Investing long-term capital growth - October 2019
2019 OCTOBER - Long-term capital growth
A few things to consider today - October 2019
Long-term savers are ultimately interested in the real (or after-inflation) rate of return. Earning a positive real return is the ‘reward’ you get for delaying gratification.
The following table demonstrates the material impact that your expected real return will have on your future purchasing power. The ability to compound returns at a real rate of 5% (as has been achieved by Coronation Balanced Plus over the last decade) increases your purchasing power by 1.6 times over 10 years and by 7 times over 40 years. Being able to add an additional 2% p.a. over the average competitor fund (also achieved by Coronation Balanced Plus since its inception) improves purchasing power by two times after a decade, and by 15 times over 40 years.
SELECTING A PRUDENT REAL RATE OF RETURN
But the future, by its very nature, is uncertain and we have, at best, only partial information to inform our forecasts. A good starting point to selecting prudent rates of return is to look at the very long-run asset class returns. From Figure 4 it is clear that:
- growth assets (property and equity) produced a real rate of return between 6% and 7%; while
- income assets (cash and bonds) earned between 1% and 2%.
This implies an expected long-run real rate of return of around 5% p.a. for a typical balanced fund (assuming growth asset exposure of between 70% – 75% and income asset exposure between 25% – 30%). Apart from global equities and local bonds, actual real returns achieved over the past decade were more or less in line with the long-term average across most of the major asset classes, which explains why the typical balanced fund achieved a real return of 4.0% p.a., while Coronation Balanced Plus, due to a positive active return contribution, achieved a real return of around 5.3% p.a. over the same period.
WHAT ARE OUR EXPECTATIONS FOR THE NEXT DECADE?
The upper band of our 10-year forecast range for local equity (see Figure 5) is now slightly above the experience of the last decade as a result of more attractive valuations. The strong performance from global markets has contributed to global equities outperforming local equities over the past decade and warrants caution in future expectations. However, it is reasonable to expect better returns from the average balanced fund over the next decade, based on a more favourable outlook for local growth assets. Considering our forecasted returns for the different asset classes that make up your typical balanced fund, it is reasonable to expect a real return going forward that is more in line with the long-term average return. In other words, after a five-year period of underwhelming returns, there is a higher probability of balanced funds meeting return expectations going forward.