Investment returns of 6% or 11%: who’s right?

What returns would you expect investments to deliver in the next five years?

Schroders put that question to both institutional investors and individual investors and found the responses to be startlingly different.

Institutional investors expect average annual total returns of 6.1% over the next five years, according to the Schroders Institutional Investor Study.

This compares to an expectation of 10.7% for individual investors, according to the results of the Schroders Global Investor Study published in July.

The studies also offered a regional breakdown. Among institutions, return estimates were highest on average in the Asia-Pacific region (6.6%) and lowest in Europe (5.5%). Investors in North America and Latin America estimated returns of 6.5% and 5.8%, respectively.

The returns include investment growth as well as any income from dividends and interest from a variety of investments including cash, bonds, property funds and equities.

The Institutional Investor Study is an analysis of views from investors at 650 pension funds, insurance companies, sovereign wealth funds and foundations from 20 locations across the world.

Return estimates are slightly down from those given in 2018 across every region except Asia, where they have gone up from 6.3%. Globally, the average estimate for returns was unchanged at 6.1%.

Institutional annual return estimates over the next five years: 2019 vs 2018

Source: Schroders. Institutional Investor Study 2019

However, there was only moderate confidence that those returns could be achieved. Only 52.2% of institutions globally were either confident or very confident of achieving their estimates.

Institutions’ estimates at odds with individuals’ expectations

What returns can investors expect? Schroders forecasts a 5.7% average annual return for world equity markets over the next decade.

Charles Prideaux, Head of Investment at Schroders, said: “There appears to be a worrying disconnect between what individual investors expect from their investments and the professional investors who are often the managers of their money.

 “The problem is that individual investors around the world are planning their future financial lives based on a certain belief. Those decisions, if not guided by the advice of a financial planner, may be wrong if based on that belief. It could be that people, as a result, are putting too little into their retirement savings plans, or it may needlessly influence their view on the amount of risk they should take.”

The expectation among individual investors has also increased in the past year, from 9.9% to 10.7%, while the 6.1% forecast from professional investors was unchanged.

Mr Prideaux said: “Why is there such a gulf in expectations? It’s hard to say for sure but it can be observed that most global equity and bond prices have been rising for the last decade. Perhaps it’s this remarkable period that has swayed opinion. It’s also worth considering that there will be millions of less experienced investors – those who began investing after the financial crises of a decade ago - who have only ever experienced most global stock markets rising.

“For our part, we’ve been very vocal about why broad market returns are likely to remain low in the next decade. It formed one of our "inescapable truths" – a report published last year that explained the factors that would drive investments now and into the 2020s.

 “There’s a pressing need for better awareness of investments and how they can help individuals. The industry needs to lead that drive to educate and improve understanding.”

The Schroders Global Investor Study (GIS) 2019 measured the views of more than 25,000 investors in 32 locations. Regionally, returns expectations were highest among individuals in the Americas, at 12.4%. In Asia, investors expect 11.5% and the figure was lowest in Europe at 9.0%.

What does Schroders expect?

The table below shows Schroders’ annual forecast total returns over the next 10 years for the two main asset types.

Global equities, which are riskier investments, are forecast to return an average 5.7% a year. This was revised down from a projection in 2018 of 6.7%. 

The highest forecast returns for governments bonds is 5.7% in emerging markets (EM). The lowest is for Japan where a 0.2% average annual loss is expected.

Mr Prideaux said: “If you expect returns to be low, there are implications to consider. It means passive-type investments that track markets are not likely to reap the returns investors have grown to expect. We therefore expect there will be a greater need for actively-managed funds that have the opportunity to deliver better returns.

“We expect investors to increasingly tap into certain super trends, such as climate change and disruption. We also anticipate rising demand for multi-asset investments that focus on risk and can diversify in an attempt to achieve better outcomes for investors.”

 Schroders 10-year forecast returns: 2019–2029 (p.a.%)

Source: Schroders, MSCI indices, ICE indices, Shiller, JP Morgan indices

The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Forecasts and assumptions may be affected by external economic or other factors.