The long-term returns from equities are likely to be lower than many investors have become used to, and to be more volatile, according to Ian Lance, who runs the Temple Bar investment trust and other mandates at Redwheel.
Lance said that most asset prices have been in a forty year cycle boosted by structurally lower bond yields, interest rates and inflation, and buoyed in more recent years by central bank policies, all of which have created a situation where: "Any investment adviser in their mid-fifties would have entered the industry in the late 1980s and thus spent their entire career in a secular bull market for equities, bonds, and real estate.
"They will have become conditioned to believing that these assets only ever go up, that any dip must be bought and that returns will always be improved by the addition of leverage. As interest rates fell, they may have been forced to take on even more risk in search of yield and also been pushed into more illiquid assets.
"If it is true that the last forty years were in many ways exceptional then it stands to reason that a likely future scenario is mean reversion of many things back to their very long-run averages. In this event, the portfolio that performed so well in the last forty years could prove to be sub-optimal.”
Lance believes inflation will be higher, as it was prior to the early 1980s, and this will impact equity markets.
Of the implications of this change for equity portfolios he said: “Equity returns are likely to be much lower than in the previous decades with the possibility of much greater volatility (as central banks are less able to ride to the rescue in every market decline).
"This won’t be the same for every geography or every sector since there is a wide dispersion of starting valuations – thus, the much lower valuation of the UK versus the US could make it a better place to be whilst the same point could be made for energy over technology.”
He said companies with a lot of debt are likely to struggle as interest rates rise, while banks, which can be more profitable as rates rise, could be among the sectors that do well.
david.thorpe@ft.com
