Accepting Mediocre Is Unacceptable

We recently received a newly published research piece from Crossmark Global Investments that like so many other recently distributed research items from other reputable industry practitioners paints a gloomy picture for future equity returns over the next 10 years. Author, esteemed industry veteran and Crossmark CIO Bob Doll forewarns that 10-year returns for both US and non-US developed market equities will likely fall within the 4-6% range annualized.

For institutions with inherent minimum required return thresholds that exceed Mr. Doll’s forecasted range, this Crossmark report, like so many of its brethren, is more unpleasant news. Namely, it forecasts an extended period of impotency for doctrinaire benchmark-relative return investing, which has been so widely and commonly utilized during the past 40 years. A period notable for its unprecedented Central Bank accommodation, and now likely conclusion.

What’s an institutional investor to do? Disappointingly, these ominous clarions broadcasting such paltry public equity forecasts are most often devoid of fresh ideas or new actionable recommendations. They’ve all seemingly resigned themselves to tolerating what they knowingly expect will be a sizable performance albatross in the traditional equity sleeve of their overall asset allocation. A fact that is so sharply underscored by the title of Mr. Doll’s Crossmark paper: "Accepting Average. The likelihood of mediocre future returns."

Asset owners and allocators should consider a more outcome-oriented approach to their legacy traditional long-only equity allocation - rather than continuing what is now widely acknowledged will be ineffectual, moribund relative return allocations.

Long-only, outcome-oriented equity strategies invest in a limited number of publicly traded portfolio companies - each one individually underwritten to deliver a satisfactory future absolute return. Obviously, there can be no guarantee of underwriting success, but like respected private equity managers, reputable public equity managers with decades of underwriting prowess can provide forecasted vs. actual return attribution.

In contrast to private equity, outcome-oriented, absolute return-seeking, underwritten public equity can be implemented without the added risks of leverage, illiquidity, decreased transparency and increased costs.

Accepting dismal returns from status quo relative return, public equity allocations, albeit begrudgingly, is not a prudent solution.