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Monthly Perspective | February 2019

30 October 2019

Twenty years ago …

You might have noticed that three of Frontier Asset Management’s Globally Diversified strategies now have twenty years of composite performance histories. Twenty years of actual client experience. We think that is pretty cool! From our investment research perspective, twenty years is also pretty cool because that is about what the duration of our expected returns is for the equity asset classes. It is also pretty close to the duration of the expected return for our favorite diversifying asset – Long-term U.S. Treasuries. And as many of you know, the investment performance of our strategies is improved by our research where we match economic and financial theory with the real world.

The long-term return expectation calculations are actually quite simple. For equity indices, the real, or above inflation, return expectation is the earnings yield, which is earnings divided by price. We “cyclically adjust”, as Robert Shiller would say, to smooth out earnings from recessions and booms because the future will have both. For long-term Treasuries, the nominal return expectation is the yield plus an adjustment for what is called “moving down the yield curve.” The yield curve adjustment is needed because bonds eventually mature, and so they are constantly becoming shorter in their maturities. A 30-year bond, for example, is eventually dropped from the long-term index after 20 years when the bond reaches less than 10 years until maturity.

So, enough about bonds! Let’s check to see how close Frontier’s expected returns for the long-duration assets compared to what actually happened. Did theory match the real world? The table below shows in rank order the expected long-term returns at the beginning of 1999 for the 5 major equity asset classes and long-term U.S. Treasuries. You may recall the beginning of 1999 was getting close to the culmination of the tech bubble, and so equity prices were pretty high world-wide and so future return expectations were pretty low.

Rank Asset Class Index Expected
Long-term ReturnJan. 1 1999
1 REITs FTSE/NAREIT Equity REITs 9.98%
2 Emerging Markets MSCI Emerging Mrkts Net 9.39%
3 U.S. Small Stocks Russell 2000 6.67%
4 U.S. Large Stocks S&P 500® 5.55%
5 Long-term U.S. Treasuries Bloomberg Bar. LT Treasuries 5.18%
6 International Developed Stocks MSCI EAFE 5.18%

It’s interesting to note that long-term Treasuries had a higher expected return than one of the equity classes, international developed markets stocks (before rounding up to the next decimal place) and was pretty close to U.S. large stocks. That is very unusual. It is also interesting to note that two of the asset classes, REITs and Emerging Markets stocks had much higher return expectations than the other classes.

So, what actually happened during the twenty-year period 1999 through 2018? The actual twenty-year returns were in the same rank order as the expectations with one exception: long-term Treasuries outperformed the S&P 500® by 0.45% but were expected to return 0.37% less. The table below shows how closely the actual returns were in relation to the expectations:

Index Expected Rank

Jan 1, 1999

Expected Long-term Return Actual Rank

20 years

1999 – 2018

Actual Annualized 20-Year Return Actual –


20-yr Return

FTSE/NAREIT Equity REITs 1 9.98% 1 9.93% -0.05%
MSCI Emerging Mrkts Net 2 9.39% 2 8.52% -0.87%
Russell 2000 3 6.67% 3 7.40% +0.73%
S&P 500® 4 5.55% 5 5.62% +0.07%
Bloomberg Bar. LT Treasuries 5 5.18% 4 6.07% +0.89%
MSCI EAFE 6 5.18% 6 3.52% -1.66%

The biggest short-fall of actual performance relative to the expected return from twenty years ago is in international developed markets stocks. Big economic and political issues in Europe have taken their toll over these twenty years which highlights how difficult it is to forecast returns of asset classes. Estimating short-term returns is generally just a guess as no sound economic theory is available to do that while estimating long-term returns is difficult because a lot can happen in twenty years. That is perhaps the main reason our globally diversified strategies are diversified among numerous asset classes all the time. No one really knows what is going to happen in the future. We certainly don’t, but it should be comforting to know that we do have a framework that is economically and mathematically sound that at least over the last 20 years, seemed to work pretty well.

You may now be wondering what our return expectations are for the next twenty years for these asset classes.

Rank Asset Class Index Expected
Long-term ReturnJan 1. 2019
1 Emerging Markets MSCI Emerging Mrkts Net 7.12%
2 International Developed Stocks MSCI EAFE 6.76%
3 REITs FTSE/NAREIT Equity REITs 5.95%
4 U.S. Small Stocks Russell 2000 5.83%
5 U.S. Large Stocks S&P 500® 5.66%
6 Long-term U.S. Treasuries Bloomberg Bar. LT Treasuries 3.10%


Unfortunately, our return expectations for the next twenty years are generally lower than they were 20 years ago. A big exception is our return expectation for international developed market stocks which is more than 1½% higher than 20 years prior; since it was the worst performing asset class in relation to its expectation that makes good sense. Long-term Treasuries, however, now have a return expectation more than 2% lower than previously, it was the best performing asset class relative to expectations twenty years ago.

Considering how similar the equity class expected returns are currently, it should not be surprising that our globally diversified strategies are very diversified across the equity classes. However, because the return expectations are lower than we would like, downside risk is higher than we would like. Therefore, our strategies continue to be somewhat conservatively allocated to uphold our Downside First Focus investment philosophy.

Past performance is no guarantee of future returns.  Performance discussed represents total returns that include income, realized and unrealized gains and losses. Nothing presented herein is or is intended to constitute investment advice or recommendations to buy or sell any types of securities and no investment decision should be made based solely on information provided herein. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for an investor’s financial situation or risk tolerance. Diversification and asset allocation do not ensure a profit or protect against a loss. All performance results should be considered in light of the market and economic conditions that prevailed at the time those results were generated. Before investing, consider investment objectives, risks, fees and expenses. All calculations of performance are by Frontier.
Information provided herein reflects Frontier’s views as of the date of this newsletter and can change at any time without notice.  Frontier obtained some of the information provided herein from third party sources believed to be reliable, but it is not guaranteed, and Frontier does not warrant or guarantee the accuracy or completeness of such information. The use of such sources does not constitute an endorsement. Data sources for funds and indices are Morningstar, the Hedge Fund Research Institute and BarclayHedge. Other sources include: National Geographic.
Exclusive reliance on the information herein is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance.  References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell any securities, commodities, treasuries or financial instruments of any kind.  This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, investment or tax advice.
Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision.
Hypothetical expected returns have certain limitations, are shown for illustrative purposes only and it should not be assumed that actual results will match the hypothetical expected returns shown. Unlike actual performance, hypothetical expected returns do not represent actual trading and since trades have not been executed, the results shown may have under or over compensated for the impact, if any, of certain unforeseen market factors. Hypothetical expected returns, whether back-tested or forecasted, have many inherent limitations and no representation is being made that any account will or is likely to achieve the results shown. In fact, there are frequently material differences between hypothetical expected results and actual results achieved. One of the limitations of hypothetical expected results is that they do not take into account that material market factors may have impacted the adviser’s decision making process if the firm were actually trading clients’ accounts.  Also, when calculating the hypothetical expected returns, the adviser has the ability to change certain assumptions and criteria in order to reflect better returns. There are numerous other factors related to the markets in general or to the implementation of any specific investment strategy that cannot be fully accounted for in the preparation of hypothetical expected results, all of which can adversely affect actual trading and performance. Importantly, it should not be assumed that investors who actually invest in this strategy will have positive returns, or returns that equal either the hypothetical expected results reflected or any corresponding benchmark presented.  In addition, performance can, and does, vary between individuals.
In reviewing the performance information presented here, we recommend that you consider both the returns generated and the level of risk that was assumed in generating those results. We believe that performance information cannot be properly assessed without understanding the amount of risk that was taken in delivering that performance. The performance information presented here covers different time periods. We present performance information for short time periods because we understand that clients and potential Investors are interested in this information, however, we recommend against making any investment decisions based on short-term performance information. For any investment products mentioned herein, a complete description of their investment objectives, along with details of the risks and fees involved is contained in their respective prospectus and statement of additional information, which is available on their websites and should be read fully.
It is generally not possible to invest directly in an index*. Exposure to an asset class or trading strategy or other category represented by an index is only available through third party investable instruments (if any) based on that index.
S&P 500®
Represents US large company stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, AMEX, and NASDAQ
HFRX Global*
Represents the hedge fund universe. It is comprised of all eligible hedge fund strategies; including but not limited to convertible arbitrage, distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage, and relative value arbitrage.  The index is weighted based on the distribution of assets in the global hedge fund industry. It is a trade-able index of actual hedge funds.
HFRX Absolute Return
The HFRX Absolute Return Index is designed to be representative of the overall composition of the hedge fund universe. It is comprised of all eligible hedge fund strategies; including but not limited to convertible arbitrage, distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage, and relative value arbitrage.
Russell 2000
Measures the performance of the small-cap segment of the U.S. equity universe
Measures international equity performance. It is comprised of the MSCI country indexes capturing large and mid-cap equities across developed markets in Europe, Australasia and the Far East, excluding the U.S. and Canada.
EAFE Small
Measures small cap equities across Developed Markets countries around the world, excluding the US and Canada.
MSCI Emerging Markets
Measures large and mid-cap equities across 23 Emerging Markets (EM) countries which include Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Russia, Qatar, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.
This is a free-float adjusted, market capitalization-weighted index of U.S. Equity REITs. Constituents of the Index include all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property.
Bloomberg Commodity Index
This is a broadly diversified index that allows investors to track commodity futures through a single, simple measure. The DJ-UBSCISM is composed of futures contracts on physical commodities.
Barclays Capital Long U.S. Treasury
Includes all publicly issued, U.S. Treasury securities that have a remaining maturity of 10 or more years, are rated investment grade, and have $250 million or more of outstanding face value
Benchmark Composition. The Benchmarks for the Long-Term Growth, Growth & Income, Balanced, Conservative and Capital Preservation strategies are combinations of the Wilshire 5000 Total Market Index, MSCI All Country World ex US Index, Bloomberg Commodity Index, HFRX Global HF Index, Barclays US Aggregate Bond Index and 3-Month T-Bills.
The blends of the indices are currently:
Capital Preservation Bench
Conservative Bench
Balanced Bench
Growth & Income Bench
Long-Term Growth Bench
Wilshire 5000
MSCI AC World ex US
Bloomberg Commodity
HFRX Global HF
Barclays US Agg
3M T-Bills
Benchmarks for the Global Opportunities, Focused Opportunities, Absolute Return Plus, Absolute Return and Short-Term Reserve strategies are the MSCI World, S&P500®, HFRX Global HF, HFRX Absolute Return and Barclays Capital 1-5 Year US Treasury Indices, respectively. In the case of indices that include foreign securities, index returns are still presented on a total return basis but will be net of foreign taxes on income generated by these securities.
Frontier’s ADV Brochure is available at no charge by request at or 307.673.5675.

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