The German asset manager has released its long-term capital market views, as it argues that investors should consider a perspective beyond one to five years for their allocations.
The research includes 10-year return forecasts, which also underpin the strategic allocations for its multi-asset portfolios.
DWS argues that, in a context of low-growth, portfolios assuming a long-term view can benefit.
“In an environment of more conservative asset-class return expectations, strategic asset allocation becomes increasingly important, utilising a rigorous and disciplined approach to portfolio construction,” the research paper titled DWS Long View said.
“More stable long-run returns can be helpful in establishing more stable strategic-asset-allocation targets,” DWS states.
As an example, it wrote that the difference between buying at the peak of the dot.com boom in April 2000 vs a year later amounts to 1% compounded annually in returns for a 15-year time investor, but roughly 6%pa for a five-year investor.
It concludes that while asset prices may be high today relative to history, over long-run periods, “returns seem to be driven by their underlying fundamental building blocks”.
Taking three main factors into consideration, valuations, growth, and central banks, DWS presents its 10-year return forecasts across asset classes.
The Long View framework breaks down returns for traditional and alternative asset classes into: income; growth; valuation, each with their own sub-components.
Over the next 10 years, based on the forecasted returns in this publication, DWS believes the efficient frontier, which represents the trade-off investors have to make between risk and returns, could not only flatten; it may also drop well below the 20-year frontier at the lower-risk end of the spectrum.
The bars in its graph (see below) are ranked by ascending forecasted returns within each asset class.
Its research finds:
- Within fixed income, emerging-market US dollar high yield and sovereign bonds appear to offer the highest expected returns.
- Relative to many other asset classes, DWS forecasts higher returns in private real estate.
- Stocks may be more attractive than bonds generally, with some opportunities in credit.
- Return forecasts for commodities are low, especially in real terms, but they could provide useful diversification benefits.
- Investors should be conscious of the impact of foreign-exchange risk on base-currency returns and volatilities. Depending on risk appetite and return objectives, investors may want to consider hedging currency risk.
- DWS assumes that central banks will reduce the risk of disorderly negative outcomes, leading to volatility likely to stay low.
- While investors will search for yield in riskier asset classes, high yield is neither a good proxy for safety nor value. Higher-yielding defensive sectors have some of the highest proportion of companies in the bubble territory.
- EM equities also present investors with highest earnings exposure to high- and excessive-climate-risk categories. Profitability of companies in these two risk categories is quite low while these account for a significant proportion of total capital expenditure.
- DWS suggests a lower growth rate for both listed infrastructure and EM equities. While theory suggests that earnings should grow in line with GDP, a number of important emerging markets (China, India and Brazil) have exhibited a different behaviour.