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Pictet WM recommends endowment-style portfolios

Declining future sovereign bond returns mean that investors should raise allocations to alternative asset classes, according to Pictet Wealth Management (WM).

In the next 10 years, the Geneva-based private bank expects basic 60/40 US portfolios to return only 4% on average annually — half the average return since 1980 — largely because of declining returns from bonds.

In contrast, it believes that endowment funds, which are the popular structure for non-profit organisation such as US universities, can generate 5.8% a year over the next decade.

“There is no single endowment strategy, but most invest 30% in alternative assets, and this can rise to over 60% in the case of some of the largest endowments,” Christophe Donay, Pictet Wealth Management’s head of asset allocation & macro research chief strategist, told a media briefing last week.

Pictet WM is part of the Pictet Group, which managed CHF 576bn ($613bn) in assets as of the end of last year. Each year it publishes Horizon, a 10-year view of economies, expected returns and strategic asset allocation.

According to Donay, who outlined the report’s recommendations, the Covid-19 pandemic has provided impetus to pre-existing economic and market dynamics, characterised by a shift to a “debt dominance” monetary policy regime that aims to suppress interest rates and government bond yields to boost economic recovery.

Conversely, the pandemic has meant an improvement in return expectations for private assets and other risk assets, including equities.

Favourite asset classes include private equity, infrastructure and gold, as well as global equities.

Pictet WM’s analysis finds that average annual returns for private equity could reach over 10% (in US dollars), and with earnings declining in 2020, the 10-year return expectations for equities have risen.

In addition, the persistence of low bond yields will likely prolong the appeal of equities, and for those willing to assume the risk, emerging-market debt and high-yield bonds offer potential, according to Pictet WM.

Donay also believes that a relatively new asset class, private infrastructure, is here to stay, arguing that strong performance delivered in the past 10 years (8.5% a year) should continue at a healthy, albeit slower, pace in the coming decade (5.6% a year).

“There will be a massive need for investments worldwide and its tight link with the UN’s Sustainable Development Goals makes it attractive to ESG-conscious investors,” he said.

Avoid sovereign bonds

On the other hand, suppressing interest rates means return prospects for government bonds and cash are decreasing.

Pictet WM’s analysis was already showing that returns for core sovereign bonds would be significantly lower than in the past (average annual nominal returns of 0.3% for US Treasuries over the next 10 years versus 9% for the best part of four decades).

Meanwhile, the shift in monetary policy will lead to negative average annual returns for cash in euro and Swiss francs over the next 10 years, while gold should benefit the most from the policy shift.

Although Pictet WM’s core scenario is that major economies will remain in a low inflation regime, the massive pandemic-related liquidity injections might foster a “regime shift” toward higher levels of global inflation, possibly triggered by currency depreciation and debasement.

As a result, gold would be a beneficiary, and the firm forecasts an average annual return for the precious metal of 4% over the next 10 years.

In this environment, which is being moulded by prolonged central bank low interest policies, “the endowment style of investing which includes exposure to alternatives is the most appropriate strategic asset allocation-style,” said Donay.

A recent report indicates that private bank clients in Asia are already convinced.

Alternative investments are the most sought-after classes among high net worth investors in the region, with 71% of asset managers surveyed saying it is the most in-demand asset class in the region, according to a report published last month by Boston-based research firm Cerulli Associates.


Changes in Pictet WM’s 10-year expected returns as a result of the Covid-19 (May 2020 vs March 2020)


Part of the Mark Allen Group.