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Mind the Gap

Legg Mason’s excellent 2016 Global Investment Survey reveals that millennials are even more conservative than people aged forty or more in their asset allocation. Yet, globally, they are hoping to generate on average 11% p.a. returns in years to come.

Chart 1 – Allocation Preferences

Source: Legg Mason 2016 Global Investment Survey

While being up nicely YTD, a static diversified long-only portfolio comprising these asset classes generated returns of approximately 2.5% p.a. in USD before fees in the last three years, and 2.9% p.a. in the last five years.

If the global low-rate / low-return paradigm we are in is to last, this makes for a wide expectation gap. The table below shows the effect of running the same portfolio dynamically with monthly re-balancings on the ALPIMA platform. Additional returns in excess of 2% p.a. were generated over the last five years, with the added benefit of lower volatility.

Chart 2 – Average Returns & Volatility -- Last 5 years

Source: ALPIMA

It may not be possible to fully close the expectation gap, but smart investing can help narrow it somewhat.