McKinsey Report: Dial Back Expectations on Future Returns

McKinsey Global Institute’s recent report warns investors to dial back their investment return expectations.  The report cites the finance and investment trends that supported the “golden era” between 1985 to 2014 has run its course. A recent article in Pensions & Investments gives insight into these findings.  Timothy Koller, principal and co-author of the report, says “Inflation and interest rates were starting to come down, but investors were still quite concerned whether inflation was knocked out of the system or not, and as a result of that, stock valuations were extremely low during that period of time by any historical standard going forward.”  Koller also noted profit margins over the past 30 years have kept returns extremely high.  “What has been driving the increase in margins during that period of time comes from globalization, more U.S. companies getting profits from overseas.” While it’s impossible to predict individual investors’ expectations, the published assumed rates and local government pension funds may point to an overzealous environment. “McKinsey projects U.S. equities could average between 4% and 5% annually in the next 20 years, while fixed-income returns could be between zero and 1% annually. An optimistic growth-recovery scenario has U.S. equities at 6.5%, which is equal to the 100-year average, still well below what state and local government pension funds project, Mr. Koller said.”