2017 Capital Market Projections

Each year, Callan develops long-term capital market projections, detailing expected return, standard devia-
tion, and correlations for major asset classes. These projections are the cornerstone for strategic planning.
This charticle summarizes key figures from Callans 2017 capital market projections.

Callans 10-Year Expectations

10-Year Return and Risk Projections
U.S. Equity 6.85%: Earnings growth is likely to
Projected Return Projected Risk improve from recent levels as the economy grows
(10-year geometric) (standard deviation)
more quickly. Expansive fiscal policies could pro-
vide an additional tailwind. Dividend yields are ex-
6.85%
Broad U.S. Equity pected to hold steady.
18.25%
6.75% Global ex-U.S. Equity 7.00%: Improving economic
Large Cap 17.40% prospects in developed markets and continued high
growth in emerging markets should support profits,
7.00%
Small/Mid Cap but not to U.S. levels. Large dividend yields com-
22.60%
7.00% pared to the U.S. result in similar total returns.
Global
ex-U.S. Equity 21.00% U.S. Fixed Income 3.00%: The bond market
Developed 6.75% should see yields rise in response to Fed tightening
Non-U.S. Equity 19.70% in the next 3 years. Yields should increase across
Emerging 7.00% maturities; short-term rates should grow more than
Market Equity 27.45% long-term, flattening the yield curve. Future higher
2.60% yields offset capital losses ex-
Short Duration 2.10% 89 Years of Stock Market Returns pected up front.
3.00% Real Estate 5.75%: Reflects
U.S. Fixed 20
3.75% downward pressure on cap
2016
1.40% 2014 rates, which declined about
Non-U.S. Fixed 15 2012
9.20% 2015 2010 0.25% in 2016.
2006
Number of Years

2011 2009
3.00% 2007 2013
TIPS Hedge Funds 5.05%: Returns
5.25% 10
reflect the cross currents of
Emerging 4.50% diminished equity prospects,
Market Debt 9.60% 5
higher cash rates, and the
4.75% prospect of varied return oppor-
High Yield 2008
10.35% 0
-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% Over tunities in uncertain markets.
3.20% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 50%
Long Duration
10.90% Source: Standard & Poors

2.65%
Commodities
18.30% Inflation Year-Over-Year
5.75%
Real Estate CPI (All Urban Consumers) PPI (All Commodities)
16.35% 20%

5.05%
Hedge Funds 15%
9.15%
10%
7.35%
Private Equity
32.90% 5%

2.25% 0%
Cash Equivalents
0.90%
-5%
2.25%
Inflation
1.50% -10%

Source: Callan
-15%
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Source: Bureau of Labor Statistics

Projected Risk and Return of Different Asset Mixes
This exhibit uses Callans projections to create a range of efficient portfolios on a spectrum from conservative to aggressive. 14.46%

10-year projected return 11.62%

9.24%
10-year projected
7.19%
standard deviation 6.50%
5.47% 5.50% 6.00%
4.50% 5.00%

2% 3% 4% 5% 7%
Private Equity 7% 7% 7% 8%
3% 5% 8%
6% 7% 9%
6%
Hedge Funds 5% 11%
5%
5%
Real Estate
16%
44% 31%
High Yield 65% 55%

23%
U.S. Fixed Income
18%
Global ex-U.S. Equity 14%
11% 30%
7% 24%
Broad U.S. Equity 19%
14%
9%

<<< Conservative Moderate Aggressive >>>

Note: Charts may not sum to 100% die to rounding.
Source: Callan
About These Projections

Callans projections consist of three primary figures for each asset class: a mean rate Multiple elements of the capital markets influence the projections: returns relative
of return, a corresponding range defined by standard deviation, and the correlations to to inflation, equity valuations, risk premiums, GDP growth, and many other factors.
other asset classes. These figures represent our best thinking for long-term expecta- These projections incorporate advanced quantitative modeling as well as qualitative
tions and establish a mid-point within a wider range of potential outcomes. We use the feedback and the economic expertise of Callans consulting professionals. Our 2017
projections to model portfolios for our clients. numbers reflect our optimism for the economy, for inflation, and for the capital markets.

Correlation Expectations (10 Years) Relationships between asset classes are as important as standard
deviations. In the past, particularly in stressed markets, correlations
Broad U.S. Equity 1.000
between asset classes have risen.
Large Cap 1.000 1.000

Small/Mid Cap 0.950 0.950 1.000 Callan revisits and adjusts our correlation expectations annually.
Global ex-U.S. Equity 0.850 0.850 0.850 1.000 Among the risky asset classes, correlations are high and will remain
Dev. Non-U.S. Equity 0.850 0.850 0.800 1.000 1.000 high. Interestingly, stocks and bonds have exhibited tremendous
Emerging Market Equity 0.850 0.850 0.850 0.950 0.850 1.000 negative correlation over time. Other uncorrelated asset classes
Short Duration -0.250 -0.250 -0.250 -0.250 -0.250 -0.300 1.000 have been commodities, TIPS, and to some extent many absolute
return strategies. We believe real estate will maintain a diversifica-
U.S. Fixed -0.100 -0.100 -0.150 -0.150 -0.100 -0.150 0.850 1.000
tion benefit, but it is harder to measure given the valuation process.
Non-U.S. Fixed 0.000 0.050 -0.100 0.000 0.050 -0.100 0.500 0.500 1.000

TIPS -0.050 -0.050 -0.100 -0.050 -0.050 -0.100 0.550 0.600 0.350 1.000

Emerging Market Debt 0.550 0.550 0.550 0.600 0.550 0.600 -0.050 0.100 0.000 0.200 1.000

High Yield 0.650 0.650 0.600 0.650 0.600 0.600 -0.150 0.000 0.100 0.050 0.600 1.000 0.200 0.100 0.050

Long Duration 0.150 0.150 0.100 0.100 0.100 0.050 0.750 0.950 0.550 0.550 0.150 0.200 1.000

Real Estate 0.150 0.150 0.150 0.150 0.150 0.150 -0.200 -0.100 0.050 0.100 0.200 0.100 -0.050 1.000

Private Equity 0.750 0.750 0.700 0.700 0.650 0.650 -0.150 -0.050 -0.050 0.000 0.450 0.550 0.200 0.200 1.000

Hedge Funds 0.800 0.800 0.750 0.750 0.750 0.750 -0.150 0.100 -0.100 0.100 0.550 0.550 0.300 0.200 0.600 1.000

Commodities 0.950 0.950 0.900 0.950 0.900 0.900 -0.250 -0.200 -0.050 -0.100 0.550 0.650 0.000 0.200 0.700 0.800 1.000

Cash Equivalents -0.050 -0.050 -0.100 -0.050 0.000 -0.100 0.300 0.100 -0.100 0.050 -0.050 -0.100 -0.050 0.050 -0.050 -0.050 0.000 1.000
Inflation 0.000 0.000 0.000 0.000 0.000 0.050 -0.200 -0.300 -0.150 0.200 0.000 0.050 -0.300 0.400 0.100 0.200 0.050 0.000 1.000
Broad Large Cap Sm/Mid Global Dev. EM Short U.S. Non-U.S. TIPS EM High Long Real Private Hedge Comm. Cash Inflation
Cap ex-U.S. Non-U.S. Equity Duration Fixed Fixed Debt Yield Duration Estate Equity Funds Equiv.

Source: Callan

Then and Now: Comparing Historical Returns to Historical Projections

Annualized Returns How Callans 10-Year Return Projections Have Changed Since 1997
for periods ended 12/31/2016
10 Years 15 Years 25 Years
Broad U.S. equity U.S. fixed income Real estate
Broad U.S. Stock Market Non-U.S. equity Non-U.S. fixed income Inflation (CPI-U)
Russell 3000 7.07% 7.11% 9.29% Private equity Cash equivalents

Large Cap U.S. Stocks 15%

S&P 500 6.95% 6.69% 9.15%

Small/Mid Cap U.S. Stocks 12%

Russell 2500 7.69% 9.17% 10.73%
Projected 10-Year Return

Non-U.S. Stock Markets 9%

MSCI World ex USA 0.86% 5.45% 5.11%

MSCI Emerging Markets 1.84% 9.50%

6%
Fixed Income

Bloomberg Barclays Aggregate 4.34% 4.58% 5.63%

3%
Bloomberg Barclays Glbl Agg ex-US 2.44% 4.96% 4.73%

Bloomberg Barclays Long G/C 6.85% 7.03% 7.58%

0%
Real Estate 97 99 01 03 05 07 09 11 13 15 17
Year
NCREIF* 7.22%* 8.93%* 8.32%* Source: Callan

Hedge Funds

Credit Suisse Hedge Fund* 4.21%* 5.81%*

About Callan

Founded in 1973, Callan Associates Inc. is one of the largest independently owned
Private Equity
investment consulting firms in the country. Headquartered in San Francisco, CA, the
Cambridge Private Equity* 10.54%* 10.22%* 15.55%* firm provides research, education, decision support, and advice to a broad array of
institutional investors.
Commodities

Bloomberg Commodity -6.23% -0.11% -0.08% For more information, please contact your Callan consultant.

San Francisco | 800.227.3288

Cash Market
Atlanta | 800.522.9782 Published January 2017
90-Day T-Bill 0.80% 1.34% 2.71%
Chicago | 800.999.3536 2017 Callan Associates Inc.
Inflation Denver | 855.864.3377
This report is for informational purposes only and
CPI-U** 1.75% 2.04% 2.28% New Jersey | 800.274.5878
should not be construed as legal or tax advice on
* Real estate and hedge fund data for periods ended 9/30/2016 rather than 12/31/2016 due to a reporting any matter. Any investment decision you make on
lag. Private equity data is time-weighted return series for periods ended 06/30/2016. the basis of this report is your sole responsibility.
www.callan.com
** CPI-U data are measured as year-over-year change through 09/30/2016 due to a reporting lag.
Sources: Bloomberg Barclays, Bureau of Labor Statistics, Callan, Cambridge, Credit Suisse, MSCI,
NCREIF, Russell, and Standard & Poors.