2021 Capital Market Assumptions: Key Insights for Planned Giving

Our latest report can help not-for-profits make well-informed decisions that benefit their organizations and donors.

Every year, BNY Mellon develops capital market return assumptions for approximately 50 asset classes around the world. These forward-looking assumptions are based on a 10-year investment time horizon and are intended to guide investors in developing their long-term strategic asset allocations.

BNY Mellon uses these assumptions to construct expected return and risk estimates used to model a variety of portfolios, including life income vehicles. It is especially important for investors to recalibrate their assumptions after a year like 2020, as the COVID-19 pandemic will continue to have significant economic, social and financial impacts over the next decade. Assessing its impact on expected investment returns is an important tool for making well-informed asset allocation decisions.

Here’s a look at some of the key findings of our 2021 Capital Market Assumptions report, as well as the implications for planned giving.

Equities Returns Increase, International Developed Expectations Higher

We see stronger equity market returns due to higher growth rates as the economy recovers from the COVID-19 pandemic. Stimulative monetary and fiscal policies and a return to pre-pandemic economic growth rates are supportive of higher equity returns. A weakening U.S. dollar, low relative valuation, and higher expected economic growth rates support higher expected returns in non-U.S. equities, especially in developed markets. Investors who maintain their long-term equity exposure and emphasize global diversification will be in the best position to realize equity premiums over the next decade.

Fixed Income Returns and Yields Decrease, Challenging Environment for Income Investors

Fixed income asset class returns will be limited given low global bond yields and global central banks’ commitment to monetary stimulus in the wake of the COVID-19 pandemic. Fixed income is still important for investors because of its diversification benefits as a hedge to equity risk, but it no longer offers attractive total return potential. In this environment of low rates and strong economic growth, fixed income investors should look to investment-grade credit, floating rate bonds, emerging market debt and hybrid/unconstrained strategies to increase yield and protect against a rise in intermediate and long-term interest rates.

Inflation Rate and GDP Growth Increase

The same monetary and fiscal stimulus that is fueling the economic recovery from the COVID-19 pandemic may also have the longer-term impact of increasing inflation. The Federal Reserve has increased its target rate of inflation and has signaled that it will hold short-term interest rates at or near zero until the U.S. economy fully recovers. Low interest rates and higher short-term economic growth rates may lead to inflation rates that are higher than historic averages. In order to protect the purchasing power of assets, investors should maintain or increase exposure to inflation hedges like equities, real estate and commodities. Exhibit 1 shows the expected return assumption for each asset class and the year-over-year change from 2020 to 2021.

Exhibit 1: 2021 Capital Market Assumptions

Expected Returns for Gift Illustrations

One of the most important inputs for any gift illustration is the expected rate of return. Small changes to the expected rate of return will have a significant impact on the outcomes shown in a gift illustration. Exhibit 2 shows the expected returns for different risk/return profiles based on BNY Mellon's 2021 Capital Market Assumptions and hypothetical portfolios comprised of U.S. Large Cap Equities and U.S. Aggregate Bonds. As you can see, the impact of lower expected returns from fixed income will have a significant impact on the year-over-year change in the expected returns for all portfolios, except for the 100% equity allocation.  Not-for-profits should update the rate of return assumptions in their gift illustrations to provide donors and other stakeholders with realistic expectations for gift outcomes.

Exhibit 2: Hypothetical Portfolios 2020 vs. 2021 Assumptions

High Payouts and Inflation Hurdle Rates for Planned Giving Vehicles

In general, planned giving vehicles have annual payout rates in excess of 5%, sometimes higher. This high hurdle rate means that planned giving portfolios must generate levels of return in excess of 5% to maintain the original value of the gift. If one also hopes to preserve the purchasing power of the original gift amount, then the required rate of return is even higher. With an increase in the expected rate of inflation to 2.4% and fees of 0.5% to 1.0%, a planned giving vehicle with a 5% payout has a hurdle rate of approximately 8%. Even the expected return of 7.2% for the all equity allocation will not provide enough return to provide for real growth over time.

If growth of principal over time is not achievable, then not-for-profits must clearly define the objectives that are achievable for their organization and their donors. For example, the primary investment objective for a planned giving portfolio could be to fund the annual beneficiary distributions or to achieve a total return of inflation plus 4%, rather than real growth of the original gift amount. By setting reasonable expectations, organizations can better inform stakeholders and donors about the potential outcomes of a planned gift.

Understand the Impact of Time Horizon

Time is one of the most powerful forces that affects investment returns. In general, portfolios with a long-term time horizon (>10 years) are less sensitive to short-term market disruptions because they have time to recover unrealized losses. In a low expected return environment like today, investors must be willing to accept some short-term risk in exchange for long-term rewards. If your time horizon is long (>10 years), then, all else equal, your portfolio should emphasize growth over stability and income. If your time horizon is shorter or finite (<7-10 years), then your portfolio should emphasize stability over growth and income. With risk-free returns in cash and government bonds at or near zero, the opportunity cost of being too conservative is very high. Not-for-profits should review their investment policy statements and the investment objectives of their planned giving programs to ensure that portfolios allocations are consistent with their risk tolerance and return objectives.

Importance of Active Management

As we move into a post-pandemic world of low returns and increased uncertainty, active and engaged management of portfolios is more important than ever. Taking advantage of opportunities and managing risk through asset allocation and consistent implementation has proven to be the most effective means of achieving long-term investment goals. BNY Mellon’s disciplined investment process, beginning with our capital market assumptions, will help not-for-profits to make well-informed and long-term decisions that benefit their organizations and donors.

  • The capital market assumptions are BNY Mellon’s estimates based upon historical market performance and the current market environment. References to future expected returns are not promises of actual returns that may be realized, and should not be relied upon. The forecasts contained herein are for illustrative purposes only and are not guarantees of performance. In addition, the forecasts are based upon subjective estimates and assumptions about circumstances and events that may not have taken place and may never do so. This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. The Bank of New York Mellon, DIFC Branch (the “Authorised Firm") is communicating these materials on behalf of The Bank of New York Mellon. The Bank of New York Mellon is a wholly owned subsidiary of The Bank of New York Mellon Corporation. This material is intended for Professional Clients only and no other person should act upon it. The Authorised Firm is regulated by the Dubai Financial Services Authority and is located at Dubai International Financial Centre, The Exchange Building 5 North, Level 6, Room 601, P.O. Box 506723, Dubai, UAE. The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the Federal Reserve and authorised by the Prudential Regulation Authority. The Bank of New York Mellon London Branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon is incorporated with limited liability in the State of New York, USA. Head Office: 240 Greenwich Street, New York, NY, 10286, USA. In the U.K. a number of the services associated with BNY Mellon Wealth Management's Family Office Services– International are provided through The Bank of New York Mellon, London Branch, One Canada Square, London, E14 5AL. The London Branch is registered in England and Wales with FC No. 005522 and BR000818. Investment management services are offered through BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, One Canada Square, London E1C 5AL, which is registered in England No. 1118580 and is authorised and regulated by the Financial Conduct Authority. Offshore trust and administration services are through BNY Mellon Trust Company (Cayman) Ltd. This document is issued in the U.K. by The Bank of New York Mellon. In the United States the information provided within this document is for use by professional investors. This material is a financial promotion in the UK and EMEA. This material, and the statements contained herein, are not an offer or solicitation to buy or sell any products (including financial products) or services or to participate in any particular strategy mentioned and should not be construed as such. BNY Mellon Fund Services (Ireland) Limited is regulated by the Central Bank of Ireland BNY Mellon Investment Servicing (International) Limited is regulated by the Central Bank of Ireland. Trademarks and logos belong to their respective owners. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation. The information in this paper is as of March 2021 and is based on sources believed to be reliable but content accuracy is not guaranteed. © 2021 The Bank of New York Mellon Corporation. All rights reserved.