The analysis by ISSG derives an expected return of 7% for US large cap stocks and similar risk-adjusted returns for US small and midcap stocks annually over the 10-year period, and the returns are propelled by real earnings growth of 2% per year, a dividend yield of 2.25% and developed market inflation of 2.5% percent.
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Further, ISSG noted that the 2% earnings growth projection is significantly below the near-term consensus of 6% annually.
In the fixed income category, ISSG sees real cash rates rising to approximately 1% annually in the US in 10 years and it added that with inflation at 2.5%, it expects the 10-year Treasury yield to be 3.5%, causing long-term Treasuries to provide a negative return over the 10-year period.
ISSG also expected returns for alternatives to depend heavily on the underlying asset class, with a range of 3% to over 11% for the category.
The returns of fixed income assets held by pension plan sponsors, many of them being underfunded, are also expected to be affected by the interest rate increases, though these same interest rate increases would also reduce plan liabilities, which might result in a net increase in funding levels.
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By GlobalDataCommenting on the report, Jeffrey Saef, managing director for BNY Mellon and head of ISSG said: "Based on our research and analysis, we are projecting extremely low fixed income returns and single-digit equities returns over the period, which will make it challenging for institutions to reach their target returns. If institutions remain intent on aiming for combined eight percent returns, they may need to seriously consider taking on more risk in their portfolios."
"High net worth individuals, foundations and endowments aiming to preserve purchasing power also should consider revisiting their fixed income allocation over the 10-year period," added Leo Grohowski, chief investment officer for BNY Mellon Wealth Management.
