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  The conditional historic method takes the same historic data, but conditions it based on starting valuation. It employs the apparent truism that a higher starting valuation should result in a lower forward return. If we take the smoothed earnings yield on equities as a proxy for return, and the same for the yield-to-maturity on US Treasuries, we see an attractive fit between starting valuation and forward return, at least on an overlapping basis (Figure 3). Figure 3. Relationship between starting valuation and 10-year forward return for US stocks (top) and bonds (bottom), 1881-2024 Source: Professor Shiller’s online database, GFD, Man Group calculations. As of December 2024. If the historic precedent were to hold, we should expect 10-year nominal CAGRs 3 to US stocks and bonds of 0% and 4%, respectively. Over the 150 years for which we have US inflation data, the lowest 10-year rolling inflation has been -4%, the average is +2% and the highest is +9%. Thus, for...

  Capital markets assumptions are both commonplace and prone to inaccuracy. Rather than gaze into the crystal ball, in this paper we aim to help you improve on CMAs for yourselves. Key takeaways: It is debateable whether the common 10-year timeframe represents an unconditional base rate, and using the same look-ahead for all assets may be an oversimplification Be prepared – returns to beta over the next decade are likely to be lower than we have seen over the last 10 years Approach capital market assumptions (CMAs) with healthy scepticism. Seek to understand their underlying drivers and assumptions before employing them in your strategic asset allocations Introduction CMAs seek to help allocators with their asset allocation decisions by establishing long-term forecasts for di...