Rice Warner has urged superannuation funds to reset their returns targets, with it finding many investment managers are retaining conventional forecasts, despite the increased risk of a downtown.
Every year, the firm surveys asset consultants and large funds about their expectations for the next decade.
For the last 10 years, there have been positive returns for the mainstream funds and the responses for expected outcomes have not changed much year to year, even with changing economic circumstances.
Rice Warner said the good returns may have made funds “complacent,” noting the investment experts it spoke to have been consistent for the last four years in assessing likely returns from each class for the next decade.
The median estimates for Australian equities have varied from 7.6 per cent to 8.2 per cent a year over the next decade, while hedging international equities have been slightly lower, factoring in higher taxes and no franking credits, with a similarly narrow range of 7 per cent to 7.7 per cent.
The investment experts have also placed government bonds in a small range, 2.75 per cent increasing to 3.5 per cent in the 2019 survey, and cash was flat at 3 per cent to 3.3 per cent, despite interest rates moving considerably down over the last four years.
“The surveys show that investment experts (and indirectly the superannuation funds) are sticking to the conventional forecasts of future performance and are not building in the impact of the global economic crises,” Rice Warner said.
It added superannuation experts should prepare members for “much lower nominal returns in a low interest rate and inflation environment – potentially being much lower than members have received in recent times” and “tolerating higher levels of volatility if they are to have a reasonable change of achieving adequate long-term returns.”
With the RBA cash rate at its historic low of 1 per cent, negative interest rates in Europe and real assets being overvalued in historical metrics, along with other indicators, global growth could be negligible in the upcoming years.
The equity risk premium has grown since the GFC and real asset values have grown as interest rates have fallen, Rice Warner said, which will have a substantial impact on investments for super funds.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
Sarah has a dual bachelor's degree in science and journalism from the University of Queensland.
You can contact her on [email protected].
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