1Scope 1 emissions include direct emissions from a company’s owned or controlled sources. Scope 2 emissions include indirect emissions from purchased or acquired energy. Scope 3 emissions include all indirect emissions that occur in the value chain of a reporting company. | 2Example is for illustrative purposes only and not intended as an investment recommendation. | 3November 2022, “The COP26 Net Zero Atlas,” FTSE Russell. | 4The MSCI ACWI Investable Market Index captures large-, mid- and small-cap representation across 23 developed markets and 24 emerging markets. With 9,126 constituents, the index covers approximately 99% of the global equity investment opportunity set. | 5Fundamental risk is risk associated with exposure to common risk factors like size, value, growth, etc. Specific risk is associated with unique characteristics of individual stocks.
Important disclosures: capital market assumptions
Equities
General — Assumed market returns are based on the Investment Strategy Group’s expectations for future dividend yield, earnings growth, and valuation change. Assumed volatility and correlations are based on historical analysis of the representative indices. Indices used are as follows:
- Global equities: MSCI AC World
- DM equities: MSCI World
- EM equities: MSCI Emerging Markets
- US large-cap equities: S&P 500
- Non-US DM equities: MSCI EAFE
- Europe equities: MSCI Europe
- Japan equities: MSCI Japan
Bonds
General — Assumed risk and correlations based on historical analysis of the representative indices. High-quality sovereign bonds – Return assumptions are based on starting yields and the expectation that yields move toward our estimate of a terminal interest rate over the time period. Using these inputs and the duration of the respective bill, note, or bond, we then calculate the income and capital gains/losses associated with these changes. We assume zero downward adjustment for downgrades and defaults for high-quality sovereign bonds.
Credit risk premia — For non-sovereign and corporate bonds, excess return assumptions are estimated. The excess return assumption is a function of excess spread, a downward adjustment for downgrades and losses, and reversion to median spread levels. The excess spread is readily observable in market pricing. The downward adjustment for downgrades and defaults is based on our proprietary research and the long-term historical experience. Indices used are as follows:
- Global bonds: Bloomberg Global Aggregate (USD Hedged)
- Global Treasuries: FTSE World Government Bond (USD Hedged)
- Global inflation-linked bonds: Bloomberg Global Inflation Linked (USD Hedged)
- Global corporate bonds: Bloomberg Global Corporate Index (USD Hedged)
- Global high yield: Bloomberg Global High Yield Index (USD Hedged)
- EMD: JPM EMBI Global Diversified
- US cash: US 3-month T-bill
Currencies
Return assumptions are shown for unhedged currency exposure, unless stated otherwise.
Hedged — Hedged currency return assumptions are based on current and forward-looking estimates for interest-rate differentials.
Unhedged — Unhedged currency return assumptions are formulated based on forward-looking estimates of real carry returns, normalization of real exchange rates, and an adjustment for productivity growth.
General
Period — Intermediate capital market assumptions reflect a period of approximately 10 years. If we developed expectations for different time periods, results shown would differ, perhaps significantly. Additionally, assumed annualized performance and results shown do not represent assumed performance for shorter periods (such as the one-year period) within the 10-year period, nor do they reflect our views of what we think may happen in other time periods besides the 10-year period. The annualized return represents our cumulative 10-year performance expectations annualized. The assumed returns shown do not reflect the potential for fluctuations and periods of negative performance.
This analysis is provided for illustrative purposes only. This material is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase shares, strategies, or other securities. References to future returns are not promises or even estimates of actual returns a client may achieve. This material relies on assumptions that are based on historical performance and our expectations of the future. These return assumptions are forward-looking, hypothetical, and are not representative of any actual portfolio, or the results that an actual portfolio may achieve. Note that asset-class assumptions are market or beta only (i.e., they ignore the impact of active management, transaction costs, management fees, etc.). The expectations of future outcomes are based on subjective inputs (i.e., strategist/analyst judgment) and are subject to change without notice. As such, this analysis is subject to numerous limitations and biases and the use of alternative assumptions would yield different results. Expected return estimates are subject to uncertainty and error.
ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY AND AN INVESTMENT CAN LOSE VALUE. Indices are unmanaged and used for illustrative purposes only. Investments cannot be made directly into an index. This illustration does not consider transaction costs, management fees, or other expenses. It also does not consider liquidity (unless otherwise stated), or the impact associated with actual trading. These elements, among others, associated with actual investing would impact the assumed returns and risks, and results would likely be lower (returns) and higher (risk). Any third-party data utilized in the analysis is believed to be reliable, but no assurance is being provided as to its accuracy or completeness.
Monthly Market Review — August 2024
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Brett Hinds
Jameson Dunn