Don’t set the bar too low
Having spent the first years of my working life in an environment where 20% inflation was quite normal. I tend to look at a return on investment of 13% a year as mediocre. It isn’t, of course. At today’s inflation rate it is a real return of about 8%. This is close to the long-run real return from balanced funds over the past 30 years. But over the past five years, investors have been lucky to even match inflation.
A study by the multinational asset manager Schroders shows that most SA investors also considered 13% to be a respectable return. Yet in the past five years the best large manager’s balanced fund, Investec, gave just 9.2% a year, and the weakest, Stanlib, 5.9%.
The simplest way to avoid disappointment is to have low expectations, but we can’t set the bar too low. There will be years of negative returns, and plenty with subinflation returns, but we should resist the temptation of moving out of risky assets such as equities and property for the false security of cash.
Claire Walsh, personal finance director of Schroders, looked at 30 countries to see the difference between actual and expected returns. SA’S investors look wildly optimistic, having expected 12.8% returns, 8.4% ahead of the market over five years. And this was in a survey of 22,000 wealthy people around the world. But this gap was exactly the same in Chile, Portugal, Indonesia and even the financially sophisticated United Arab Emirates. The Russians were the most optimistic, with expectations
13.4% ahead of the market return.
Walsh says the MSCI world index has given a
12.2% return over five years. But the JSE has delivered dismal returns of 6%, only just above inflation.
Some countries will be delighted to have seen returns well ahead of expectations. With very little return from cash or bonds, until very recently, US investors considered an 8.5% return to be satisfactory, yet the return of 13.1% has been the best in any of the 30 markets that are measured. The only market that comes close is India, with a 12.9% return, but its investors, used to the emerging-market risk premium, expected a 13.7% return. The highest expectations were all in emerging markets such as Thailand and Brazil.
China, with an expectation of a 13.1% return, was greedier than its neighbours in Taiwan, with an 11.6% expectation.
It is hard to compare SA, which still has an inflationary problem, with countries that have flirted with deflation, such as Belgium and Switzerland.
We would be confining ourselves to low long-term returns if we expected our fund managers to give a 7% return as the Belgians do, or the 7.4% that is acceptable to the Swiss.
Schroders believes a 5.6% return from a multi-asset or balanced strategy over the next 10 years is realistic. With rand depreciation, let’s call that about 8%-10%.
It is not surprising that many prudent asset managers are bringing money back to SA. This return can be achieved just by sitting in SA sovereign long bonds, with little need for taking the risks of a traditional 65%-75% in equities.
Walsh says forecasts should not be relied on for financial planning — but then in my view only a minority of financial planners can be relied on for effective planning anyway.
I wonder whether millennials, who have no experience of double-digit inflation, have a different perspective. Maybe the 6%-9% returns from the Large Manager Watch are adequate to them, as they don’t anchor expectations in the 13%15% range. But even they won’t find an inflationtracking return acceptable.
Returns can be achieved just by sitting in SA sovereign long bonds