{"id":9797,"date":"2024-04-11T16:06:52","date_gmt":"2024-04-11T15:06:52","guid":{"rendered":"https:\/\/sarasinandpartners.com\/row\/think\/future-returns-what-can-multi-asset-investors-expect-to-achieve-2\/"},"modified":"2024-04-30T16:40:30","modified_gmt":"2024-04-30T15:40:30","slug":"future-returns-what-can-multi-asset-investors-expect-to-achieve-2","status":"publish","type":"post","link":"https:\/\/sarasinandpartners.com\/row\/think\/future-returns-what-can-multi-asset-investors-expect-to-achieve-2\/","title":{"rendered":"Future returns: what can multi-asset investors expect to achieve?"},"content":{"rendered":"

What can multi-asset investors expect to achieve?<\/strong><\/h3>\n

In the last few years, investors have been confronted with one of the most aggressive bouts of inflation seen in decades. The effects of this were amplified by the falls seen in both equity and bond markets in 2022. While there has been a strong recovery in portfolio values over the last year, questions still remain as to what the future holds.<\/p>\n

To answer some of these questions, we believe it is important to consider:<\/p>\n

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  1. The past<\/strong> \u2013 how have portfolios historically behaved in these market environments? What lessons can be drawn from these patterns?<\/li>\n
  2. The future<\/strong> \u2013 what do we expect to drive returns going forward? What is different about the next decade?<\/li>\n
  3. Your portfolio<\/strong> \u2013 what are the implications of our forecasts for asset allocation?<\/li>\n<\/ol>\n

    The findings we will describe are sourced from our Compendium of Investment<\/a>.[1]<\/strong><\/a> For over 25 years, we have produced this document with the aim of sharing our long-term outlook for the asset classes we include in our clients\u2019 portfolios. These projections are the basis of how we establish long-term investment strategies.<\/p>\n

    History favours the patient<\/strong><\/h3>\n

    To build a clear understanding of the past, we have sourced the longest available history of investment markets. With the support of our data providers, we have produced a long-term multi-asset portfolio track record, the Endowment Model, an investment strategy used by our charity clients. Our analysis traces all the way back to 1900, reminding us of the many periods of growth, collapse and recovery that an investor would have experienced in the last 124 years.<\/p>\n

    Given the surge in inflation experienced during 2021-23, we have specifically reviewed how our multi-asset approach has performed following periods when inflation outpaced the absolute return, resulting in negative real returns. The results make for heartening reading, showing a general trend of rebounds in performance.<\/p>\n

    We found that, following a period of negative real returns, investors in the Endowment Model experienced average real returns of 5.6% per annum over the next five years. However, particularly sharp losses \u2013 where real returns have declined by more than 10% in any one year \u2013 have typically been followed by even stronger real returns of 6.6% per annum over the next five years.<\/p>\n

    The chart below shows the average five-year performance of the Endowment Model after a period of positive real returns, negative real returns and a sharp decline in real returns of -10% or more.\"\"<\/span><\/p>\n

    Perhaps the key insight from our analysis is that the worst decision for many investors would have been to sell in the depths of a market decline and then miss out on the recovery. If history serves as a guide, investors in multi-asset strategies are likely to experience a rebound in returns, as has already been seen in 2023 and in the first quarter of this year.<\/p>\n

    The fundamentals that drive projected returns <\/strong><\/h3>\n

    While the past offers helpful lessons, the key driver of our market projections is the prevailing economic environment and how we expect it to shape investment markets.<\/p>\n

    Over the long-term, returns from equities are driven by the rate at which capital is returned to shareholders (via dividends and buybacks), which is ultimately a function of earnings and economic growth. Over the near term, we expect gross domestic product (GDP) to grow a little quicker as inflation begins to recede, and interest rates are lowered. Growth is likely to decline gradually thereafter, as the working-age population grows at a slower rate. This, together with a range of other factors detailed in the Compendium of Investment, sets the tone for 7-10 year expected investment returns.\"\"<\/span><\/p>\n

    These returns are lower than the historical average since 1900, as UK equities and gilts have typically generated 9.0% per annum and 5.0% per annum, respectively.<\/p>\n

    However, we are also expecting inflation to be lower \u2013 an average 2.3% per annum, while the average since 1900 has been 3.8%. This is positive for investors\u2019 spending power.<\/p>\n

    Our projected return for global equities, the primary engine of growth for our clients\u2019 portfolios, is 7.7%. Once we account for the expected level of UK inflation, this translates into a real return of 5.3%, which is slightly higher than the long-term average of 5.0%.<\/p>\n

    Having experienced over a decade of low bond yields, the projected return from gilts is now 3.8% which equates to a return of 1.5% after inflation. Real returns from corporate bonds appear more encouraging at 2.9% per annum.<\/p>\n

    What are the implications for today\u2019s portfolios?<\/strong><\/h3>\n

    To help understand the impacts of our forecasts on both medium-term and long-term portfolios, we have used the following:<\/p>\n