Excess returns can be critical in achieving a targeted return with the lowest possible total volatility. For a fully active portfolio, excess returns may contribute an estimated 15% of the total return in the multi-asset portfolio. Even more importantly, the low correlation of excess returns with other return sources in a portfolio may allow investors to reduce their reliance on risky assets, such as listed equities, to achieve those return levels. Understanding the magnitude of realistically achievable excess returns and their correlation with other factors helps investors determine how much they can rely on this valuable return source.

This paper refreshes our excess return expectations, tracking errors, and correlations. We examine and share our conclusions on equities and fixed income while reviewing the recession and recovery periods.