Capital market assumptions: Methodology update

Aug 20, 2018 | Invesco Global Solution team

The Invesco Global Solutions Development and Implementation team (Invesco Global Solutions) is dedicated to designing outcome-oriented, multi-asset portfolios that meet the specific goals of investors. Capital market assumptions (CMAs) are key to this effort. CMAs provide the long-term estimates for the behavior of different asset classes. Specifically, for each of the asset classes which we estimate, we develop assumptions with regard to return, standard deviation of return (volatility) and correlation with other asset classes.

We have expanded the research platform to include additional time horizons and alternative asset classes. This document reviews the building block methodology which underpins the estimates for traditional asset classes (equities, fixed income, commodities) and introduces the recent CMA enhancements.

Estimating returns for traditional asset classes: A 'building block' approach

We employ a fundamentally based "building block" approach to estimating asset class returns. Building blocks represent a “bottom-up” approach in which the underlying drivers of asset class returns are used to form estimates (Figure 1).

First, these sources of return are identified by deconstructing returns into income and capital gain components. Next, estimates for each driver are formed using fundamental data such as yield, earnings growth and valuation, and combined to establish estimated returns.

By incorporating fundamental data, our approach allows for the relative attractiveness of asset classes to vary over time. Other approaches based on historical relative returns can provide relatively static risk-premiums through time in which certain asset classes contain constant return advantages. The following section will detail and present the estimates across various equity, fixed income and commodity asset classes.









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