, DWS
  • Forecasted returns have come down by roughly 100 basis points in the past 12 months and asset classes with typically higher return face ESG challenges
  • Growth is an important component of returns, but there is evidence of structurally lower growth and lack of translation of GDP into earnings growth in some emerging economies
  • Investors need to examine the various drivers of potential returns across asset classes in an ongoing effort to assess investment goals
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Executive summary

More than ten years after the Global Financial Crisis, investors are reminded of the importance of staying invested for the long run, having realized strong nominal and real returns across asset classes. As such, forward-looking forecasted returns may be lower than returns in recent years. This pulling forward of returns over the last decade is due to 3 main factors that we will discuss further in the paper: valuations, growth, and central banks. Taking these factors into consideration, we present our long-term ten-year return forecasts across asset classes which we refer to as our “Long View.”

In our Long View, we show our forecasted returns across asset classes and regions on the efficient frontier, which represents the trade-off investors have to make between risk and returns. The chart below depicts the efficient frontier over the last ten years since the credit crisis and compares it to the efficient frontier over the past two decades. As seen, the post-financial crisis efficient frontier is steeper. What this suggests is on a relative basis, investors received greater compensation for commensurate levels of risk in the decade following the financial crisis.

Over the next ten years, based on the forecasted returns in this publication, we believe the efficient frontier could not only flatten; it may also drop well below the 20-year frontier at the lower-risk end of the spectrum.

In an environment of more conservative asset-class return expectations, strategic asset allocation becomes increasingly important, utilizing a rigorous and disciplined approach to portfolio construction.

This publication details the long-term capital market views that underpin the strategic allocations for DWS’s multi-asset portfolios. These estimates are based on 10-year models and should not be compared with the 12-month forecasts published in the DWS CIO View.

Central to this document is our belief that clients should consider a long term perspective beyond 1–5 years when it comes to constructing investment portfolios. Perhaps, counterintuitively, extending the investment horizon has, in the past, produced less volatile, more precise forecasts, as shown in Figure 12. This can potentially make entry points less relevant.

Figure 10: Efficient frontiers: Forecasted and historical returns and volatilities, annualised

Fig 10_CHART_EN_72DPI.png

Historical Efficient Frontiers are noted above as “Efficient Frontier” and are calculated using historical returns and volatilities over the time frame noted through 12/31/19. Each historical efficient frontier represents the risk-return profile of a portfolio which consisted of two asset classes; World Equities (in euro, unhedged) and Global Aggregate Fixed Income (euro-hedged). The Long View Efficient Frontier represents a forecasted optimal portfolio (EUR) using the various asset classes represented in the figure, subject to certain weighting/concentration constraints that result in component asset classes being able to trade above the line in this instance (please see page 25 of the document for more details on these optimization techniques). Source: DWS Investments UK Limited. Data as of 12/31/19. See appendix for the representative index corresponding to each asset class.

For example, we believe that many asset-class valuations are high relative to history. But as we show on page 16, when investing with a 15-year time horizon, the difference between buying exactly at the peak of the dot.com boom in April 2000 vs. a year later only amounts to one percent compounded annually. Clearly, though, if an investor had had a shorter horizon of five years, the difference in returns generated from buying at the peak versus one year later was greater, amounting to roughly six percent per annum. Thus, while asset prices may be high today relative to history, over long-run periods (15 years in this example), returns seem to be driven by their underlying fundamental building blocks.

When looking at rolling one-year price returns of the S&P 500 from 1871 to 2019, a negative two-standard-deviation move equated to a 27 percent decline in prices. When calculating a negative two-standard-deviation move using rolling 10-year returns over this same time frame, the decline in prices is less than 1 percent per annum. More stable long-run returns can be helpful in establishing more stable strategic-asset-allocation targets.

Hence, skeptics may be surprised to learn that the volatility of returns historically has been lower when using long-term horizons, although past performance may not be indicative of future results.

Figure 11: Asset allocation and risk allocation by target volatility

Fig 11_A_CHART_EN_72DPI.png

Fig 11_B_CHART_EN_72DPI.png

Source: DWS Investments UK Limited. Data as of 12/31/19. For illustrative purposes only. See page 25 for details. See appendix for the representative index corresponding to each asset class.

Figure 12: Distribution of U.S. equities: Historical returns over different time periods, annualised

Fig 12_CHART_EN_72DPI.png

Source: Robert J. Shiller, DWS Investments UK Limited. Data from 1871 to 2019.[1]
Past performance may not be indicative returns.


We use the same building-block approach to forecasting returns irrespective of asset class. We believe this brings consistency and transparency to our analysis and also may help clients better understand the constituent sources of returns.

The Long View framework breaks down returns into: income + growth + valuation, each with their own sub-components.

The pillars and components for the traditional asset classes under our coverage (equities, fixed income and commodities) can be seen below.

Meanwhile, alternative asset classes under our coverage (listed real estate, private real estate, private real estate debt, listed infrastructure and private infrastructure debt) are forecasted using exactly the same approach, sometimes with an added premium to account for specific features, such as liquidity.

Figure 13: Long View for traditional asset classes: Pillar decomposition

Fig 13_CHART_EN_72DPI.png

Source: DWS Investments UK Limited. As of 12/31/19[1]

Figure 14: Long View for alternative asset classes: Pillar decomposition

Fig 14_CHART_EN_72DPI.png

Source: DWS Investments UK Limited. As of 12/31/19.

Return forecasts

Our Long View forecasts for all asset classes can be seen below. The bars are ranked by ascending forecasted returns within each asset class.

In summary, we make five observations from the results:

  • Within fixed income, emerging-market U.S. dollar (USD) high yield and sovereign bonds appear to offer the highest expected returns.

  • Relative to many other asset classes, we expect higher returns in private real estate.
  • According to our analysis, stocks may be more attractive than bonds generally, with some opportunities in credit.
  • Return forecasts from commodities are low (especially in real terms) but they could provide useful diversification benefits.
  • Investors should be conscious of the impact of foreign-exchange (forex) risk on base-currency returns and volatilities. Depending on risk appetite and return objectives, investors may want to consider hedging currency risk (see page 27).

Figure 15: Forecast and realised returns for 10 years, annualised (local currency)

Fig 15_CHART_EN_72DPI.png

Source: DWS Investments UK Limited. As of 12/31/19. See appendix for the representative index corresponding to each asset class.[1]

You can download the complete report below.

All opinions and claims are based upon data on 1/29/20 and may not come to pass. This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation. Past performance may not be indicative of future returns. Forecasts are based on assumptions, estimates, views and or analyses, which might prove inaccurate or incorrect. Any hypothetical results may have inherent limitations. Among them are the sharp differences which may exist between hypothetical and actual results which may be achieved through investment in a particular product or strategy. Hypothetical results are generally prepared with the benefit of hindsight and typically do not account for financial risk and other factors which may adversely affect actual results. DWS Investments UK Limited

CRC 073493 (1/20)

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1. Forecasts are based on assumptions, estimates, views and or analyses, which might prove inaccurate or incorrect.

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