Global Asset Allocation: Investing in a Time of Debt and Uncertainty

In early 2025, pension fund manager Lynda Chen was troubled. She knew how important portfolio returns were for the pension’s finances. The fund’s assets ensure the pension’s health, as portfolio returns prefund the cost of the benefits the pension pays out to members. Built into Chen’s pension calculations was a 6.5% expected return, which, relative to other pension funds, was conservative. But in this world of massive debt levels and rising policy uncertainty—government debt levels were at or near all-time highs and policy uncertainty was along some aspects “off the charts”—could she count on 6.5% returns going forward? Or did she need to further reduce the fund’s expected returns assumptions? Currently, her fund was invested in equities (in the United States, other developed markets, and emerging markets), fixed income (US government and corporate bonds), and “alternatives.” Whether or not she changed the assumed expected returns, should she consider altering the fund’s global asset allocation? This case includes an overview of the global macroeconomic situation in 2025, with emphasis on national debt levels, inflation, monetary policy, emerging and developed markets, and drivers of equity and bond returns.