Investment returns of 6% or 11%: who’s right?
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.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.