Investment managers may have overly ambitious expectations for long-term investment returns, according to a new survey from State Street Global Advisors.

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Five-year returns on equities will be 10 percent, and bonds will return 5.5 percent, according to the average expectation of 400 institutional investors surveyed by SSGA.

But that level of confidence “raises the question as to whether expectations have adjusted to a potential lower-for-longer return scenario,” according to SSGA.

Nearly one-quarter of the managers surveyed said their portfolios’ return expectations are currently not being met, while 13 percent say today’s returns are outpacing expectations.

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What’s more, 84 percent of the managers expect returns to fall short of expectations over the next year.

SSGA expects investment returns to be weaker for the foreseeable future, meaning “investors’ projections may be more difficult to achieve with traditional investment models.”

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Managers experiencing lower-than-expected returns are increasing active management and exposure to alternative investments, the most popular tactic managers are using to offset sluggish returns.

“The imperative to hit return targets could be driving investors to take on more risk as the global financial crisis becomes more distant,” SSGA’s report said.

Only 2 percent of managers expect to increase allocations to passive equity strategies in the next two years, while 19 percent plan to increase active equity exposure.

As more fund managers increase active equity exposures, their tolerance for underperforming underlying active equity funds is not long: 40 percent said they tolerate underperformance for one year before considering a replacement; 49 percent said they wait two years before considering a replacement fund.

SSGA’s report is the latest in an increasing group of analysis that suggests retirement investors and fund managers should expect lower rates of return going forward.

Between 1970 and 2014, the annual compound return on large-cap stocks was 10.5 percent, and for bonds it was 7.9 percent, according to data cited by Charles Schwab.

In a recent report, JP Morgan presumes 6.5 percent annualized returns on portfolios for pre-retirees, and 5 percent for retirees.

Last year, Jack Bogle, Vanguard’s founder, told Morningstar’s Christine Benz that annualized returns on stocks could be as low as 4 percent for stocks in the next decade, and 3 percent for fixed income.

“You’re talking about a really tough decade for equity investors,” Bogle told Morningstar. “Predicting at 7.5 percent or 8.5 percent return is just silly.”

In a recent interview with BenefisPro, David Blanchett, head of retirement research at Morningstar Investment Management, said “I think returns going forward are going to be lower than historical averages. The U.S. has pretty much been the best performing market for stocks in the world over the last 115 years, and I don’t think it’s realistic to assume this relative outperformance is going to continue.”

And global consulting firm McKinsey and Company issued a report last week saying returns for U.S. and western European stocks and bonds will be substantially lower over the next 20 years than returns experiences the past three decades.

Instant Insights /

More managers increasing risk to offset lackluster returns

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