When Returns Are Good, Should Expectations Match?

“The concern was that investors were starting to have expectations based on recent performance,” Johann Schneider, program director for capital market insights at Russell Investments, told PLANADVISER. The dashboard helps manage an investor’s expectations of returns, which can be overly optimistic as well as overly negative.

When the tool was first created last fall, equity markets were up 30%, Schneider said, “but we didn’t think was a reasonable expectation to have going forth. We were trying to figure out the best way to communicate where we are in the market, and where do these returns fit in the history of all returns in that asset class?”

Originally the dashboard was a static picture of the returns of 14 asset classes to help give some context to the returns environment, as advisers were struggling to talk with investors about the current market, but the response from wholesalers and advisers was so positive that Russell built a system to update the chart each month.

“It’s an easy and simple way to talk about performance with a client,” Schneider said, because it does not deal in hundreds of numbers and explanations. “Just 14 assets we think are important. The dashboard tells you whether the period we’re in is normal or not, and we provide a short simple commentary with insight about what that chart means.”

The dashboard is not trying to analyze drivers in each class, Schneider explained, but simply offers perspective on a regular basis, another facet of the performance discussion that advisers have with investors. The goal is for advisers to help clients in setting realistic expectations while sketching a broader context for market movements. 

Like the other tools on Russell’s Helping Advisors site, the tool is a simple visual representation of key data. The dashboard contrasts current 12-month returns with historical and typical returns for a sample of asset classes (represented by relevant indexes), including large-cap U.S. equity, small-cap U.S. equity, global equity, emerging markets, commodities, global infrastructure, global real estate and cash.

Looking Pretty Typical 

“In a period like right now, we found all of the returns are inside their normal range,” Schneider said. “It’s a different conclusion than you might come to right now—we’re not in an extreme environment.” The last couple of months have been a strong market, he noted, and Russell is trying to get advisers and investors to look at a longer term, but with a more reasonable time frame.

“You shouldn’t be too overly optimistic about returns,” Schneider said. While returns have been slightly above average, that does not mean it’s reasonable to project even stronger returns, or to worry about the strength of the market. “There is no reason to expect the market to reverse, or expect strong negative returns going forward.”

It is possible to address returns too frequently, he feels. In the context of a retirement portfolio the data can encourage an investor or adviser to focus on medium- to longer-term returns. “It’s not saying, ‘What is the hottest asset class?’ ” Schneider said. It is a way to look at returns and feel more comfortable, especially as a complement to a more standard performance report that details why Europe or the U.S. is doing well.

The dashboard can be helpful for discussions with investors on the sidelines, for example, because it illustrates so clearly how cash historically has such a narrow range of returns. On the current dashboard, cash stands out as the asset class with the lowest return and the narrowest range. “By investing in cash you are limiting your upside,” Schneider pointed out. “If you want to expose your portfolio to potential for growth you have to invest in some equities. Staying in cash means locking in a negative real return.”

Each month, Schneider will provide related commentary on the Asset Class Dashboard so that advisers can understand any important updates and use the information with clients. The Asset Class Dashboard is part of the Helping Advisors website, what Schneider calls a portal to help provide perspective. The dashboard is a public site, open to anyone.