Many in retirement are travelling comfortably, with three key factors contributing to their happiness – good physical and mental health and enough money to enjoy life.
Perhaps the assumption that markets are still anchored by predictable economic policies needs to be challenged. For the first time since the fall of the Berlin Wall, political volatility – once background noise – is potentially reshaping investment risk at a structural level.
Warning, adult themes: very bad news for investors
If the news that annual investment returns for the next ten-or-so years will be only 1 per cent-2 per cent has not yet sunk in, then listen to this.
This is a 15-minute video from Research Affiliates in the US, designed as an introductory demonstration of a free asset allocation tool for its big super fund clients in Australia. But the US firm is using its actual global forecasts for all asset classes, and they are frightening.
Mike Aked, the head of research in Australia, who established the Research Affiliates offices here in 2018, said he could not find an investment into which he was prepared to put all his money, which could be expected to return more than 3 per cent-4 per cent a year.
“The probability is that the best you can get is a real [after inflation] return of 2 per cent,” he says on the video.
Using MySuper data as an asset allocation proxy, from the Australian Prudential Regulatory Authority (APRA) database, the real return on those mainstream superannuation products was 17 per cent for the last 12 months, and 8 per cent a year average over ten years.
Feeding the Research Affiliates forecasts into the APRA MySuper asset allocation model of 75 per cent equities and 25 per cent fixed income, the return will be just 1.4 per cent a year for ten years (after an expected inflation figure of 2.5 per cent).
Research Affiliates is an implementation specialist fund manager providing smart-beta strategies and various services, such as after-tax management, to enhance returns. It was launched in 2002 in Newport Beach, California and had US$166 billion (A$222 billion) under management as of March 2021. As the name implies, the firm is research-driven.
The good news for Australian investors is that according to the Research Affiliates forecasts, Australian equities will be among the slightly better performing – or less poorly performing – asset classes over the next ten years.
Aked says that Australian equities are likely to provide a real rate of return of 3.0 per cent a year and emerging markets (in Australian dollar terms) will provide 4.3 per cent. The average for the major developed markets, including the US, is likely to be zero.
The best performer over the next ten years – which Research Affiliates has called “the trade of the century” – is UK equities, with an expected real return of 4.0 per cent. The UK share market is currently helped by low valuations, while the US is impaired going forward because of its current historically high valuations.
– Greg Bright
