Australian income investors are receiving annual returns almost 3% lower than anticipated from their income producing investments, representing a ‘reality gap’ between investor expectations and actual returns, a trend that is mirrored around the world, according to a Global Income Survey by global asset manager Legg Mason.
Australian income investors hoped for an average income return of 8.4% from their investments, however, respondents reported their actual return was 5.7%, on average – almost 3% less than hoped.
Legg Mason head of Global Marketing Matt Schiffman said that the ‘reality gap’ of -2.7% was significant in the current environment: “Three quarters of Australian investors say they are seeking out better income opportunities and a similar proportion want to become more knowledgeable about the opportunities available.
“But close to four in 10 indicated they do not have a good understanding of the income producing products available to them and 85% of investors want their adviser to bring them more income opportunities,” Mr Schiffman said.
The overwhelming majority of Australian investors (71%) are conservative when it comes to investing in income generating products. Nonetheless, 69% of investors say income is now important or extremely important to them.
This emphasis has increased in recent years, with 60% of respondents saying income is somewhat more important or much more important to them than it was five years ago.
Of the thirteen countries surveyed, Australians have the highest holdings of real estate investments (27%) after Germany, and the lowest proportion of equities (19%) after France, in their overall investment allocation. This is compared with other developed nations like the US (which has 7% real estate and 39% equities) and the UK (which has 17% real estate and 27% equities).
“Australians’ well known love-affair with real estate is reflected in the findings. But when it comes to income generating investments, Australians may be better placed to diversify more strongly beyond real estate, and increase their allocation to equity investments that pay a high level of income, which may also provide them with the added advantages of dividend imputation,” said Mr Schiffman.
Australian investors were also among the least likely to invest for income internationally (58%) due to concerns about global uncertainty and levels of risk involved.
Global Investment Trends
Around the world, income investors are seeking, on average, an annual investment return of 8.9%, but in reality are receiving 6.1%: a shortfall of 2.8%. Despite this, only 54% of investors globally are prepared to take on more risk to make up this shortfall.
Asian investors take out the top three positions in willingness to assume more risk for a higher yield, with large majorities of investors from China (77%), Singapore (73%) and Hong Kong (63%). However, Japan is the exception to the rule with just 36% prepared to take on more risk.
The most unrealistic investors are from Taiwan, as they expect an annual return of 10% compared with an actual return of 6.0% (representing a ‘reality gap’ of -4.0%). Chinese investors have the highest outright return expectations at 10.5%, leaving a -3.4% gap between their preferred return and their actual return of 7.1%.