The Know:
New era, new expectations. If equities deliver mid-single digit returns over the next decade, the role of income should be reconsidered.
The Great Moderation
Equity markets have delivered strong returns in the decade since the Global Financial Crisis. Going forward, investors may face a decade of more modest returns given a starting point of elevated valuations, low interest rates, and moderate economic growth. We see a case for less reliance on capital appreciation and a greater effort to “lock in” total return through income potential.
Source: Bloomberg and GSAM.
The How:
Appreciating income. Consider seeking to lock in more total return through cash flow.
In Search of Cash Flow Enhancers
Cash flow diversifiers could be one potential solution for lower returns going forward. A range of these asset classes—which include Emerging Market Debt and Global Infrastructure—have more than double the yield of US equities, while also providing diversification potential. With low historical betas, these asset classes may serve to offset some portfolio volatility while seeking to lock in a greater proportion of total return through income.
Source: Bloomberg and GSAM.
Top Section Notes: As of November 30, 2019. ‘US Large Cap Equity’ is represented by the S&P 500 Index. 'Average Total Return' shows the average annualized return over the past five decades: 1970–1979, 1980–1989, 1990–1999, 2000–2009, and 2010–2019. '2010s' refers to the annualized total return for the S&P 500 Index from 2010 - 2019. 'Next Decade Expectations' refers to the expected annualized total return for the S&P 500 Index from 2020 through 2029. Bottom Section Notes: As of November 30, 2019. Expected returns are estimates of hypothetical average returns of economic asset classes derived from statistical models. There can be no assurance that these returns can be achieved. Actual returns are likely to vary. Expected returns on both charts reflect GS Global Portfolio Solutions Group strategic assumptions as of September 2019. Strategic long-term assumptions are subject to high levels of uncertainty regarding future economic and market factors that may affect future performance. They are hypothetical indications of a broad range of possible returns. ‘US Large Cap Equity’ is represented by the S&P 500 Index. ‘US REITs’ is represented by the FTSE/NAREIT US Index. ‘Bank Loans’ is represented by the Credit Suisse Leveraged Loan Index. ‘Global Infrastructure and MLPs’ is represented by the S&P Global Infrastructure Index. ‘Global High Yield Bonds’ is represented by the Bloomberg Barclays Global High Yield Index. ‘Emerging Market Debt’ is represented by the JPM EMBI Global Diversified Index. ‘Beta’ is calculated based on the past 12 months of daily return data for each index relative to the S&P 500 Index. Betas for Bank Loans, Emerging Market Debt, and US REITs are calculated using returns from the S&P Leveraged Loan Index, the Bloomberg Barclays Emerging Markets USD Aggregate Index, and the Dow Jones US Select Real Estate Index, respectively, due to data availability. Past performance does not guarantee future results, which may vary. Emerging markets securities may be less liquid and more volatile and are subject to a number of additional risks, including but not limited to currency fluctuations and political instability.
