Return expectations - Key observations from our annual investor survey - July 2020
We recently concluded our annual investor survey, primarily aimed at understanding how you feel about the investments you have entrusted to us. A key survey question is what the return is that you expect from your portfolio over time. Our aim is to understand how well the expectations of investors with different needs and time horizons calibrate to what we think the likely future market outcomes will be.
My first observation is that more than 25% of you said that you just don’t know, which is the highest level of uncertainty since our first survey four years ago. This is understandable, given high volatility levels and the disappointing performance of domestic growth assets in recent years.
Overall, expectations have declined and 61% of the investors who expressed an opinion expect an annual return over time of 10% or more today, compared to 82% in 2017. Most of this decline can be ascribed to investors with a long-term growth goal, which is the cohort most likely to be exposed to the asset classes that disappointed over the last five years.
The average long-term growth return expectation is 10.9% per year (2017: 12%). Coronation’s expected return forecast for a multi-asset fund, such as Balanced Plus, over the next decade is in the 9% to 12% range given current valuation levels across the different asset classes, and assuming that we manage to add around 1.5% annual outperformance to the benchmark. For long-term growth investors, we think expectations, albeit on the optimistic side, is achievable.
The situation is different for investors with needs consistent with the funds that have done well over the last five years. Investors with international diversification as their primary goal have unchanged return expectations of 11.8% per year (2017: 11.6%). This is also the case for those with immediate income needs (which the Coronation Strategic Income Fund is aimed at), who expect 9.3% p.a. (2017: 9.0% p.a.).
We think these expectations may be heroic. The S&P 500 had a golden decade, returning 13.6% per year in US dollar compared to the 119-year average return of 6.5%. The return over the last decade was fuelled by declining tax rates and lower interest rates, which allowed profit margins to widen and discount rates to drop. These tailwinds are not likely to blow as strong over the next 10 years. The US still makes up 58% of the MSCI All Country World Index, the most important benchmark for global equity funds. While the international investment universe offers many opportunities to add outperformance which may help to get closer to expectations, we expect global index returns of 7% to 9% per annum over the next decade.
Our key concern relates to investor expectations in the immediate income category. Income investors typically have shorter time horizons, often of two to three years. Policy interest rates, anchored by prevailing inflation, play a major role in return outcomes for these investors. Given the demand destruction caused by the pandemic, inflation declined to 2.1% in May, a 16-year low. We expect inflation to remain around the lower end of the 3% to 6% target range over the next three years.
The South African Reserve Bank has already cut interest rates materially, and given how weak the economy is, further cuts are likely. Over the next three years, we think that returns in the 5% to 6% range will be a good outcome for income fund investors, which is much lower than the 9.3% survey expectation and the 8.4% Strategic Income delivered over the previous decade. While investors could successfully ride out the storm in lower risk funds historically, the outlook for adopting this approach as your long-term strategy is less rosy.