At SEI, we recently updated our capital market assumptions (CMAs) as part of our review and monitoring process. This brought our estimates for risk premiums over cash in line with our current expectations for capital markets (cash is used as a proxy for the theoretical return on a risk-free asset).

Fixed-income return expectations lowered

Central banks around the world have reacted swiftly and significantly in their efforts to prop up the global economy in light of the COVID-19 pandemic. Several have indicated their willingness to keep interest rates low and allow short-term rates to be anchored for an extended period of time. In our view, longer-term rates are also unlikely to move notably higher as there have been no signs that the global bond market expects inflation to run wild.

With low interest rates rising only gradually back to more normal levels, we expect fixed-income returns to be subdued for some time. Given roll-down return assumptions (falling yields and rising prices as a bond’s maturity date approaches) and lower expected returns on cash, we do not see an improvement in risk/return ratios for bonds relative to equities. Accordingly, despite the low level of expected returns on bonds, this does not change our view that fixed-income investments have a role to play in investors’ portfolios.

Global equity return expectations lowered

Based on current global central-bank policies implemented in light of the COVID-19 pandemic, our base-case view is a slow return of interest rates to more typical levels. Equity asset classes are still expected to deliver similar levels of risk premiums as they have historically; however, we anticipate lower absolute returns given the lower interest-rate environment.

About SEI’s capital market assumptions

At SEI, we develop forward-looking, long-term capital market assumptions about risk, returns and correlations for a variety of global asset classes, interest rates and inflation. Our assumptions are based on quantitative analyses of historical data and current market environments along with qualitative reasoning. We believe this approach allows for greater impartiality than methods that rely on historical data alone, which are often skewed by a single time period or event.

We aggregate our asset-class assumptions into a diversified portfolio, and then run Monte-Carlo simulations to develop scenarios across a wide variety of market environments that can provide insight into the potential impact of future market variability over time.

In our view, the value of these assumptions is ultimately not in their accuracy as point estimates, but in their ability to capture relevant relationships and changes in those relationships as a function of economic and market influences—and in our ability to help investors make well-informed decisions.

Please refer to our recent publication, Developing Capital Market Assumptions, for more detail about how we develop CMAs at SEI. Information regarding the actual assumptions that we use in a specific portfolio can be requested from your SEI representative.

CMAs are not predictions of how asset classes will perform or reliable indicators of future performance; instead, they are expected long-term characteristics of asset classes. The below figures are SEI’s mean estimates for select asset classes. They do not represent all asset classes SEI analyses nor should they be considered projections for any SEI investment products. Different tools and models can simulate various market conditions using these assumptions as inputs. CMAs are used in the strategic asset allocation process, for asset/liability studies, and in proposal-generation systems. All assumptions are pre-tax and gross of any fees or expenses related to investing.

Important Information

This document and its contents are directed only at persons who have been classified by SEI Investments (Europe) Limited as a Professional Client for the purposes of the FCA Conduct of Business Sourcebook.

This information is issued by SEI Investments (Europe) Limited, 1st Floor, Alphabeta, 14-18 Finsbury Square, London EC2A 1BR, which is authorised and regulated by the Financial Conduct Authority.

No offer of any security is made hereby. Recipients of this information who intend to apply for shares in any SEI Fund are reminded that any such application may be made solely on the basis of the information contained in the Prospectus.

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

The value of an investment and any income from it can go down as well as up. Investors may not get back the original amount invested. In addition to the normal risks associated with equity investing, international investments may involve risk of capital loss from unfavourable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Bonds and bond funds are subject to interest rate risk and will decline in value as interest rates rise. High yield bonds involve greater risks of default or downgrade and are more volatile than investment grade securities, due to the speculative nature of their investments. Narrowly focused investments and smaller companies typically exhibit higher volatility.

Whilst considerable care has been taken to ensure the information contained within this document is accurate and up-todate, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information.