Pimco's July 2015 Asset Allocation Secular Outlook, titled Asset Allocation Without Tailwinds, warned that the 'new neutral' will be lower than in years past.
As a rough benchmark, investors can expect US interest rates to be closer to two per cent than the 'traditional' average of four per cent, said the paper.
Pimco does not foresee an "inflation problem" as the global economy moves away from an era of "extremely limited price increases".
"Low interest rates and moderate inflation together support a muted but prolonged business cycle, and we believe this combination helps to sustain current asset valuations," said the paper.
The fixed income house said its 'new neutral' thesis (ie. that short-term interest rates will be below GFC levels for the next three to five years) has "significant ramifications" for multi-asset investors.
"We would argue that the tailwind from ever-lower policy rates and contracting term premia over the past 30 years is largely past us," Pimco said.
"Moreover, current valuations – as most assets already price in the reality of lower rates – are likely to constrain potential returns.
"Investors will need to be more dynamic and tactical in their overall asset allocations, and they should approach portfolio construction with even more differentiation as they allocate risk to individual positions.
"It is still possible to achieve compelling returns, but we believe the role of active portfolio management has become more important, and more necessary, than ever," Pimco said.
