The portfolio construction process is centered on three primary goals. If done properly, the portfolio should:
- Be designed around the specific goals for each client.
- Be well diversified to reduce unnecessary risks.
- Be built upon reasonable forward looking return and risk assumptions.
It’s important to note that an optimal portfolio for the future cannot be built on historical returns. The bond market is a perfect example of this. Given today’s low rates, we cannot expect the 6.3% annualized returns achieved over the past 30 years from bonds going forward. Following a sound investment process and constructing a portfolio with these goals in mind will substantially improve the odds of actually realizing a given financial goal.
APCM’s strategic economic and financial markets outlook provides a foundation upon which reasonable forward looking return and risk assumptions are built. Updates to these long term return expectations help clients determine if their current investment allocation remains suitable for the future. Which is a crucial part of the investment management process!
Currently, APCM’s strategic outlook can be summarized as follows:
- Modest global economic growth and low inflation
- Growth headwinds from debt and demographics and tailwinds from technological innovation
- Expected stock and bond returns that remain subdued relative to history
Since the global financial crisis, global growth has been modest and certainly frustratingly weak at times with bouts of deflationary scares. Based on data from the World Bank, global GDP grew at an average rate of 3.7% per year from 1960 until the peak before the crisis in 2007. Since then growth has downshifted on a global basis to 2.2%. While the U.S has helped to provide stability to global growth with persistent expansion since 2009, the current period remains the weakest on record in the post WWII era. It is also of note though that it is one of the longest, lasting over seven years thus far.
Recently, the surprise U.S. election results have pushed up growth and inflation expectations in the U.S. leaving some to wonder if the tide has turned for the modest global growth picture. 2017 U.S. GDP projections have ticked up since the election, and stand at 2.2% for 2017. These projections could move higher as clarity emerges on proposed policies, but the effects are likely to be spread out into 2018 and beyond. On a global basis, the IMF is calling for GDP growth of 3.4% in 2017, up from a projected 3.1% in 2016.
To address the longer term global growth picture it is important to consider the known structural challenges. These include, among others, aging demographics and current debt levels. APCM’s initial assessment is that U.S. growth expectations have been pushed modestly higher, but the outlook overseas is less certain. It is probably too early to tell if the tailwinds from anticipated fiscal stimulus, reduced austerity measures, and less regulation will be strong enough to overcome unfavorable demographics, debt levels and transitioning emerging economies.
In the coming few weeks, APCM’s investment committee will be hard at work updating the firm’s strategic outlook. Look for our complete thoughts to be summarized in January.
In the meantime, we would caution against making drastic portfolio changes based upon revised growth expectations or current market levels. As long as your portfolio was constructed with a sound investment process and meets the three primary goals listed above, then changes should really only be necessary if your unique circumstances have changed as well. Temporarily abandoning a sound plan is a sure way to increase the odds of falling short of your goals!
Brandy Niclai, CFA®
CIO – Multi-Asset Strategies