The mechanics of long-term forecasting: Vanguard launches the Capital Markets Model

Vanguard | 27 November 2014


Vanguard has today publicly launched the Vanguard Capital Markets Model (VCMM), explaining the mechanics of the simulation engine that informs the investment outlook and asset allocation insights of the $3 trillion global asset manager.

The VCMM is a proprietary model that combines financial modelling and economic analysis to simulate forward-looking asset return distributions for a range of asset classes and risk factors, enabling the measurement of potential long term outcomes for different portfolio asset allocations.

Outputs from the VCMM are drawn from modelling that encompasses a range of potential futures, not simply historical scenarios.

Jeffrey Johnson, Head of Vanguard's Investment Strategy Group, Asia Pacific, said: "The insights provided by the capital markets model have long been leveraged internally in the research and development of new products, and to inform our investment outlook.

"We are excited to share the expertise of Vanguard's global Investment Strategy Group, and the insights of the VCMM more broadly in the Asia-Pacific region."

Vanguard's Investment Strategy Group, under the leadership of global Chief Economist Joe Davis, began working on the VCMM more than six years ago, and through continuous development it has the ability to model the majority of global markets and generates distributional forecasts for hundreds of financial market parameters including inflation, yield curves, foreign exchange rates and volatility.

The outputs of the VCMM deliver reasonable return expectations for the major asset classes, with forecasts presented as projected 10 year annualised returns.

"On present modelling, over the next 10 years global equities for Australian investors show the greatest likelihood of an annualised return between 6% and 9%, and we see a high probability of global fixed interest returning between 2.5 and 4%.

"Both projections are somewhat below longer term averages, further demonstrating the importance to investors of saving as much as possible and keeping costs low," said Mr. Johnson.

The VCMM has been developed with a clear link to Vanguard's long standing investment principles, which highlight the importance of creating a specific and realistic plan to meet pre-defined goals.

Robin Bowerman, Head of Market Strategy and Communications, said: "The outcomes from the VCMM are derived from 10,000 simulations for each asset class, to provide a probabilistic framework to support the beginning of investment and financial planning conversations.

"While the VCMM output may have some bearing on strategic asset allocation decisions, it is not a market timing or tactical asset allocation instrument.

"Too often we see investors disappointed when chasing future returns based on recent past performance or crystal ball predictions.

"Investors can benefit focusing on the things within their control, taking a long term perspective, and developing an appropriate asset allocation mix consistent with realistic risk-and-return expectations."

A comprehensive research paper explaining the Vanguard Capital Markets Model is available now at