In focus

UK investors forecast returns of 8.1% – with UK millennials expecting more

UK investors expect annual returns of 8.1% over the next five years, according to a major new global study.

The finding, part of the Schroders Global Investor Study 2018, marked a notable fall from an expectation of 8.7% in the UK in last year’s study.

The returns, based on the average expectation of 1,000 UK investors, include growth in their money as well as any income paid out in the form of dividends and interest from a variety of investments including cash, bonds, property funds and shares.

The global study measured the views of more than 22,000 investors in 30 countries. Hopes for investment returns were more moderate in the UK than for any of the regional averages.

Returns expectations were highest in Asia, at 11.8%. In the Americas, investors expected 10.2% and the figure was lowest in Europe at 8.6%.

The responses follow a particularly strong spell for equities and they echo returns achieved by global stock markets in the past five years. The MSCI World Index, for instance, has returned 12.2% a year since 2013. However, it’s worth noting that over the same period the UK MSCI Index returned 6.8% a year.

The historic performance of markets does not offer a guide to future returns.

A full list of countries and their average expected annual investment returns over the next five years, compared to returns - just for stock markets - over the last five years can be found below.

Average annual expected five-year returns versus actual MSCI index five-year average annual returns

  Country Investors’ expected annual returns over next five years (%) Actual stock market annual returns 2013-2018 (%) Difference between expected returns and actual returns (%)
1 Indonesia 16.8 8.5 8.3
2 Thailand 15.5 8.1 7.4
3 Brazil 14.5 9.1 5.4
4 India 13.7 12.9 0.8
5 UAE 13.3 4.8 8.5
6 China 13.1 8.0 5.1
7 Russia 13.0 -0.4 13.4
8 South Africa 12.8 4.4 8.4
9 Chile 12.4 4.4 8.4
10 Taiwan 11.6 10.7 0.9
11 Poland 10.9 11.0 -0.1
12 Portugal 10.1 1.8 8.3
13 Hong Kong 9.3 7.9 1.4
14 Australia 9.2 7.8 1.4
15 Singapore 9.1 12.1 -3.0
16 Spain 9.1 3.8 5.3
17 Japan 8.9 9.9 -1.0
18 Sweden 8.9 9.3 -0.4
19 Denmark 8.8 12.4 -3.6
20 US 8.5 13.1 -4.6
21 Netherlands 8.3 5.4 2.9
22 Austria 8.2 7.1 1.1
23 South Korea 8.1 7.2 0.9
24 UK 8.1 6.8 1.3
25 Canada 7.9 7.3 0.6
26 Germany 7.8 7.0 0.8
27 France 7.6 9.0 -1.4
28 Italy 7.5 5.1 2.4
29 Switzerland 7.4 5.6 1.8
30 Belgium 7.0 7.6 -0.6

Source: Schroders Global Investor Study 2018. Thomson Reuters Datastream data correct as at 3 October 2018. Five-year MSCI Index returns between 01 Oct 2013 and 01 Oct 2018 are based in the local currency.

We have focused on equities because of the higher risk and potentially higher returns. Doing so underlines the level of optimism among investors, given their expectations are based on a portfolio of mixed investments and savings, which may deliver lower returns. The average investor, globally, holds 33% in equities, 18% in bonds, 25% in cash, 12% in property funds and 11% in alternative investments.

‘Expert’ investors expect even higher returns

The study also drilled down into how expectations vary by levels of experience and knowledge.

UK Investors who judged their level of investment knowledge to be “advanced/expert” expect returns of 7.2% a year over the next five years.

Those who consider their level of investment knowledge as beginner expect a slightly more modest 7%. “Intermediate” investors expect 6.8%.

Investors' expected annual returns based on investment knowledge

  Americas Asia Europe UK Global
Advanced/Expert 10.2 13.6 9.8 7.2 10.9
Intermediate 10.5 11.6 8.2 6.8 9.7
Beginner/Rudimentary 9.6 10.0 7.1 7.0 8.8
Average 10.2 11.8 8.6 7.0 9.9

Source: Schroders Global Investor Study 2018.

How age affects expectations

Younger generations had bolder expectations for their investments than older generations.

UK millennials, defined in this study as those aged between 18 and 36, believed they would get an annual return of 8.6% over the next five years.

The expectations stepped down with each generation: Generation X (age 37 to 50) expected 8.3%; Baby Boomers (age 51 to 70) expected 7.8%; those aged 71 and over were expecting annual returns of 6.1%. 

Claire Walsh, Personal Finance Director at Schroders, said: “The difference in forecasts may, in part, be explained by attitudes to risk. Younger investors tend to have a longer timeframe ahead of them, which means they might have more of their money invested in high-risk, high return assets. In contrast, those nearing retirement or who are already retired, may prefer to hold lower-risk, lower return investments. They are far more sensitive to sudden falls in the value of their investments.

“It should also be noted that many millennials were young when the financial crisis occurred. In the decade since, we’ve had such a long run of growth it isn’t surprising that younger investors are so optimistic about future investment performance.”

The study supports this view, highlighting a clear correlation between age and risk. Among investors globally who identify themselves as “expert”, the trend was very clear. The 18-24 age group hold on average 27% of their portfolio in high-risk investments. This percentage consistently decreases with each subsequent age group, bottoming out at just 20% for ‘expert/advanced’ investors over 65.

How much of their portfolio do ‘expert/advanced’ investors put in high-risk investments?

  18-24 25-34 35-44 45-54 55-64 65+
Percentage of portfolio in high-risk investments 27% 26% 25% 22% 21% 20%

Source: Schroders Global Investor Study 2018.

What do analysts predict for future returns?

Returns are notoriously difficult to predict but Schroders Multi-Asset investment team forecasts suggest a 5.6% return for global equites over the next 10 years.

Forecasts, of course, should not be relied on for financial planning. In fact, the high return expectations may raise concerns among financial planners. The study also showed that the top reason for saving was to have a comfortable life during retirement. Those plans could unravel if returns are lower than expected.

Income expectations

Investors were also surveyed about their attitude to income. When asked the level of income they would like to achieve, rather than what they expected, the average answer in the UK was 8.6% compared with 10.1% globally.

This related only to interest and dividends paid out by investments, not increases in value, and excluded cash savings or property. [Read the full story]

The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors.