Chasing investment reality

In an industry which obsesses about best-performing funds and regards products which set out to just beat cash returns as dull – I can confidently state that it came as a bit of a surprise to find that clients do not necessarily share industry views.

That, however, is the conclusion from research recently conducted among DIY investors, those who self-select the majority of their investments.

Investors were asked to give their expected minimum annualised return from a multi-asset fund over the past three years on a £5000 investment, and gave an average figure of 3.8 per cent. That is a decent return but not exactly the stuff of dreams. And it is below the average return achieved by multi-asset funds.

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Analysis showed that the vast majority of multi-asset funds delivered higher annualised returns over the past three years, with an average return of 5.4 per cent.

Even those investors with higher than average expectations would not have been disappointed. The 26 per cent of investors who said they would expect an annualised multi-asset return of at least 5 per cent over the last three years, would have seen that achieved by three out of five (61.3 per cent) multi-asset funds.

But the research – interesting though it is – is not the whole story. Investors said they expect returns over the next three years to be very similar to the last three. That appears, to me, to underline that there is a wider issue to be addressed about investor expectations, which have broadly changed.

The stock market turbulence and ongoing volatility of the past five years have radically altered expectations. The experience of the past few months – with the FTSE 100 soaring 13 per cent and then dropping back again – demonstrates that volatility is still very much a reality.

In general, people do not want to lose money and simple targets such as beating inflation and cash returns are seen as reasonable.

Expectations are now much more realistic, with people learning from having lost money in 2008 and onwards. The historically low interest rates and stock market volatility has had a real impact on people’s finances and their expectations.

The industry needs to remember that people are not stupid – they know there is always going to be a trade-off and that to have the potential for high returns they have to take higher risks and face the possibility of losing money.

Just as trust takes years to build but can be lost overnight by a bad decision, the same applies to investor expectations. People have become used to volatility and have had experience of losing money and of poorly performing investments. They remember the bad periods for far longer than they remember the good times and that will probably still be the case into the near future.

It is often said that the best return that can be achieved for a client is the one they expected in the first place. It may be a cliche but I believe it is completely true.

Advisers need to focus not just on the absolute number at the end of the investment term, but just as much on how the portfolio behaves along the way. Research has showed there may be a disconnect between what advisers believe that clients expect, and what they actually do expect.