Defined Benefit
Defined Contribution
Insurance Assets
Nonprofit

A Deeper Look at How We Did With Our Capital Markets Assumptions

A Deeper Look at How We Did With Our Capital Markets Assumptions
clock
1 min 52 sec

Each year, when we create our Capital Markets Assumptions, we publish a blog post outlining how we have done with our projections over time, using a representative portfolio consisting of 60% equity, 30% fixed income, and 10% real estate.

Our assumptions include projections for return, risk, and correlation and are used to inform the strategic planning process for all of our clients. The main purpose of the projections is to help clients design efficient portfolios. The projections are also used to form expectations for 10-year total portfolio returns to assist in a variety of planning exercises.

In this post we thought we would share how our assumptions have performed for specific asset classes:

  • Large cap equity
  • Core fixed income
  • Core real estate

10 projection years are shown, with the most recent projection being 2014, which encompasses the 10-year period ended Dec. 31, 2023. The charts that follow are similar in format to the chart that accompanies the blog post linked above about a 60%/30%/10% portfolio.

capital markets assumptions by asset class

For large cap equity, actual returns have generally been within one standard deviation of our projected returns. The 10-year periods ended in 2019, 2020, and 2021 contain two calendar year returns in excess of 30%, seven to eight double-digit calendar year returns, and only one single-digit calendar year decline.

capital markets assumptions by asset class

For core fixed income, actual returns have generally been within one standard deviation of our projected returns, though typically on the low side. The 10-year periods ended in 2022 and 2023 contain the 13% decline in calendar year 2022.

capital markets assumptions by asset class

For core real estate, actual returns have been within one standard deviation of our projected returns, with actual returns exceeding projected returns starting in the 10 years ending in 2019.

Our ability to project the return and risk of portfolios with several asset classes is stronger than our ability to project the return and risk of individual asset classes in isolation. Overestimation of one asset class is typically offset by underestimation in another asset class, resulting in reduced forecasting error for projections of portfolios including these asset classes.

The key takeaway from this exercise is that capital markets assumptions are generally good for describing a range of reasonable potential outcomes for a diversified portfolio, making them effective tools for designing efficient portfolios and for simulating the risk of financial variables.

Disclosures

The Callan Institute (the “Institute”) is, and will be, the sole owner and copyright holder of all material prepared or developed by the Institute. No party has the right to reproduce, revise, resell, disseminate externally, disseminate to any affiliate firms, or post on internal websites any part of any material prepared or developed by the Institute, without the Institute’s permission. Institute clients only have the right to utilize such material internally in their business.

Posted by

Share
Share on facebook
Share on twitter
Share on linkedin
Related Posts
Public Markets

The Supermicro Conundrum: When Successful Small Cap Stocks Hurt Managers

Nicole Wubbena
Callan expert analyzes the impact of Supermicro on small cap growth managers.
Public Markets

Gains for Stocks Mask Wide Disparities; Little to No Change for Bonds

Kristin Bradbury
Callan expert analyzes the global stock and bond markets in 2Q24.
Public Markets

Is This a Time for Active Managers to Shine?

Tony Lissuzzo
A post from a member of the Callan Nonprofit Group on how dispersion affects active management.
Private Markets

Significant Drops in Private Equity Activity From Peak Years of 2021-22

Ashley Kahn
Callan expert analyzes private equity activity in 1Q24, from fundraising to exits.
Private Markets

Sector-Specialist Strategies: What Institutional Investors Need to Know

Chrissy Mehnert
A look at sector-specialist strategies and how institutional investors can analyze them.
Public Markets

Stocks Continue Rally; Bond Returns Fall Amid Rate Cut Uncertainty

Kristin Bradbury
Callan expert analyzes the performance of global markets in 1Q24 and the outlook for the year.
Public Markets

The Magnificent Seven and Large Cap Portfolios: What Institutional Investors Need to Know

Nicole Wubbena
What institutional investors need to know about the Magnificent Seven and large cap stock portfolios
Private Markets

Private Equity Sees a Big Slowdown After Frenzy of 2021

Ashley Kahn
An update on private equity performance in 4Q23 and for the year.
Macro Trends

Our Capital Markets Assumptions: How'd We Do?

Greg Allen
Greg Allen and Julia Moriarty compare Callan's Capital Markets Assumptions to actual returns since 1989.
Public Markets

Stocks Near a Record High, and Bonds Reverse Course

Kristin Bradbury
Kristin Bradbury analyzes global stock and bond markets in 4Q23.

Callan Family Office

You are now leaving Callan LLC’s website and going to Callan Family Office’s website. Callan Family Office is not affiliated with Callan LLC.  Callan LLC has licensed the Callan® trademark to Callan Family Office for use in providing investment advisory services to ultra-high net worth clients, family foundations, and endowments. Callan Family Office and Callan LLC are independent, unaffiliated investment advisory firms separately registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940.

Callan LLC is not responsible for the services and content on Callan Family Office’s website. Inclusion of this link does not constitute or imply an endorsement, sponsorship, or recommendation by Callan LLC of their website, or its contents, and Callan LLC is not responsible or liable for your use of it. When visiting their website, you are subject to Callan Family Office’s terms of use and privacy policies.