Speaking at a lunch in Sydney yesterday, Vanguard investment analyst Frank Polanco said the Vanguard Capital Markets Model (VCMM) can generate “its own” possible future scenarios for various asset classes and not rely on the past as an indicator.

“There is only one history, but looking forward there is an infinite number of futures that could eventuate," Dr Polanco said. "What we do in our modelling is we look at 10,000 of those potential futures to determine what might be the outcome for the market."

Vanguard explained its VCMM simulation tool also combines economic and financial variables to “weigh many risk factors” that can influence future investment outcomes.

“In this setting investors can assess the impact of expected changes in interest rates, inflation shocks, or economic growth in their portfolios,” a statement from Vanguard said.

“[Also] by focusing on a [range] of outcomes rather than on point forecasts, the VCMM can better incorporate statistical uncertainty into its forecasts,” Vanguard said.

“A well-reasoned approach to statistical uncertainty is an important aspect of any analytical model. This statistical uncertainty provides investors with a powerful framework to assess unanticipated risks,” the statement said.

Vanguard also said its investment strategy group, which began working on the VCMM more than six years ago, now has the “ability to model” the majority of global markets and generate distributional forecasts for "hundreds of financial market parameters".

“The outputs of the VCMM deliver reasonable return expectations for the major asset classes, with forecasts presented as projected 10-year annualised returns,” Vanguard said.