Long-Term Capital Market Assumptions

By Radu Gabudean, Ph.D. & Rich Weiss - September 2019

Key Takeaways

  • Capital market return assumptions are an essential component of the investment tools and capabilities we deploy to aid clients in developing portfolio solutions. These capabilities rest on a combination of fundamental insights and quantitative methodologies grounded in academic theory and investment practitioner experience.
  • Our return forecasts are the product of a multi-model approach that allows for a holistic, nuanced view across financial markets and asset classes. This process reflects our foundational belief that a multi-faceted approach to solving deep investment problems is preferable to any single view or solution. Such an approach is supported by academic and real-world analyses, which demonstrate the greater accuracy of robust multi-model forecasts over single-dimensional ones.
  • For each asset class, we develop a set of assumptions for return, risk, and correlation. Because asset class returns and relationships are ultimately grounded in economic fundamentals, we forecast over the equivalent of a complete economic and market cycle.
  • We arrive at our return forecasts through various modeling techniques, such as a classic valuation approach, a risk-premium approach, and an historical risk and return analysis. In addition to this quantitative process, we employ a qualitative review, recognizing that there are elements that can’t be easily captured by a quantitative process. Further, the quantitative models require forecasting various inputs, which again may contain qualitative elements.
  • Volatility and correlations are evaluated across multiple time periods and frequencies to develop comprehensive measures. This is important because volatility is episodic and horizon dependent— it varies depending on the time period and frequency at which it is measured. As a result, our measure of volatility uses multiple time frames and frequencies to form a comprehensive, robust view over time. Contrast this approach with that of a number of our peers who may use only a single frequency and historical window.
  • Lastly, and importantly, we test the robustness of our forecasting framework with a series of Monte Carlo simulations, scenario analyses, and stress testing. These quantitative “checks” help to ensure the viability, consistency and usefulness of our forecasts.
Radu Gabudean, Ph.D.
Vice President
Portfolio Manager
Rich Weiss
Chief Investment Officer
Multi-Asset Strategies

Long-Term Capital Market Assumptions

Investment Viewpoints | September 2019

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    The Making of a Glide Path

    Understanding the impact of design decisions on retirement outcomes.

    Investing for Sustainable Income: Diversification Matters

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      Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

      The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.