Experts warn of ‘broken’ risk and reward relationship

Gareth Lewis, chief investment officer at Tilney Bestinvest, said the “old-fashioned” relationship between risk and reward has broken down, with the definition of risk assets could currently be extended to even include those which are essentially risk-free.

“It’s all risk and no reward, and while the risks are growing, I don’t think they are fully understood anymore,” he stated.

“Investors are being forced to move their allocations from risk-free assets, like domestic sovereign bonds, into asset classes which carry risk, and I think they have become immune to the level of risk which is being taken.”

Mr Lewis said tricky conversations with clients around managing their expectations was a growing problem.

“We are in a world where interest rates are zero, inflation is zero, growth is 2 per cent, but an awful lot of clients still think of their returns after fees in the pre-2008 world of 7 per cent, and that is an unrealistic rate of return.

“Investment returns at some point have to reflect the economic reality.”