Echelon - July 2016

Crossing The Point Of Low Return

The point of low return may finally have been crossed. Not because capital markets are about to offer higher valuation multiples, but because the often unexciting bond market is making a statement. Never during recent history has fixed income – led by risk-free government bonds – offered real rates of return as high as they do now.

Investors expecting 2015’s puny returns to continue this year suddenly now find they can expect at least six percent real yields on cash (after discounting inflation). Indeed, the point of low returns has been crossed. However, over optimism is dangerous, especially for those managing money for long-term wealth maximization.

Long-term fund managers can’t take their eyes off those opportunities that offer exponential returns. For managers of retirement savings funds, beating an inflation benchmark won’t cut it. They will be closely tracking equities, the asset class that’s most capable of delivering those outsized returns. The market has been a difficult place to generate high yields for over two years.

The stock market’s mood swings reflect the difficulties of forecasting how well the economy will do overall. It hasn’t rebounded strongly as many expected, nor has it slipped into an abyss as others forecasted. For money managers, the attraction of fixed income isn’t such as easy one to pick.