Narrowing the return gap: 10 steps in the right direction

Many investors are stuck between relatively high return targets and stubbornly low market return expectations. While no single “bridge” will get investors where they need to go, we think this series of incremental ideas can help put a portfolio on a path forward.

10 investment "stepping stones"

  1. Get more active in equities
  2. Find cash-flow compounders
  3. Seek upside by limiting downside
  4. Invest thematically
  5. Optimize fixed income exposure
  6. Enhance alternatives with portable alpha
  7. Seek illiquidity premium opportunities
  8. Dial up infrastructure exposure
  9. Find ways to be more contrarian
  10. Consider “core alternatives”

MANY INSTITUTIONAL INVESTORS,  from public and private pensions to endowments and foundations, are stuck between a rock and a hard place. Their return targets remain relatively high, while capital market return expectations for the near to intermediate term are still stubbornly low. In this paper, we consider several different approaches to this challenge and propose 10 “stepping stones” — incremental investment ideas that may help put an institution’s portfolio on a path forward.

Gauging the return gap

In working with public pensions, we have seen return targets come down over the last 15 years, but only modestly. With large US plans, for example, the current average is still nearly 7.5%, versus 8% a decade ago. Return targets of corporate plans, endowments, foundations, and financial institutions have also declined somewhat, but they still pose a high hurdle when compared with…”

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