J.P. Morgan Offers Sober Outlook Despite Market Highs

While the equity markets have posted very strong returns in each of the last two years, investing leaders with J.P. Morgan Asset Management warn the long-term outlook remains muted.

J.P. Morgan Asset Management has published its updated global market growth assumptions for 2018, offering up a forecast that is broadly unchanged from 2017 estimates.

The 2018 outlook analysis was penned by Anne Lester, head of U.S. retirement solutions for global asset management solutions, and Dan Oldroyd, portfolio manager and head of target-date strategies. The pair pins forward-looking annual developed market growth at 1.5% and emerging markets at 4.5%, translating to “constrained, generally modest return expectations across most major asset classes, further impacted by the late stage of the current business cycle.”

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As Lester and Oldroyd have warned heading into prior years, many market participants are likely pleased with year-to-date results from their retirement accounts, but the outlook for market returns over the next 10 to 15 years “remains less than inspiring.”

“In an overall portfolio context, the expected return for a simple 60% world equity and 40% U.S. aggregate bond portfolio—in our view, a reasonable proxy for the average asset allocation over a typical participant’s life span—has declined to 5.25%, down from 5.50% last year,” Lester and Oldroyd note. “The stock-bond frontier has shifted in a clock-wise direction—as bonds improve, given an anticipated slow road to normalization, and elevated valuations, typical of the later stage of the business cycle, constrain equity returns.”

Both experts leave some room for ongoing short-term optimism, however: “Our analysis of the interplay between near-term cyclical factors and more enduring secular trends offers reason for cautious optimism. We see potential for technology-induced productivity improvements to help end a prolonged series of downgrades to trend growth. Nevertheless, investors can still expect to face a historically low return environment over the next decade.”

Offering some broad suggestions for retirement plan professionals, the J.P. Morgan analysis suggests individuals need to be given the ability to save more and start earlier.

“Our latest long-term economic growth and market return assumptions, combined with longer life expectancy, validate participants’ concerns about the possibility of outliving their retirement savings,” Lester and Oldroyd say. “Saving more is the most obvious and effective way to improve retirement outcomes.”

Making portfolio diversification easier—which in most cases means making it automatic—is the second suggestion from J.P. Morgan: “The goal, of course, is not simply to offer a broader range of investment options within the core menu; that would leave the complex task of asset allocation to plan participants. In fact, our research suggests that only about one-third of participants are confident in their ability to choose the right investment options from their plan lineups.…In our view, the best way to ensure participants realize the true advantages of diversification all along the road to retirement is through professionally managed portfolio strategies, such as target date funds (TDFs). Of course, that assumes the TDF itself is well-diversified, constructed by skilled asset allocation professionals who understand how participant behavior and investment needs vary over the life cycle and rely on a consistently derived set of long-term asset class return, risk and correlation estimates to inform portfolio construction and management.”

Finally, the analysis suggests retirement investors may want to consider using active management where appropriate.

“With a lower outlook for beta returns across most asset classes, alpha becomes an even more critical component for achieving required returns. Skilled professional investors can generate alpha through adept security selection and/or tactical asset allocation—opportunistically shifting assets across sectors, asset classes and regions as attractive opportunities present themselves,” Lester and Oldroyd conclude. “For example, insights into tangible investment opportunities associated with technological change and the ability to tactically position portfolios through the late-cycle challenges ahead present opportunities for alpha generation. And given the low correlation between the alpha and beta components of return, the active component can also help to diversify portfolio risk.”

Generation X a Key Target for Advisers

More than half of this generation currently does not have an adviser.

Generation X offers key opportunities for advisers, according to “Moving the Needle: Targeting Generation X,” commissioned by Jefferson National, the advisory solutions business of Nationwide. The report is aimed at helping advisers and registered investment advisers (RIAs) better understand Gen X’s priorities, preference and concerns, so they can grow their business.

“Being in their prime earning years and next in line for inheritance, Gen X is a vital segment for advisers to target in order to enhance profitability and set their firms up for future success,” says Craig Hawley, head of Nationwide’s advisory solutions business. “Each year, successful advisers are most likely to say that Gen X will be their primary target over the next 12 months.” In fact, Jefferson National says these investors are poised to inherit $30 trillion.

Jefferson National also says that the number of affluent Gen X investors now exceeds the number of affluent Baby Boomers. Citing a study by Deloitte, the firm says that by 2030, Gen X investor’s assets will reach $22 trillion, while Millennials’ share will be $11 trillion.

The study found that 52% of Gen X do not have an adviser. As the Jefferson National report says, “as this generation continues to earn more and inherit more wealth, there is huge opportunity for advisers to tap into this market.”

Among those Gen X’ers who are working with an adviser, 30% say it is because they are concerned about saving enough for retirement. For Millenials working with an adviser, the primary motivation is to feel confident about their financial future, cited by 27%.

When selecting an adviser, Gen X investors  say experience matters most (41%). Twenty-six percent want personalized advice for a holistic financial picture, and 20% say a fee-based fiduciary standard is important.

Among all members of Gen X, including those not working with an adviser, when asked about their top financial concerns, 46% say it is saving enough for retirement, 28% say it is the cost of health care, 21% say it is financing their children’s education, and 20% say it is protecting assets.

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Thirty-three percent of Gen X prefers face-to-face meetings over all other forms of communication. Likewise, Jefferson National says this is the best way for advisers to learn about Gen X investors’ needs.

The firm also found that 26% of Gen X investors say the quality of communication makes for a successful customer experience, followed by low-cost products and services (22%) and establishing a personal relationship with their adviser (14%).

Jefferson National’s report on Gen X can be downloaded here.

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