Great (Capital Market) Expectations Paul Roberts proberts@arlingclose.com

Past performance is not a reliable indicator of future returns, or so goes the ubiquitous statement on much investment-related material. Despite this, past performance is often (always?) used by many investors as at least a general guide to what the future may bring. After all, if historic returns for a particular investment (or asset class or fund) are low, are you going to take the risk that things may improve, or might you be more comfortable with a more consistent performer whilst understanding that what goes up will probably come down, at least at some point.

That said, past income returns can be a reasonable predictor of future income (e.g. bond coupons and property rents can be relatively predictable), whereas for capital returns it becomes much trickier to forecast what may happen (e.g. March 2020).

Making any prediction is always difficult, particularly when it involves the future, but capital market assumptions are used by many market participants as a guide as to what asset classes may return over the next investment period, be that period one year, five years, or even 30 years. Included within these assumptions (or ‘expectations’) also tends to be the potential risk/volatility of these asset classes.

Clients know that we’re in favour of long-term investing and how using a range of asset classes from property to equity, from bonds to alternatives, can provide a boost to portfolio returns that cash would struggle to achieve, even in this rising interest rate environment.

The use of your favourite internet search engine should yield the capital market expectations of many a fund management house to sift through - most of which would have been prepared at the beginning of this year. While we make no attempt to be exhaustive here, even a relatively wide range of estimates can provide some guidance as to what returns assets classes (and also geographical regions) may generate, and therefore whether it is worth staying invested while all the time maintaining a long-term view in terms of achieving your investment goals.

From the search the author undertook, in the UK nominal annualised total return estimates ranged from 4-6% for equities and for bonds of all types from 0-2%, while for property it was around 6%. Over in the US, equities were predicted to generate between 3-5% return and bonds between 1-3%. While in Europe, equities were forecast to deliver between 5-9% annualised nominal total returns. Estimates for many more asset classes and many more geographies are available, but in the interests of brevity on a Tuesday, I’ll save readers’ time by only mentioning the ones above.

Whether the reality of the returns generated turns out to be anything close to what was predicted, and particularly if we take a long-term strategic view, is that asset classes outside of cash continue to be a good place to look for those investors seeking higher returns than short-dated cash and near-cash investment can offer, even if the (capital) ride may be a little bumpier along the way.

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