Trust company sees modest mkt returns, reaffirms need for active approach. Wilmington Trust is out with a 10-year capital-markets forecast focusing on the continued importance of risk management and projects the likely performance of and risks associated with various asset classes.

"As we have been saying since 2006, we believe the expected return from assuming additional risk remains low," says Adrian Cronje, director of asset allocation at Wilmington Trust and author of the firm's 2008 Capital Markets Forecast for Strategic Planning report. "We continue to expect markets to deliver modest returns over the next 10 years compared to historical averages. Risk in the global capital markets is in the process of being re-priced, and it will take some time for the process to unfold fully. Investors need to be patient before taking steps to assume greater risk when deciding how to diversify their assets from today's starting point."

The report cites three factors related to the re-pricing of risk, one of which is the widening of credit spread, where lower-quality fixed income securities are yielding more relative to Treasury bills. This is an indication that investors are demanding more when they assume more risk. A second factor is the de-leveraging of many hedge funds, so that hedge funds are repaying loans they had assumed to enhance returns, and a third factor is the correction in the stock markets.

Starting to tell

"It had been clear to us that storm clouds were brewing, although we did not know exactly when it was going to start to rain," says Cronje. "We had spent much of the last two years steadily lowering risk across many of our recommended investment strategies, with the exception of categories in which risk was still being rewarded, such as emerging market international stocks. As a result, we have weathered the credit crisis storm well and believe we are in good position to take more risk again when the time is right."

Over the next two quarters, the housing market downturn, tighter credit, and more unemployment will begin to tell on consumers. But Cronje expects the U.S. economy to stabilize in the second half of 2008 as monetary and fiscal policy move to correct the economy.

Wilmington Trust will maintain a bias toward equities, emphasizing international exposure, particularly in emerging markets. The report also suggests that investors use real assets, such as global inflation-linked bonds, global real estate-related securities, and commodity-related securities, to help guard against unexpected inflation. Non-traditional asset classes can help investors exploit volatility and distress in the markets.

"While traditional fixed income assets, such as short- to intermediate-term investment grade bonds, are useful in guarding against slower economic growth, opportunity awaits those investors who have an ability to hold more illiquid assets," says Cronje.

"Intelligent diversification will remain the single most important contributor to preserving and enhancing wealth and supporting sustainable spending rates for the long term after inflation and taxes," Mr. Cronje said. "There is no more effective way of heeding Benjamin Graham's famous observation that investment management is often more about the management of risks than the management of returns," Cronje adds.

In addition to its headquarters in Wilmington, Del., Wilmington Trust and its affiliates have offices in California, Connecticut, Florida, Georgia, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, New York, Pennsylvania, South Carolina, Vermont, the Cayman Islands, the Channel Islands, London and Dublin. -FWR

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