Investors are achieving lower returns than expected

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According to Schroders Global Investor Study 2018, there is a disconnect between what South Africans expect to earn in returns over the coming years and the annual rate of return they are currently achieving.

The survey of over 22 wealth investors across 30 countries shows that South Africans expect almost 3% higher returns than the global average. Despite actual MSCI index five-year average annual returns over the period 2013-2018 (based in rands) being relatively low (4.4%), we expect annual returns to increase by 8.4% to 12.8% over the next five  years.

Claire Walsh, Personal Finance Director at Schroders, says the study has 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,” she says. “The average investor holds 33% in equities, 18% in bonds, 25% in cash, 12% in property funds and 11% in alternative investments.”

The average South African investor holds 31% in equities, 17% in bonds, 21% in cash, 15% in property funds and 15% in alternative investments.

Globally, investors’ expectations follow a particularly strong spell of global equities. The South African equities market, however, has delivered dismal returns. At the end of November, the FTSE/JSE All Share Index offered a five-year annualised return of 6%, only slightly above inflation.

“South Africa and Chile jointly show the third-highest difference between expected returns and actual returns, trailing only Russia (13.4%) and the UAE (8.5%),” says Walsh.

Walsh says investors and their advisers should interrogate their assumptions about the next five years in assessing whether the large current expectation-reality gap can be closed. Schroders Multi-Asset Investment team forecasts a 5.6% return for global equities over the next ten years. “Forecasts, of course, should not be relied on for financial planning,” Walsh points out. “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.”