From soaring market
returns, solid and dependable government bonds and even cash protected in some
way from the debilitating impact of inflation in the past, investors are now
left with a bleaker future ahead, investment managers have warned.
The regulator has backed
this glum prediction with the Financial Conduct Authority’s latest consultation
paper confirming its estimate for returns over the next 10 to 15 years from
investment products was around the 5% mark.
It said projection rates
provided for investors to see how their money might grow should not exceed this
measure.
Rather than shouting down a
pessimistic regulator, investment managers have instead agreed, noting with a
glum realism that things are indeed different this time but alas, not for the
better.
Tom Becket, chief investment officer at Psigma Investment Management, points to three key factors that hinted at what the future holds.
Rock bottom interest rates
and bond yields, expensive equity valuations and a prediction of sluggish
global growth over at least the next decade all suggest returns will remain
lower over the next 10 years than they have been over the previous 10.
He says: “Our own in-house
forecast is for equities to return just under 5%. The FCA is absolutely correct
on this call.
“My view has always been to
under promise and over deliver. It’s time to be realistic and I think our
industry has been very good at over promising and under delivering in the past.
I think being realistic is particularly appropriate at this point in time.”
The globe was bloated by
booming economic growth over the latter half of the twentieth century and the
early years of the twenty first, and equity returns over a long 40-year time
frame came in at around 7%.
Future global growth even
after an economic recovery, is expected to remain sluggish, if it exists in any
meaningful way at all, and consensus says 7% equity returns will be but a
pipedream for future investors.
Darius McDermott, managing
director at Chelsea Financial Services, says: “I think 5% is a very realistic
bet, you might hope to do better over the long term.
“But over the 7%
return period we have had strong global growth and a number of very experienced
managers have come to me and said growth will be much lower in the future, and so
you should expect lower returns from equities.”
The
FCA’s growth prediction was based on a portfolio made up 60% equities, 20%
gilts, 10% corporate bonds, 7% property and 3% cash and money market funds.
For
products without a tax exemption estimated returns were even lower at 4.5%.
Put
fees into the mix and returns would drop further still – although of
course lowering fees is
also something the industry is working on.
So, it
seems the low yielding world we have lived in since the financial crisis is not
going to be the short-lived beast many had hoped.
However,
while returns look likely to remain significantly lower than many have been
used to in the past, you will still be better off in the markets than outside
holding cash.
Tom
McPhail, head of policy at Hargreaves Lansdown, says: “In spite of all the
economic and political fluctuations and uncertainties we have experienced in
recent years, the FCA is still comfortable with the view that an investor
holding a typical mixed portfolio predominantly invested in equities, can
expect to enjoy a real return of around 3% a year.
“For
any investor fearful of committing their savings to the investment markets, this
is an important message: if you want to make your money grow over the long
term, take advantage of the tax breaks on offer and invest in the stock market;
holding your money in cash is fine for the short term but over time it is
likely to be eroded by inflation.”
