Russell Investments' global chief investment officer, Jeff Hussey, said while low returns never materialised in 2013, it is inevitable that they will only be delayed so long.
“The uncomfortable reality is that global bond yields have further to rise, credit spreads have little room to narrow, and equity markets are trading at fairly full valuations along a variety of different metrics,” Mr Hussey said.
The challenge for investors entering a low-return world will be achieving their required rate of return at a manageable level of risk, he added.
“The best way to do this, in our opinion, is through the use of actively managed, globally diversified, multi-asset strategies,” Mr Hussey said. “'Set it and forget it' won’t cut it anymore. In a low-return world, every basis point counts. “
Russell Investments first predicted in 2009 that the US economy recovery would be characterised by an initial growth rebound followed by a prolonged period of modest growth.
Mr Hussey said this “square-root shaped recovery” has meant that inflation has remained low, despite continual money printing and the fact that investors have been increasingly pushed up the risk spectrum.
“This process looks like it will continue in 2014, with the added twist that the Fed seems set to begin the process of withdrawing from money printing during the year,” he said.
“We can’t be sure of the consequences, but extra volatility seems a good bet.”
Russell Investments believes signs of economic recovery in Europe and Japan and an improved outlook for US growth will keep equities slightly higher.
Mr Hussey said major tax policy changes in Japan and a fragmented Europe could, however, generate occasional tension.
Despite uncertainty over credit conditions in China and the impact of the Fed's tapering on current account deficit financing, he said emerging markets present a strong opportunity.
“On the other end of the spectrum, we believe that small cap, particularly in the US, has run hard and also bears close watching for cutting risk,” he said.
Russell Investments believes fixed income will be an effective tool for diversifying equities, but generating return while actively managing interest rate exposure will be challenging.
The investment manager also favours alternatives, particularly hedge funds as they are less closely associated with equity markets.
