Global Asset Allocation: Investing in a Time of Debt, Deficits, and Quantitative Easing

Abstract

Built into a pension fund's calculations was a 7% expected return, but in this world of debt, deficits, and quantitative easing (and negative interest rates!), could such a return be counted on? Or was it necessary to reduce the fund's expected returns assumptions? And whether or not assumptions on expected returns were changed, should the fund's global asset allocation be altered? This case provides an opportunity for students to form, in the context of an analysis of the global macroeconomic environment, five-year expected returns for major asset classes. Excerpt UVA-F-1738 Rev. Apr. 2, 2018 Global Asset Allocation: Investing in a Time of Debt, Deficits, and Quantitative Easing Pension fund manager Lynda Chen was troubled. Built into the pension calculations was a 7% expected return, which, relative to other pension funds, was conservative. But in this world of debt, deficits, and quantitative easing (and negative interest rates!), could she count on such a return going forward? Or did she need to further reduce the fund's expected returns assumptions? Currently, as shown in Exhibit 1, her fund was invested in equities (in the United States, other developed markets, and emerging markets) and fixed income (US government and non-US sovereign bonds), with a portion of investable funds kept in cash in case good opportunities arose. Whether or not she changed the assumed expected returns, should she consider altering the fund's global asset allocation? The Global Macro Situation: Debt, Deficits, and Quantitative Easing . . .