The current CMA landscape
Capital Market Assumptions (CMAs), which comprise expected returns and corresponding risk measures, are fundamental inputs in asset allocation. Despite their importance, many investors are unable to meaningfully use widely available estimates in their investment processes, due to multiple shortcomings.
The first issue, while conceptual, concerns fundamental CMA definitions. The expected return on an asset class has to be consistent with market consensus expectations on all components of present value. As a quick example for equities, this means we need to estimate the market view on growth to understand the expected return. This is the relevant basis on which to evaluate strategic asset allocation. Many existing approaches produce predictions and views that diverge from market consensus and are more appropriately utilised within active macro strategies. We think this confusion explains why investors and asset allocators regularly encounter expected returns estimates that are very conflicting.
The second issue we encounter is minimal attention paid to the risk side of CMAs. Given that expected returns can only ever be a mild guide to future outcomes, it is a significant omission to neglect risk estimates. The costs only grow as investment horizons extend, and many CMA offerings do not distinguish between short- and long-term risk. At best, estimates involve an extrapolation of shorter-term volatilities, usually estimated using realized returns.
Finally, we tend to see dated and inefficient tech stacks underpinning the production and delivery of CMA estimates. Investors need seamless integration of CMA inputs into their investment processes. The current CMA landscape is characterised by infrequent updates delivered in cumbersome formats.
In summary, these shortcomings have eroded investor confidence in CMAs. We have developed a new generation CMA solution that addresses these shortcomings and provides investors with better asset allocation tools.
AS CMAs – new generation of asset allocation tools
Our new generation CMA solution moves beyond traditional approaches along several dimensions. AS CMAs are derived from a consistent present-value approach applied to all asset classes. All markets and asset classes are updated daily, and histories made available for testing strategies. Our estimates enable investors to explore expected returns, risk, and risk-return trade-offs across investment horizons. Simulation-based asset return paths allow investors to test their strategies, create scenarios, and impose their own views in a consistent way. Finally, investors can easily obtain the CMAs through modern tech solutions.
When estimating expected returns, there is broad-based agreement that returns on each asset class can be broken down into three components: Carry, Growth, and Value. We keep the three-component structure outlined above but radically change how they are implemented. Perhaps most importantly, all three components are linked to market pricing and macro consensus in a consistent way. This means our estimates are forward-looking, aligned with present-value logic, and have coherent stochastic properties.
To the extent asset allocators want to accurately capture the full range of potential investment outcomes across asset classes and horizons, an accurate representation of risk is at least as important as timely and accurate estimates of expected returns. Our estimates of risk and correlations are obtained from a simulation model which is specifically designed to capture how global macro and asset markets evolve over the long term. The simulation-based risk measures are fully consistent with the estimates of expected returns. One of the benefits of the simulation-based approach is that we provide simulated paths for asset returns as part of our CMAs. Clients can use these paths to explore bespoke risk measures or impose their own macro views.
We pay significant attention to the tech infrastructure underpinning the production and delivery of our CMAs. This ensures that our CMA estimates can be integrated into analyses and processes with minimal frictions and at higher frequency. High frequency delivery means estimates are up-to-date when markets are volatile and are beneficial when decisions need timely information, even if most organisations naturally make allocation decisions at a lower frequency. Investors can receive our CMAs through direct API feeds, Snowflake shares, and our interactive analytics platform.
How do AS CMAs add value?
AS CMAs provide comprehensive visibility on investment opportunities and risk, helping investors construct and maintain robust and optimal asset allocations and portfolios.
Daily estimates facilitate real-time assessments incorporating the latest market developments. Clients can use these paths to explore bespoke risk measures or impose their own macro views. Expected returns and risk cover horizons from 1 to 30 years, are available in multiple currencies, and provided in nominal and real terms. The combination of daily frequency and multiple horizons expands the use of our CMAs beyond strategic towards tactical asset allocation.
Our comprehensive CMAs coverage includes developed and emerging market equities, fixed income, and private assets, including the coverage of country, segment, and sector components. Granularity enables investors to refine their asset allocation along multiple dimensions. Current and historical estimates delivered through API and interactive dashboards ensure that investors can fully benefit from the granularity and timeliness of our estimates.
For more details, see our CMA Solution page for more details. Over the next weeks, we will publish articles that expand on AS Capital Market Assumptions, how they innovate relative to existing offerings, and how they add value for investors.
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