Chris Durack

Australian investors expect an annual return of 8.9% from their investments over the next five years, lower than global investor expectations of 10.9%, according to the latest Schroders Global Investor Study*.

These high expectations may be explained by the survey findings that 80% of people globally (and 75% in Australia) are still basing their predictions for future returns on past returns, with a decade of strong returns potentially inflating people’s expectations to unrealistic levels. For example the Schroder Strategic Growth Fund returned 8.2% p.a. (pre fees as at 31 July 2020) and the S&P / ASX200 index delivered 7.8% (as at 31 August 2020) over the last 10 years.

The Schroders Global Investor Study 2020 explores the behaviours and attitudes of more than 23,000 people who invest from 32 locations around the world, including Australia.

Unsurprisingly, survey respondents expect the COVID-19 pandemic to have a negative economic impact, and 66% believe the impact will be felt for the next six months to two years, while only 21% believe the impact will go beyond two years.

Geographically, investors in the Americas had the highest annual return expectations, at 13.2% on average, compared with 8.9% for investors in Australia and 9.4% for investors in Europe . Japan had the lowest return expectations at 6.0%.

A  majority of investors globally (62%), and even larger majority in Australia (75%), base their expected returns on current interest rates. This is unsurprising given the current lower for longer interest rates environment, however the expected return is still higher than such low interest rates would traditionally allow.

Globally, the most common sources for financial advice are banks (46%), independent financial advisers (42%) and investors’ own research (31%). This compares to Australia where the top three sources of financial advice are independent financial advisors (47%), followed by their own research (38%) and banks (30%).

Interestingly, millennials in Australia are significantly more likely to obtain financial advice from a bank (47%) or stockbroker (32%) compared to non-millennials – where 24% get advice from banks and 20% get advice from stockbrokers.

Looking to the year ahead, the challenges posed by COVID-19 and its associated economic impact means people are less likely to use their disposable income on lifestyle items. Expenditure on luxury items such as holidays and vehicles has also taken a hit (from 11% in 2017 versus 6% in 2020).

Interestingly, using disposable income to invest in general investments, deposit in a savings account and keep as cash at home also increased in priority, perhaps showing that people are preparing for a period of financial uncertainty.

COVID-19 has certainly made its mark on investment behaviour even if investors aren’t expecting it to impact their returns in the long term. When asked how they approached the period of stock market volatility in February and March of 2020, globally, a significant majority of people indicated they made changes to their portfolio. Over a quarter of people (28%) moved significant proportions of their portfolio to lower risk investments, while a fifth (20%) moved some of their portfolio to high-risk investments.

However, Australian investors were more likely than their global counterparts to stick to their original plans, with 34% sticking with their original plan and not making any changes to their investment portfolio during this period. Interestingly, women were more likely to not make any changes to their portfolio (38%) compared to men (31%).

Overall, the survey found Australian men have greater belief in their investment knowledge, with 44% describing their knowledge as expert/advanced compared to only 27% of women.

Chris Durack Schroders’ country head, Australia commented: “Australians’ return expectations have decreased from the unrealistically high level of 10.9% p.a. from the last survey. But overall, against a backdrop of market turbulence, expectations for income and returns are still high.

“With 80% of people around the world  still basing their predictions on the returns they have received in the past, the past decade of strong returns continues to potentially inflate people’s expectations to unrealistic levels.

“The next decade is set to deliver returns that likely don’t match the expectations of investors. People around the world stated that they want to have financial knowledge, but few have the confidence to say they are experts.  These are difficult times so more than ever, ensuring Australians have access to resources and advice to set realistic investment objectives and appropriate investment strategies will remain the key to success.

“There is an opportunity for the industry to take the initiative in addressing this demand for knowledge, and in reinforcing the importance and value of professional financial education and advice.”

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