Recently I had reason to review Blackrock’s 3Q capital market assumptions (the most recent update) and noticed a few things, among them how low the expected nominal returns are for almost anything, and specifically how bearish they are on US large cap equities.
Here’s an excerpt from the assumptions:
|Item||Expected Return||Expected Vol|
|US Core RE||5.9%||12.1%|
|US PE (Buyout)||17.1%||32.0%|
A few questions came to mind:
- How is core US real estate higher expected return than US equities? maybe COVID related depression in some markets, but I think of “core” US real estate as higher quality multifamily, office, and industrial which is almost bond-like returns.
- US credit is -0.1% nominal returns? Any way to get to this conclusion other than expecting significantly higher interest rates in the next 5 years?
- And oddest of all, is that US private equity is a massive outlier. Look at the chart. 4x US large cap returns. I get that it should be higher due to leverage, but 4x higher? Many studies have shown that after fees, private equity on average doesn’t perform much better (unless you go back to early days with smaller funds and few competitors) than public equity portfolios. Also I don’t think US PE has ever had industry returns like that with the exception of pre 2000s KKR, BX, etc.
- BLK’s comment on why this might be is highly contradictory: “Richer valuations for equities, particularly in the U.S. and in emerging markets (EM) following the rally, have lowered our expected returns for the asset class. Our private equity expected returns have risen due to cheaper valuations and higher average economic growth expectations over the next five years. “
I’m curious if anyone here has been involved in the sausage making behind these assumptions. I know that these things need to be taken with a grain of salt, but still – how do they reach some of these conclusions?