AQR’s Antti Ilmanen Predicts Low Returns

Low expected returns are going to anchor bad news for all of us for the rest of our working lifetimes, warned AQR principal and researcher Antti Ilmanen at the 2016 CFA Institutes European Investment Conference. This according to an article earlier this month in Enterprising Investor.

“I’ve got bad news as a starter,” Ilmanen told the conference audience. He suggested that for a balanced portfolio, the real return would be closer to 1% annually than the “healthy 4% historic U.S. equity risk premium.” He outlined three potential future scenarios:

  • Slow pain, in which low yields persist for years and there are no more windfalls from declining rates. Life insurance companies “may suffer badly in this instance.”
  • Fast pain, which he characterized as “payback time for the boomer generation’s windfall gains.” In this scenario, he said, “long-only institutional portfolios suffer across the board (although liability values fall).”
  • 2008 Redux: Equity valuations and bond yields fall. “A double whammy for underfunded pension plans with a duration mismatch,” he said.

According to the article, Ilmanen sees the “slow pain” scenario as the most likely. He suggests that investors consider “factor timing using approaches such as smart beta.” Specifically, he explained his preference for focusing on “harvesting from four to five styles that have historically generated positive long-run risk-adjusted returns,” and described the following:

  • Value—relative cheapness
  • Momentum—recent winners versus losers
  • Carry—outperformance of high versus low yield assets
  • Defensive—outperformance of lower-risk and higher-quality assets
  • Trend—recent asset performance consistency

He recommended using a combination of styles, however. “I think it is really dangerous to pick just one favorite style here and go for that,” he warned, “because you are going to hit the three-to-four-year window where you’ll find unpleasant performance and throw in the towel at the wrong time.”