Russell Invesments blog image of briefcase, illustrating our case for multi-asset investing
Russell Invesments blog image of briefcase, illustrating our case for multi-asset investing

A case for multi-asset investing: The low-return imperative

There’s one primary reason we believe it’s more important than ever before for investors to consider a multi-asset approach to investing. We call this reason the low-return imperative—the idea that because future market returns are likely to be lower than the required rate of return, it’s imperative for investors to seek additional sources of return to improve the odds of achieving their desired outcomes.

Lower market returns: The way of the future?

We believe that overall future market returns—particularly those from traditional asset classes like equities and bonds—will be lower than in the past. Case in point: In 2009, a standard 60/40 stock and bond portfolio was expected to return 6.6% per annum (p.a.) in the following 20 years. Fast forward seven years, and this same portfolio is now forecast to return 5.6% p.a. over the next 10 years—a 1% decline.1

When compared to returns from a generation ago, the drop-off may be even more steep. A survey from the Federal Reserve Bank of Philadelphia this past January calculated that the expected rate of return for a 60/40 portfolio over the next 10 years is 3.5 percentage points lower than it was in the early 1990s.2

Medium-term valuation measures, calculated by the Cyclically Adjusted Price Earnings (CAPE) ratio (otherwise known as the Shiller PE3) also indicate a sobering outlook for returns. The chart below—of S&P 500® Index returns from 1936-2016—shows that when the CAPE is at 14 or lower, returns in the ensuing 10-year period averaged 15.5% per annum. Conversely, when the CAPE was at 24 or higher, average returns were only 4.9%. As of August 31, 2017, the current CAPE ratio is 30.214—indicating that it may be difficult for U.S. equities to equal the returns achieved in prior decades.

Simple average of 10-year-forward S&P 500® Index return (1/1/36 – 12/31/16)

Index performance is not indicative of the performance of any specific investment. Indexes are not managed and may not be invested in directly.

Source: Russell Investments, Thomson Reuters

Can desired outcomes ever match hurdle rates?

We recognize that each investor has a different outcome in mind when it comes to the required rate of return, or the hurdle rate. For simplicity’s sake, we look at three main investor types—defined benefit plans, non-profits, and individual or defined contributors—to see how they might stack up against their respective hurdle rates.

Defined benefit plans

  • The average funded status of a U.S. defined benefit plan is below 80%–meaning there’s still a lot of ground to cover to reach fully-funded status.5 Using 2016 10-K filings from our analysis of the largest corporate pension plans in the U.S., a return of 9.22% would be needed to achieve full funding.6
  • This is 362 basis points higher than a typical 60/40 stock and bond portfolio would yield per our December 2016 assumptions.7


  • Non-profit investors typically have a 5% spending requirement.8 When tacked on to inflation, which we expect to be 2.1% p.a. over the next 10 years, as well as investment expenses, we calculate the hurdle rate to be 7.60%.
  • This is 200 basis points higher than a typical 60/40 stock and bond portfolio would yield, per our December 2016 assumptions.

Individual or defined contributions

  • We believe it’s easiest to think of an individual’s hurdle rate as the required return needed to achieve a certain income replacement percentage at retirement, given a certain savings rate. The chart below illustrates the hurdle rate of return for a typical 45-year-old who expects her 401(k) to provide 49% of her final income at retirement—with different starting balances.
  • The chart shows that there are many instances where market returns don’t match the expected hurdle rate of 5.6% for a typical 60/40 stock and bond portfolio.

Estimated “hurdle rate” of return for an individual defined contribution participant at given starting balances

Source: Russell Investments calculations

In short, each of these investors may have difficulty attaining the return rates we expect a typical 60/40 bond and stock portfolio to yield—to the tune of 200 to 400 basis points. This is the low return part of the low-return imperative we have stressed. How, then, might investors potentially make up this difference?

Enter the multi-asset approach

Assuming investors are relying chiefly on market returns, we believe the best method to address the imperative—that is, the need for additional sources of return—is a multi-asset approach.

We define multi-asset as the process of identifying, combining and dynamically managing a globally diverse mix of performance sources to achieve a specific outcome.

A multi-asset solution is comprised of three phases:

  • Design: A customized asset allocation is designed to include both traditional and non-traditional diversifying exposures across a wide variety of styles, geographies, sectors and factors.
  • Construct: The portfolio is constructed through an open-architecture framework, using a blend of passive positioning strategies to capture strategic beliefs/risk premia AND “best-in-class” concentrated active strategies to capture skill in stock selection. Close attention is paid to costs.
  • Manage: The portfolio is managed dynamically in real time using risk analysis and precise implementation to efficiently add additional incremental return and/or help manage downside risk.

In multi-asset, we are essentially “making the assets work harder” than a traditional static portfolio to help bridge the gap between what is required and what we believe the markets (or passive-only investments) are likely to deliver. We believe that this solution may allow for asset owners and individuals to uncover additional sources of return that might not be available through a traditional approach, and in turn increase the likelihood they will achieve the investment outcomes they seek.

1 Source: Russell Investments Capital Market Assumptions. Please note all information shown is based on assumptions. Expected returns employ proprietary projections of the returns of each asset class. We estimate the performance of an asset class or strategy by analyzing current economic and market conditions and historical market trends. It is likely that actual returns will vary considerably from these assumptions, even for a number of years. References to future returns for either asset allocation strategies or asset classes are not promises or even estimates of actual returns a client portfolio may achieve. Asset classes are broad general categories which may or may not correspond well to specific products.

2 Federal Reserve Bank of Philadelphia, Survey of Professional Forecasters & Russell Investments. Data as of January, 2017.

3 Campbell. J., Shiller, R. (1988, July). “Stock Prices, Earnings, and Expected Dividends,” Journal of Finance, Vol. 43, No. 3, : Russell Investments calculations


5 Owens, J. (2016, March). “$20 billion club strategy”. Russell Investments Research.; and Collie, B. (2017, March). “Discount rates fall and shortfalls increase for the $20 billion club in 2016”. Russell Investments Research.

6 Owens, J. (2016, March). “$20 billion club strategy”. Russell Investments Research.; and Collie, B. (2017, March). “Discount rates fall and shortfalls increase for the $20 billion club in 2016”. Russell Investments Research.

7 Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. There is no guarantee that any stated results will occur.

8 Murray, S. (2011, October). “Non-profit spending rules”. Russell Investments Research.