If Arnott is right, Encinitas' unfunded pension liabilities are a lot closer to the Stanford analysis of $154 million than the CalPERS/Blakespear estimate of $40 million.40% Bonds. Yield is 2% for the US aggregate bond market.
60% Stocks. Our base case is 5.4% for US stocks, but we think valuations are too high, so we trim this to 3.3% for the coming decade. Here’s our logic:
The yield is 2%.
Earnings growth over the past century has been 4.5%, of which 3.1% was inflation (real growth of 1.4% … far less than most people realize).
Inflation expectations are about 2%, so perhaps we should trim this forecast by 1.1%.
This gives us a base-case of 5.4%.
Valuation multiples are stretched, with the stock market priced at 25 times the 10-year average earnings, against a historical norm of 16.8x. If we’re back to historical norms in 10 years, that costs us another 4.2%. Since valuation multiples could (a) return to historical norms, or (b) remain at today’s lofty multiples, let’s split the difference, and trim our return expectations another 2.1%.
This gives us a likely outcome of 3.3% from stocks.
If our logic is sound, we earn 0.8% from our bonds (40% allocation x 2% return) and 2% to 3.2% from our stocks (60% x 3.3%, or 60% x 5.4%). Add up the return from stocks and the return from bonds, and we get 2.8% to 4% from our balanced portfolio.
Thursday, April 6, 2017
Renowned investor takes issue with rosy pension outlook endorsed by Blakespear
Widely respected investment manager Rob Arnott explains the math behind likely pension returns: