Equity Return Expectations and Portfolios: Evidence from Large Asset Managers
99 Pages Posted: 14 Jan 2021 Last revised: 28 Dec 2023
Date Written: December 27, 2023
Abstract
Collecting large asset managers' capital market assumptions, we revisit the relationships between subjective equity premium expectations, equity valuations, and financial portfolios. In contrast to the well-documented extrapolative expectations of retail investors, asset managers' equity premium expectations are countercyclical: they are high (low) when valuations are low (high). We find that asset managers' portfolios reflect their heterogeneous expectations: allocation funds of asset managers with larger US equity premium expectations invest significantly more in US equities. The pass-through of expectations to portfolios seems to be muted by investment mandates and is smaller than the one predicted by a standard portfolio choice model.
Keywords: Asset management, beliefs, expectations formation, semi-elasticity of demand
JEL Classification: G00, G12, G23
Suggested Citation: Suggested Citation