John West: Why Most Capital-Market Assumptions are Unreasonable
John West is a managing director and head of client strategies for Research Affiliates.
He is responsible for maximizing the investor impact of Research Affiliates’ insights and products. Since joining the firm in 2006, John has been actively involved in and led product management, affiliate support, and institutional relations as well as numerous client service initiatives. He is one of the principal external communicators of the firm’s asset allocation and smart beta strategies.
John holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society Los Angeles. He is also a co-author of The Fundamental Index: A Better Way to Invest (Wiley 2008).
I spoke with John on October 26 at the Schwab IMPACT conference.
Please describe your role within Research Affiliates.
I head client strategies. In an investment management construct, I oversee functions traditionally labeled marketing and distribution. But the way that I view client strategies moving forward is that it’s our job to make sure that we’re maximizing the investor impact of our strategies. That means that we are communicating to clients when our strategies are attractively priced, which is generally after periods of underperformance, and when it’s a good time to rebalance away from them, which is after periods of outperformance.
That’s the exact opposite way most people in our business handle talking to clients. But I think that’s the primary reason we see a huge shortfall between dollar-weighted and time-weighted returns.
You’ve written that 5% is not a reasonable assumption for investors’ real returns over a 10-year horizon. What led you to that conclusion?
If you walk around Schwab IMPACT, you’re going to see hundreds of investment manager booths, all of them telling you they’re going to get you higher returns. We need to answer the question: higher returns than what? What’s the baseline that we’re going to get if we allocate our portfolios according to typical asset-class mixes?
Understanding what that baseline is going to deliver us is really the first step in prudent investment management. That baseline is very, very low. Now, there’s nothing inherently wrong with that. It’s just if we’re counting on 5% when we’re going to get 2%, that’s a problem because the perception of that difference happens very slowly. People don’t realize it. They wake up in 10 or 15 years and they are cumulatively 40%-50% below what they thought they were going to have.
We want to do that baseline survey, and then we can start to have a very real conversation about what are likely ways you can increase your return or increase your nest egg, the most obvious and certain one is to increase your savings rate.