by Tom Bradley

In last Monday’s Report on Business, Ian McGugan (my former editor and one of my favourite writers) did a piece on return expectations. He referenced a survey done by Schroders PLC, the UK investment manager, that polled 22,000 people from around the world. It found that individual investors are expecting an annual return of 10.2% over the next 5 years. Yes, 10%. This compares to a return for the MSCI World Index over the last 30 years of 7.2%.

The survey showed that Canadians were expecting less (8.6%), but even that number is high relative to what the investment landscape is offering today. The 30-year period Ian referred to was one when declining interest rates provided a nice tail wind. To add to the party, profit margins and valuation multiples have been expanding more recently. In other words, everything has been going the right way. Today, however, we have 2% interest rates, which means fixed income returns are guaranteed to be low and equities will have to do it on their own.

We’ve been counseling our clients to expect lower returns over the next five years. We have no idea where stock prices are going in the short term, but when we do the math – dividends (2-3%) plus profit growth (3-4%) plus an adjustment for a change in valuation (minus 1-2%) – we arrive at a range of 4 to 6% per year. This is well below what we’ve experienced over the last 8 years, but compares favourably with GICs and bonds.

I don’t know where most Canadians are on this (8.6% sounds too high to me), but I’m confident that our clients’ expectations are more reasonable. They know we have to stay disciplined and be patient through what may be a period of subdued returns. The key is sticking to the plan and being ready for a time when the outlook is more in line with the Schroders survey.