Callan tells Mendocino County retirement board expected 10-year returns lower but bonds offer stronger support

Callan, the retirement system’s investment consultant, presented updated 10‑year capital market projections to the Mendocino County Employees Retirement Association (MCERA) board on Jan. 15, 2025. John Pironi, described in the packet as “senior vice president, capital market expectations,” and Callan panelist Claire reviewed outlooks for equities, fixed income, real estate and alternatives and answered trustees’ questions.

Callan’s core message was that the U.S. economy appears healthy but that high valuations have trimmed expectations for equity returns. “Calhoun views the…the US economy is healthy,” Pironi said during the presentation, and Callan reduced its equity return assumptions modestly compared with last year while keeping a 10‑year inflation forecast near 2.5 percent.

Why it matters: the board uses Callan’s long‑term assumptions to set strategic asset allocation. Callan said higher prevailing yields make fixed income a far more attractive source of return and risk‑mitigation than in the 0–2 percent rate environment of several years ago. The firm’s blended projection for the plan’s current asset allocation — based on the new assumptions — was slightly north of 7 percent annualized over 10 years, still above the plan’s 6.5 percent actuarial target, but down marginally from the prior year.

Details from the presentation: Callan reported a modest decrease in projected annualized returns for U.S. equities (driven largely by elevated valuations), a small decline in fixed‑income projections relative to last year but with much higher starting yields than several years ago, and an increased near‑term outlook for real estate because current cap‑rate valuations are more favorable than two years ago. Callan said its fixed‑income expectation for broad investment‑grade bonds is a little south of 5 percent annualized over 10 years, and it projected about 7.25 percent for the S&P 500 on a nominal basis, a roughly 25 basis‑point reduction from the prior year’s forecast.

Board discussion and follow‑ups: trustees asked about the time horizon Callan uses and valuation divergence between emerging markets and developed ex‑U.S. markets. Pironi said Callan uses a 10‑year horizon for setting strategic projections and that international valuations remain more in line with long‑run norms than U.S. valuations. Trustees also discussed the implications of a stronger dollar on recent international returns.

Concurrent performance note: staff reported that the board’s investment staff performed opportunistic rebalancing in November, trimming some overweight U.S. equity exposure and reallocating proceeds toward international and emerging markets to move allocations closer to target. The report did not record a formal board vote on the rebalancing.

What’s next: Callan said trustees will receive more detailed performance reviews in February and that the firm will interview emerging markets and international small‑cap managers in upcoming months.

Ending: The board took no formal vote on asset‑allocation changes at the Jan. 15 meeting; Callan’s outlook and staff’s performance and rebalancing report were presented for information and will inform future allocation and manager decisions.