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.
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.
An adviser trying to shoot the lights out for a client will in general have to take a lot of risks to do so. While the client may simply want a comfortable ride where they beat inflation, make a decent return and do not get frightened on the way.
Clients will probably be perfectly happy if advisers can match their expectations, and very happy if advisers can beat their expectations by 1 per cent. However it is not the case that every extra 1 per cent of outperformance – irrespective of risk taken – will make the client even happier.
Without having a proper conversation with clients to understand their actual expectations, they may become less happy as they start to worry about the levels of risk being taken. Even worse, it may be the case that unexpected outperformance leads them to revise their expectations upwards, leaving the adviser having to meet unachievable targets.
It certainly would be interesting to compare clients with the same expectations – if both Client A and Client B have expectations of 5 per cent growth and Client A achieves 7 per cent and Client B 9 per cent, would Client B be twice as happy?
It is potentially a vicious circle, which takes us back to the virtuous circle which advisers will be well aware of.
Each client’s expectations need to be measured against not just how much risk they are prepared to take, but also how much they can afford to lose. Last year, the FSA focused on capacity for loss as a major part of the advice process and rightly so. But attitude to risk and capacity for loss are not the whole story either. Investors do need to take risks to meet their objectives and sometimes taking no investment risk introduces the danger of letting the client down.
Unfortunately, the industry does not help itself on occasion. Quite apart from the almost single focus on the best-performing funds there are the adverts and marketing material featuring rockets taking off and talking about stellar performance.
The aim is always to talk about the biggest number for performance that you can get, and to focus on top-quartile.
In reality, annualised returns of 4 or 6 per cent are pretty good as they beat current levels of inflation and cash returns; and having realistic expectations is no bad thing.
Of course it is not always an easy thing to sell to clients – simply saying to them that you are going to do okay is not particularly appealing. The problem is that as an industry we are too focused on high-end and glamorous, exciting products rather than also giving a little attention to the steady, reliable funds with consistent returns.
This is not just a plea for boredom. There is also a need for innovation and that has been delivered successfully through multi-asset funds, which have proved their worth with a degree of consistency and predictability by spreading investment risk and not focusing on one asset class.
They have done what absolute return funds were initially meant to do but in many cases ended up not doing. They were the flavour of the month once but many are now out of favour with investors and advisers alike.
The key to delivering consistency is, to some extent, diversification and that is delivered through multi-asset investing.
There needs to be innovation too, which could perhaps come through accessing more diverse asset classes. Institutional investors use infrastructure and private equity funds, for instance, but they are not broadly available to retail investors. Offering more asset classes will help achieve greater diversification and deliver investor expectations.
But the lesson to learn is that investors may be ahead of us as their expectations are realistic. On average, multi-asset funds are delivering to and exceeding their expectations so – let us drop the fanfare, rockets and soaring graphs and let us keep giving them the returns they want with the level of risk that suits them.
Paul Fidell is senior investment business development manager of Prudential
Key points
The vast majority of multi-asset funds have delivered higher annualised returns over the past three years, with an average return of 5.4 per cent
Just as trust takes years to build but can be lost overnight by a bad decision, the same applies to investor expectations
There is also a need for innovation and that has been delivered successfully through multi-asset funds
