Cliff Asness, a quantitative hedge fund manager in the US wrote an article recently where he projects himself forward to 2035 and looks back at the decade to come (2025 to 2035). This is a serious article written in his slightly tongue-in-cheek manner, which tries to ‘predict’ investment returns over the next ten years. The full article can be accessed here 2035: An Allocator Looks Back Over the Last 10 Years

US Equities 
While no one can predict the future, Asness suggests the returns from US may be below par over the next decade

“It turns out that investing in US equities at a CAPE* in the high 30s yet again turned out to be a disappointing exercise….despite continued strong earnings growth, US equities only beat cash by a couple of percent per annum over the whole decade...”

Essentially, Asness is suggesting that the high price paid for US now will translate in below average returns. After the stellar US equity returns from 2010-2025 this may turn out to be accurate. 

Private Equity 
Private Equity is the darling of private banks and the financial product of choice for high net worth individuals. Why is this? Well, private banks get to charge their clients 3%-4% per annum and clients get the exclusivity of investing in private companies. One important point about private equity is that the quarterly valuations of private equity do not have to reflect their value at that point in time. So, if the value of the private equity investment has declined by -20%, it does not have to be reported as such. 

Asness says, “So at the end of the day, a lot of managers got paid a **** ton of money for less-than-equity returns, with at-least-as-high-as-equity risk, just so allocators could feel safe in their jobs and to make sure others thought they were on the cutting edge of investing. That was a pretty large payment, like many hundreds of billion dollars over 10 years industry-wide, from our collective investors to our collective managers, just to make our allocator lives easier!”.

Asness is suggesting that for investment allocators private equity is an easy ‘Yes’ as the past performance has been good and the fees are better. His main point is that private equity is still equity. In other words if equity deliver below average performance, so will private equity. 

Bonds
Investing in Bonds of the last ten years has been a disaster. Asness is somewhat more optimistic about the next ten years, even though the US government is currently running a current account deficit.

“Inflation ran 3-4% for the decade and U.S. bonds were a bit subpar (i.e., lower real returns than over their long-term history). But they were not a total disaster, and clearly not as bad versus their historical norms, as U.S. equities”.

International Equities
If Asness was downbeat on US equities, would International Equities fare better? 

“Of course, after being left for dead by so many U.S. investors, the global stock market did better with non-U.S. stocks actually turning in historically healthy real returns (like 5-6% per annum over cash). It turned out that, just as we thought, the U.S. really did have the best companies (most profitable, most innovative, fastest growing) and this indeed continued in this last decade. But it also turned out that paying an epic multiple for the U.S. compared to the rest of the world mattered somewhat more than we thought, and international diversification, as we knew it would one day, did eventually work”.