The Sector Strategist: Using New Asset Allocation Techniques to Reduce Risk and Improve Investment Returns

CHAPTER 1

The Return Dilemma

Living in dreams of yesterday, we find ourselves still dreaming of impossible future conquests.

Charles Lindberg

Family Office Exchange (FOX), a leading provider of research and education to the wealthy and their advisors, released the results of a survey they made in early 2011. For 2011, wealthy families anticipated a median long-term return of 8% from their investments, consistent with previous years' studies. On the corporate side of the ledger, sentiment is equally optimistic. According to Milliman, a large independent actuarial and consulting firm, large public U.S. companies currently maintain an expected rate of return of 8% for their firms' pension funds, a slight decrease compared with 8.1% for 2009. The annual Milliman study covers 100 U.S. public companies with the largest defined benefit pension plan assets. Although the expected return has steadily declined during the past decade from a gaudy 9.4% in 2001, an 8% return expectation is still above the longterm averages.

The Milliman study also listed the percentage of pension plan assets invested in equities in 2010, which was 45%, a slight increase from the 44% in the previous year. Bond allocations were unchanged at 36%, and allocation to other investments, including cash, increased from 19% to 20% during 2010. Individual investors, who as a class are typically more aggressive, held 50.9% of their portfolios in stocks and stock funds according to the July 2011 AAII Asset Allocation Survey. ...