What’s your expected return? (12/13)

The Reuters article below explains that many pension funds have failed to achieve their 8% annual return target this past decade. However, as of year-end 2012, strategic index investing delivered 9% to 10% annually.

This explains why CalPERS, the largest public pension fund in the U.S., is increasing its exposure to index funds. It also explains why the world’s largest mutual fund is now a Vanguard index fund.

Still, it is very important to be specific regarding the time frame being reviewed. As of today, the 10-year annualized return from strategic indexing is close to 8%.

Facing new reality, funds assume lower returns

By Natsuko Waki, 12/13/13

What if 3 percent is the new 8 percent?

Institutional investors such as pension funds have typically built in return assumptions of 8 percent a year – a rate some of them have not achieved for more than a decade.

Faced with slower economic growth across the world, some are cutting these long-term assumptions for the first time in a quarter of a century, with potentially far-reaching implications for pensioners, savers and asset managers.

Since the world entered what PIMCO dubbed the New Normal or slower economic growth in 2009, investors have had a relatively easy time making money thanks to cheap cash from central banks fuelling virtually all asset prices. This year alone benchmark world stocks have gained 15 percent.

But even with that, large investors, especially pension funds, have failed to achieve the 8 percent target, partly due to high fixed income holdings which returned very little.

According to the OECD, the weighted average real net investment return of pension funds which manage combined assets of over $32 trillion was 4.4 percent in 2012, and just 0.2 percent in the year before.

U.S. public pension funds, which have been increasing the share of equities in their portfolio, made an average quarterly return of 3.45 percent in the first nine months of 2013, based on data from Wilshire Associates. Wilshire’s data shows the median return was 5.2 percent over the last five years.

Click here for the full article and see our investable benchmarks.


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