Equity Return Expectations and Portfolios: Evidence from Large Asset Managers

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.