Investors have to reduce their expectations about what is a reasonable return, according to Square Mile’s Richard Romer-Lee.
Speaking during a roundtable event hosted by Legg Mason, the managing director at investment consulting and research firm Square Mile said he is increasingly seeing a demand for higher returns – either through yield or total return – against a backdrop of few attractive investment opportunities.
“We are all having to re-adjust our expectations as to what is a reasonable return,” Mr Romer-Lee said, adding previous expectations of 5 per cent returns on capital which was expected when the pension freedoms were introduced just over a year ago.
“Now that return is already at 4 per cent and people are struggling to justify how they get 4 per cent,” he said.
Mr Romer-Lee said parts of the bond and equity markets, and other asset classes which are harder to access, are becoming of more interest.
“But increasingly investors have to be selective of where they invest, which necessitates some active fund management because these opportunities are hard to find.”
Nick Langley, chief executive of Rare Infrastructure, said institutional investors such as pension plans have been “aggressively pursuing” infrastructure assets.
“These investors really want to get hold of long-dated assets which have some income and inflation protection to offset their annuity-style liabilities,” he said.
“We have seen those high-yielding assets get more expensive,” Mr Langley said, pointing out that assets like airports and toll roads have inflation protection.
“Interestingly across the whole of the sector, there has been an average 5 per cent yield in the higher yielding category, and that has been pretty stable for the past 10 years.”
Mr Langley, who is also chief investment officer of Rare Infrastructure, also pointed to what he described as an “unorthodox monetary policy experiment”, which he argued is going to drive yields even lower.
“All these excess reserves are stuck at the central banks and we haven’t seen banks expanding balance sheets very rapidly.
“This will be a challenge over coming years and will create problems in the credit markets.”
Sebastian van Mook, financial adviser at Abacus Associates, agreed that investors should lower their expectations over the medium to long-term.
“Novice investors often want a higher return than they are getting, and those expectations should be downgraded because we are in a period of prolonged volatility.
“Investors will only end up being disappointed and dissatisfied,” he said, adding: “I have always managed expectations by taking a very conservative view.”
katherine.denham@ft.com
