Having said that, there are still benefits to investors in making longer-term return estimates based on thorough research and a repeatable investment process. These include the potential ability to profit from periods of short-term mis-pricing as well as the confidence to pursue illiquid investment opportunities which could yield above-average returns in the long term.
We believe the discipline of making a long-term estimate forces investors to decide on credible key assumptions and assess the sensitivity of the final numbers, helping them to align risk to long-term investment return objectives.
Last year saw stock-picking rewarded as investors started to look through the big picture. Robust equity returns at a time when macro concerns remain high may be a sign that the nature of returns is changing, back to a focus on the fundamentals, the importance of research and a robust and repeatable investment process.
The long-run signals do suggest that the return environment shaped by the post crisis world is starting to change. I firmly believe that it was never a question of simply risk on/risk off, but more about where is risk is likely to be rewarded.
History and common sense suggest that looking forward this is unlikely to be the safe-haven assets, where prices are still close to 100-year highs.
It will take time for the new return environment to emerge. However, there is an increasing probability that it will do so in 2013, with truly sustainable business models and income important elements driving returns.
Portfolios over the next ten years should be oriented more towards the riskier end of the spectrum, namely equities and real estate, and less towards government bonds.
