What returns do you expect from investments over the next 10 years?

Isa investors expect better returns from multi-asset than equities. Andrew Oxlade examines the expectations of investors, offered in the Schroders Global Investor Study.

03/04/2018
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Authors

Andrew Oxlade
Head of Editorial Content

Accurately forecasting returns for investing is not just difficult, it’s impossible.

However, the guesses that people offer can tell their own story.

We put an impossible question to 1,104 UK investors as part of our most recent Global Investor Study. We asked relatively experienced investors what returns they expected for their Isas over the next decade, based on the money being invested in different assets.

Shares vs the rest

The anticipated return for a stockmarket-based Isa was 5% a year, slightly ahead of bonds at 4.5%.

A better result was expected for commercial property at 5.2%. This involves investing in shops and offices with tenant rental paying steady income. The expectation is pretty punchy. British faith in bricks and mortar is, it seems, deeply ingrained.

Hopes were highest, however, for “mixed assets” where returns of 5.3% were expected. Historically, global equities have been a strong performer, on average, over long periods so it is, perhaps, surprising that investors expect better returns elsewhere.

It is, however, encouraging to see some faith in the wisdom of spreading your money around – the mixed assets approach. If done shrewdly, diversification can smooth the ups and downs of an investment portfolio’s performance. Beating the performance of equities over the very long-term, however, is more of a challenge.

Perhaps more startling is the expectation of investors that a cash Isa will produce annual returns of 3.2%. This would be something of a marked turnaround from the past five years. 

Average annual return expectations over the next 10 years

Type of IsaExpected annual return
Stocks & shares Isa in mixed assets 5.3%
Stocks & shares Isa in commercial property 5.2%
Stocks & shares Isa in equities 5.0%
Stocks & shares Isa in bonds 4.5%
Cash Isa 3.2%

Forecasts included should not be relied upon, and are not guaranteed.

Source: Schroders Global Investor Study2017. Question: What average annual returns do you expect over the next decade?

The average interest rate on variable-rate cash Isas has been just 0.9% over the past five years, according to Bank of England data. Of course, cash Isas have advantages over investments. For one, you can safely assume the full return of your capital, which isn’t always the case for investments, and savings are covered by the Financial Services Compensation Scheme (FSCS) up to £85,000 per person with each firm.

Investors are constantly reminded that past performance does not offer a guide to future returns, and they seem to be listening. Their forecasts are considerably more bearish than recent history. Over the past five years, the MSCI World index has grown by 7.7% a year, before the boost from dividend income is considered. This may have just been a particularly good spell for equities, although performance over the long-term has also been strong.

Interestingly, younger investors had more confidence in savings than older investors. Those aged under 36, a loose definition of millennials, expected a 4% return from cash Isas while those aged 36 or over expected just 2.8%. Baby boomers, the over-65s, only expected 2.5% from cash.

Our Global Investor Study put a second question to the same UK investors, each of whom planned to invest at least €10,000 (or the equivalent) in the 12 months ahead, which points to a certain level of experience. 

How Isa money has been invested

We asked: where do you hold the majority of your Isa money?

Unfortunately 14% of investors didn’t have any money in Isas. They will be missing out on a range of benefits with protection on income tax and capital gains tax normally of most importance to investors.

Nearly half (47%) named cash Isas as their biggest holding. It was 19% for Isa funds and 18% for individual shares.

It would seem the low-risk nature of savings is still a big draw. Historically, that benefit has come at the cost of lower returns.

Most popular types of Isa

Type of IsaProportion of investors
Cash Isas 47%
Isa funds 19%
Individual shares 18%
Don't have Isa money 14%
Other 1%

Source: Schroders Global Investor Study 2017. Question: Where do you hold the majority of your Isa money?

What is an Isa?

An Isa, or Individual Savings Account, is a tax-efficient account into which anyone over the age of 18 can save up to £20,000 a year and withdraw the proceeds, at any time, tax-free (treatment depends on the individual and may be subject to change in future).

A saver can choose to keep any savings in a cash Isa and receive interest payments. It works like an ordinary bank account but with no tax due on the income. Alternatively they can take on the risk of investing in financial markets via individual securities or entrust your money to a fund manager to pick the assets. These funds may invest just in shares or bonds (also known as fixed income), or commercial property. Other types of assets can be chosen.

Fixed income is where an investor loans money to a company, via a bond, in exchange for a stream of income. It is regarded as less volatile and lower risk than equities but returns, historically, have been lower. This is no guide to future returns and your capital is at risk with any investment.

It should be noted that the expectations for investment returns for 10 years were significantly lower than for five years. These figures have been released previously with investors expecting a return of 8.7% a year.  

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Authors

Andrew Oxlade
Head of Editorial Content

Topics

Equities
UK
Andrew Oxlade
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