INVESTMENTS
Emma Ann Hughes explains why income seekers must adjust their expectations
36 ouble-digit returns have become stuck in our memories but as the 2020s get underway, it is important to remember that this rate of income is the exception, not the rule. Across a broader sweep of history, base rates have stayed far closer to where we are today. The years since the 2008 to 2009 global financial crisis have been difficult for income seekers and investment experts expect this is unlikely to change in 2020, so it is vital for financial advisers to adjust their clients’ expectations. This is because low interest rates are likely to persist, limiting the income on offer from so-called safe assets and meaning cash and government bonds may no longer compensate for inflation. Rupert Rucker, head of income solutions at Schroders, says: “We live in a world where record low interest rates and years of asset purchases by central banks have led to ultra-low bond yields. “This means that the lower-risk investments and savings accounts that helped produce an income for previous generations simply do not offer high enough returns to grow our money.
“In developed markets in particular, rates of inflation are higher than deposit rates, meaning the value of cash savings is actually being eroded.”
LOW INTEREST-RATES In 2019, many central banks, such as the US Federal Reserve (Fed), cut interest rates rather than raised them. This low interest-rate environment looks set to persist in 2020. As a result, Mr Rucker points out that income seekers will not be able to rely on cash savings or low-risk government bonds to provide the income they have come to expect. In fact, investors want higher levels of income than any asset class can provide. A poll of investors by Schroders found that the average expectation of annual investment returns for the next five years now stands at 10.7%, yet the investment house’s multi-asset team’s latest forecasts for the next 10 years show emerging market equities are likely to provide the highest return but even these are only likely to deliver 9%. Sheridan Admans, investment manager of The Share Centre, agrees
that advisers should prepare their clients to expect lower returns from some regional or sector equities ahead. Mr Admans says: “Equities generally in the last 10 years have delivered a Sharpe of about one; the long-run average is 0.6. “Reverting back to the long-run average, it is likely equity returns will be nearer to about 5% returned during the next 10 years against a higher volatility backdrop, which equals a lower Sharpe.” But Schroders’ Mr Rucker says it is important that investors do not despair.
thepfs.org | Personal Finance Professional | SPRING 2020
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30/01/2020 13:02