Retail investors hope for double-digit future stock market returns; institutions’ predictions are more modest. Which is more realistic?

 

A recent survey by global asset manager Schroders suggests retail – or individual – investors are more optimistic about future returns than those at large institutions.

Schroders’ Institutional Investor Study is an analysis of views from investors at 650 pension funds, insurance companies, sovereign wealth funds and foundations from 20 locations across the world.

Schroders Global Investor Study, prepared by Raconteur, polled more than 23,000 individual across 32 locations who will be investing at least €10,000 (or the equivalent) in the next 12 months for their investment views.

The studies found that individuals expect average annual returns of nearly 11% over the next five years while institutional investors anticipate a more modest 6%; sentiment appears little changed compared to a year earlier, despite two thirds of individual investors expecting economic pain from Covid-19 to last anything between six months to two years.

Expected returns include investment growth as well as income from investments; these results are broadly in line with those in 2019 when individuals’ global expectations were 10.7% returns (10.9% this year) and institutions’ 5.7% (versus 5.9% this year).

The studies found a relationship between future return expectations and historic market performance.

Those regions that had recently delivered high returns, such as the US, generated higher future expectations; the converse was also true where, for example Japan’s lower historic returns led to lower predictions.
 

How realistic are these expectations?

 

Schroders’ estimates suggest individuals could be disappointed by future returns, citing its inescapable investment truths that returns will be lower during the next decade than they have been historically.

The company’s global economics team expects global equity market annual returns to average 5.7% for the period 2019-2029; even emerging markets, which it believes could generate returns of 8.5%, will undershoot individual investors’ expectations.

By the same token, the best performing bond market should be emerging markets at 5.2%, while Japanese bonds could deliver negative returns.

DIY investors favour equities

In terms of asset allocation, a consistent theme since the institutional survey launched in 2017, is that developed equity markets are the most popular asset class; institutional investors plan to allocate more than 30% of their portfolios in developed market equities in 2020 and plan on increasing this to 33.1% in the next 12 months with a planned increase in their allocation to private assets.

The second biggest allocation (nearly 25%) is to developed market bonds with emerging market equities and bonds making up a more moderate 8% each.

Stocks and shares are also a top pick with DIY investors, with 62% choosing to invest in them; cash in bank accounts was another popular choice among individual investors, presumably reflecting current uncertainty and market volatility.

Schroder’s global Institutional Investor Study analyses institutional investors’ attitudes towards investment objectives, performance outlook and risk; respondents are from a spectrum of institutions, including pension funds, insurance companies, sovereign wealth funds, endowments and foundations managing approximately $25.9 trillion in assets.
 





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