South African investors are achieving returns 8.4% lower than expected

The danger of over-optimistic returns

A major global study found that South African investors expect their portfolios to return nearly 13% annually over the next five years – almost 3% higher than the global average – and 8.4% higher than their actual returns over the past five years.

There appears to be a significant disconnect between what South Africans expect to earn in returns over the coming years, and the annual rate of return that they are currently achieving. Despite actual MSCI index five-year average annual returns over the period 2013 to 2018 (based in rands) being relatively low (4.4%), South African investors expect annual returns to increase by 8.4% to 12.8% over the next five years – almost 3% higher than the global average returns expectations of investors (9.9%) over this same period.

This is according to the Schroders Global Investor Study 2018, a survey conducted by global asset management firm, Schroders, of over 22,000 wealth investors* across 30 countries[1].The returns include growth in their money as well as any income paid out in the form of dividends and interest from a variety of investments including cash, bonds, property funds and equities. According to the study, the average South African investor holds 31% in equities, 17% in bonds, 21% in cash, 15% in property funds and 15% in alternative investments.

Claire Walsh, Personal Finance Director at Schroders, says that the study has focused on equities because of the higher risk and potentially higher returns. “Doing so underlines the level of optimism among investors, given their expectations are based on a portfolio of mixed investments and savings, which may deliver lower returns. The average investor holds 33% in equities, 18% in bonds, 25% in cash, 12% in property funds and 11% in alternative investments.”

Globally, Walsh says that investors’ expectations follow a particularly strong spell for global equities, in particular, and echo returns achieved by global stock markets in the past five years. “The MSCI World Index, for instance, has returned 12.2% a year since 2013. The historic performance of markets does not offer a guide to future returns.

“The South African equities market, however, has delivered dismal returns in comparison. At the end of November, the FTSE/JSE All Share Index five-year annualised return of 6% is only slightly above inflation,” she adds.
Referring to the below table, Walsh says that this can be seen in the difference between expected returns and actual returns, which is particularly significant for South Africa. “As can be seen in the comparison table, South Africa shows the third highest difference between expected returns and actual returns (8.4), trailing only Russia (13%), and UAE (8.5%).”

Average annual expected five-year returns versus actual MSCI index five-year average annual returns

Source: Schroders Global Investor Study 2018. Thomson Reuters Datastream data correct as at 3 October 2018. Five-year MSCI Index returns between 01 Oct 2013 and 01 Oct 2018 are based in the local currency.

What do analysts predict for future returns?

Investors and their advisors should interrogate their assumptions about the next five years in assessing whether the large current expectation-reality gap can be closed. Returns are notoriously difficult to predict, but Schroders Multi-Asset investment team forecasts suggest a 5.6% return for global equites (generally the asset class that drives long-term returns in a multi-asset portfolio) over the next 10 years.

“Forecasts, of course, should not be relied on for financial planning,” says Walsh. “In fact, the high return expectations may raise concerns among financial planners. The study also showed that the top reason for saving was to have a comfortable life during retirement. Those plans could unravel if returns are lower than expected,” she concludes.

* In April 2018, Schroders commissioned Research Plus Ltd to conduct an independent online survey of over 22,000 people who invest from 30 countries around the globe. The countries included Australia, Brazil, Canada, China, France, Germany, India, Italy, Japan, the Netherlands, Spain, the UK and the US. This research defines “people” as those who will be investing at least €10,000 (or the equivalent) in the next 12 months and who have made changes to their investments within the last ten years