ML11161A155
| ML11161A155 | |
| Person / Time | |
|---|---|
| Site: | Comanche Peak  |
| Issue date: | 11/30/2009 |
| From: | J.P. Morgan Trust Co |
| To: | Office of Nuclear Reactor Regulation |
| References | |
| CP- 201100646, TXX-11056 | |
| Download: ML11161A155 (5) | |
Text
Enclosure 4 to TXX-11056 JP Morgan's Long-term Capital Market Returns
/J.P.Morgan Asset Management Morgan Asset Management Long-term Capital Market Return Assumptions As of November 30, 2009 Expected 10-15 year annualized compound returns', (%)Inflation 325 Core Inflation 275 Real GDP 2.75 U.S. Cash 3.50 U.S. Intermediate Treasury' 41Xi U.S. Long Treasury4 325 U.S. TIPS 5.00 U.S. Aggregate 4.50 , U.S. Long Duration Gov't/Credit 5.00 U.S. Investment Grade Corporate 5Z5 U.S. Long Corporate 5.75 U.S. High Yield 7.50 World Government Bond (local) 2_.5 Non-U.S. World Government Bond (local) 2.50 Non-U.S. World Government Bond 325 Emerging Market Debt 7.50 U.S. Municipal 3.50 U.S. Large Cap 7.50 U.S. Large Cap EPS Growth 550 U.S. Large Cap Dividend Yield 250 U.S. Large Cap P/E Return Impact -0.50 U.S. Mid Cap 7.75 U.S. Small Cap 7.75 U.S. Large Cap Value 7,75 U.S. Large Cap Growth 725 Europe ex U.K. Large Cap (local) 8.00 Japan Large Cap (local) 5.0 U.K. Large Cap (local) 775 MSCI EAFE (local) 7.00 MSCI EAFE 7.75 Emerging Market Equity 9.50 Asia ex-Japan 9.50 U.S. Private Equitys'A 8.50 U.S. Direct Real Estate (unlevered)l 8.00 U.S. Value Added Real Estate (unlevered)sw 925 European Real Estate (unlevered, local)' 7Z5 875 U.S. REITs 7.75 Hedge Fund-Arbitrage (non-directional)f 5.50 Hedge Fund-Directional,'
700 Hedge Fund-Fund of funds',' 6.0 Commodities' 7.00 Rationale High unemployment and bank deleveraging to keep inflation low in the near term, but today's aggressive policy stimulus may lead to higher inflation as economic conditions normalize.
Strong growth in the emerging economies combined with ongoing dollar weakness should drive commodity prices up, causing headline inflation to outstrip core.Private sector deleveraging and a rising federal debt burden to place constraints on economic growth.Policy rates to rise from today's extraordinarily low levels, but Federal Reserve likely to err on the side of raising rates too late rather than too early.Yields to rise towards a higher equilibrium nominal rate as federal debt levels and inflation risks increase.
The resulting capital loss to constrain total returns.Yields to rise towards a higher equilibrium nominal rate as federal debt levels and inflation risks increase.
Duration exposure to result in heavy capital losses as yields move higher.TIPS to outperform nominal Treasuries as expected inflation rises from current levels.Further spread narrowing expected, but total returns to be constrained as overall yields rise with risk free rates.Spreads currently close to equilibrium, but total returns compromised as overall yields rise with risk free rates.Further narrowing in spreads offset by higher risk free rates. Haircut applied to total returns for expected defaults.Government bond yields to rise globally from current levels leading to capital losses as rates converge to equilibrium.
Dollar depreciation against weighted average of WGBI currencies expected to boost returns to U.S. investors.
Spreads currently close to equilibrium, but total returns compromised as overall yields rise with risk free rates.Yield ratio versus Treasuries to be little changed as impact of deteriorating local government finances offsets the effect of rising federal tax rates.Sum of below building blocks (Nominal EPS growth -Dividend Yield + P/E return impact). Slightly lower total return than in pre-crisis years reflects higher inflation and constraints on growth over the longer term.Lower projected earnings growth given a likely political shift towards labor and higher expected cost of capital. Earnings to grow in line with nominal GDP.Dividend yields to rise slightly from current levels. No major change in dividend policy expected.Valuations to contract slightly from current levels as the economic cycle matures and earnings normalize.
Moderate premium to large cap assumed for both. Tighter credit availability and limited scope for valuation improvement to restrain return advantage.
Value to outperform growth over time, especially given likelihood of increased investor demand for yield.Earnings premium to nominal GDP given greater scope for cost-cutting and relatively large share of emerging market sourced revenues.
Small positive valuation contribution; current valuations below historical averages versus the U.S.Demographic challenges and ongoing battle with deflation to mean that Japan remains a global laggard. Earnings premium to nominal GDP given export exposure to emerging Asia.Returns constrained by higher expected cost of capital and higher projected inflation.
Earnings to grow in line with nominal GDP.Market capitalization weighted average of expectations for regional equity returns.Dollar depreciation against weighted average of EAFE currencies expected to boost returns to U.S. investors.
Relatively healthy emerging economy fundamentals and high rates of productivity make for strong economic growth. Monetary support from local central banks to boost emerging market returns as policymakers seek to limit currency appreciation.
Headwinds from higher imported commodity prices offset by stronger underlying economic growth than other emerging regions.100 bps premium to public markets retained.
Higher cost of debt implies lower returns, but recent underperformance versus public markets serves as an offset.Returns typically between stocks and bonds, but premium to equities reflects current undervaluation and reversion to fair pricing over the forecast period.Same premium to direct real estate assumed as in prior years for specialized acquisition and management expertise.
Some valuation boost from prior year, but shallower downturn and earlier recovery make for lower valuation premium than U.S.Exposure to government-regulated sectors limits return downside.
Returns boosted by leverage.Slight discount to underlying core real estate return given recent rapid price adjustment back towards equilibrium in more liquid REITs market.Directional returns below public equities given lower volatility and less leverage than in prior years. Non-directional returns reflect modest premium to aggregate bonds. Fund of funds return assumed to be 60%equity (average of U.S. large cap and EAFE) .40% U.S. aggregate bond return. Sizeable divergences expected between managers.Returns based on expectation for relatively rapid giobal nominal GDP growth.Return estimates are on a compound or internal rate of return (IRR) basis. Equivalent arithmetic averages, as well as further information, are shown on the following page.All asset class assumptions are in total return terms, including equity return assumptions.
All returns are in U.S. dollar terms unless otherwise indicated.
U.S. Intermediate Treasury returns based on Barclays 7-10 yr Treasury index.U.S. Long Treasury returns based on Barclays 20+yr Treasury index.Private Equity, Hedge Funds. Real Estate. Infrastructure and Commodities are unlike other asset classes shown above in that there is no underlying investible index.6 The return estimates shown for these asset classes are our estimates of industry medians-the dispersion of returns among managers in these asset classes is typically far wider than for traditional asset classes.See additional notes on the following page.
a.Expected laion Matrix annualized volatilityz
(%)ICo rlt nMa ix r'nl X L6 Cr U.S Inflation U.S. Cashi U.S. IntermediateTreasury3 U.S. LongTreasury' U.S.&IPS U.S. Aggregate U.S. Long Duration Govt/Credi U.S. Investmnent Grade Corp US. LongCorporate U.S. High Yield WGBI hedged WGBI unhedged WGBI ex-US. hedged WGBI ex-U.S, unhedged Emerging Market Debt U.S. Municpal U.S Large Cap U.S. Mid Cap U.S.Small Cap U.S. Large Cap Value U.S. " CapGrowth Europe ex-U.K Large Cap Japan Large Cap U.K LargeCap EAFE unhedged EAFE hedged Emerging Market Equity Asiaex-Japan US. Private EquityW US. Direct Real Estate (unlev.)j U.S. Vaue Added Real Estate&lnfrastructuree U.S. RErIs Hedge Funds (non-directionaJ)U Hedge Funds (directionalP Hedge Funds of Fundss4 Commodities 5 E! L50 350 050 420G 625 325 12259.50 5.75 625 ,75 1050 750 M2s 3.75300 3275 7.50 3A5 250 3358a75 7.5082 3501 75 0D9 L~O- .3°2 , 0 '-am om 091 LOD to<C E*oL o0.01 0.6 0.6 LOOýO2 O£6 OB8 0,83 0-78 1 ._-0.9 -OM 0.84 0.88 0.73 093 L-W8 -006 0.57 057 OM6 OM8 0,84 LOD0-024 -OM8 0.58 O4 065 0.2 0.87 a94 0120-16 016 -0.1 0.30 0024 058-OM3 0(12 091 086 0.58 0.82 0.78 0.53-0J4 -WOJ20.6 0.0 0.0 OL67 0.64 0.55-04 = 0.81 0,77 09 0.73 0.00 0,47-0.10 ,.05 3 2 0.50 0-4 O.9 0-55 0.51 0.09 0.06 0256 0.1 051 034 0.M-049 002 0W 4 0.88 023 093 .002 W 0.57LOC 00 o >-Q49 -5 o087 7o 1.00o " 0.49 0.16 051 0 475 1.4 w 2---- .---- -ut 069 0.69 020 034 017 0.33 00 -O 059 025 053 O043 0.46 038 0-41 L00-I.50 1625 0.042- -024 -1116 0a.0503 0.05 025 1875 0.07 2 -024 -0O3 0.11 0.02 0.9 75 21.75 0.04 -002 013 0.02 -0M 005 U5 16.00 003 0.02 -0.19 -0.1 0.09 0.02 008 25 1925 0.05 -006 -027 -0.18 0.03 -0.6 0.2 W0 1925 003-004 0.12 0.08 004 0.1 801850 03U -WJ3 -406 000 022 032 0.18 U5 1725 OD9 -005 -022 -08 0.10 004 008 5 100 0,05 -C07 -018 -009 0.34 0.07 0.35 051620 0.02 0.02 -035 -022 -406 -O" .001 0 2525 0.03 -009 -022 -0.14 0.14 003 0.10 62450 03 -010 -0.21 -0.13 03 0.03 01 024 031 023 026 021 0.33 034 034 O3X 0.22 028 034 028 029 025 035 035 032 039 025 064 0.71 O.4 0,61 061 0,65 0.49 0154 0,68 0.62-027.035_025-Q20-am1 023 4.14-026_Q21-035 005 0.6 0.02 0.11 4Q01 O23 026 0.20 025-0112 4125.018.029-a21.0.17 4O25.021 4-22 0.O0 0,11 0.06 0.16 0.03 029 030 026 031-007 055 -O.O4 0,62 0.02 057 -002 0.51-0,02 031-2 053 .O.O5 059 -02 0.46 0.05 0.53 -0.11 00 092 081 0.90 092 0.88 061 085 0.87 0,880:: L)L>091 1.00 D 085 071 LO0 0,89 0.81 075 0.88 0.79 O83 0.63 035 0.56 0.82 O.68 083 0.89 0.80 O82 089 081 080 O.82 0.7 020 0.76 01 067 LO0 0.7 082 084 0.9 0.74*0 L)100 0,3 LOO 093 (161 1.(00 095 0.74 0L91 oX 0L67 0113 a 0. B 0.99 0,63 0-5 0.33 0360.69-026 0.13 -025 018 0.63 -0.01 0.3 .020 0.18 0.55 0.00 0.80 076 03 036 067--22 2525 8)5 1300 11200 0,07 -007 026 4-16 0.05 0.0100 0.02 0.06 -0,01 W3 030 0.06 019 016 O04 035 O.9 034 03 O.06 027 005 014 0.07 024 025 022 035 026 028 024 0.16 025 0.64 036 0.30 025 24.50 650 925 7.50 1725 0.10 031 -.015 0.00 0.21 06 0.14 014 0.05 0.20 0.17 O1 -O21 -0.6 026 0300 5-0,04 0.22 0L17 0.19 0.34 0.36 060.026 0.00 015 4034.0258.028-024-W.2 0.02.424 015 001 0.10 -004 025 0.12 022 -00 0.13 -0M9 0.04-028 0.03-024 025 .O4 006 0O03.02 0160300.09 aO1023 0.05 0.24 029 0.20 0250.48 0C 3 0.165 0920 0.08 0.61 005 0.06 0.52 0.09 025 029 -009 0.72 035 029 0.19 059 0.53 0.75 052 029 084 OAO 0.32 024 0.66 0.64 O,85 0,64 036 092 038 030 021 064 056 0,83 Oh4 025 0.58 0.40 033 024 0,67 O.48 0,63 037 030 O.77 0710 055 OO 027 035 026 032 022 029 0.22 027 0G3 020 0.21 019 045 0.59 0A3 0.53 0540.64 052066 0.78 000.8 3 026 060 0.630.40.80 027 0.41 0.41 0.44>, 0.3 .4 0a7 .7 L 0 =0 W W 58 09 0 1.00 Q.8 083 0 .023 00 3 0 .5 LOO =-7 7 07 LO >059 ,M 050 0,47 052 0.60 047 045 0,68 059 0L74 0158 0,63 025 021 021 0G83 .8 0.84 0.78 0, 0.27 023 016 0867 023 OJ5 013 010 045 030 0.48 02 025 0.02 0 .6-g 0 05 0.8 LO0 0E 020 0.9 0,5 0 O 0,34 032 0.13 0.33 0.17 0.01 002 0.08 018 0.06 0.06 012 051 035 029 026 0.43 032 026 023 0.20 0,9 0.51 034* All returns on this page are in U.S. dollar terms.Note: Given the complex risk-reward trade-offs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations to all the above asset classes, Please note that all information shown is based on qualitative analysis.Exclusive reliance on the above is not advised.This information is not intended as a recommendation to invest in any particular asset class or as a promise of future performance.
Note that these asset class assumptions are passive only-they do not consider the impact of active management.
References to future returns for either asset allocation strategies or asset classes are not promises or even estimates of actual returns a client portfolio may achieve.See footnotes on the prior page.
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