In line with last year’s survey, respondents remained confident they could meet their investment return objectives. This is despite October being the worst month for global equities since 2012 and the word ‘correction’ being on the tip of many tongues.
In fact, survey respondents identified a pullback in equity markets as the biggest portfolio risk for the year to come, just ahead of rising interest rates. We “hope to be wrong about lower, more volatile returns for longer”, one respondent commented. “Equity markets are generally highly priced. Rising bond yields are likely to trigger a devaluation in all assets, especially equities,” another said.
Among geopolitical risks, respondents were most concerned about China tensions and US politics. One respondent commented that if China sneezes, Australia gets a cold. An additional respondent was more specific, citing as matters of concern “the populist politics leading to a sustained trade war between the US and China” and “a frozen US congress stymieing further stimulus or a co-ordinated response to the next crisis”.
Another respondent was less concerned, however, and said, “Geopolitical risks rarely matter much to markets and are currently relatively benign, despite the focus in the short-term news cycle.”
Despite the acknowledged concerns, seven in eight (87.5 per cent) respondents said they were confident of meeting their balanced return targets in 2018; few (8.3 per cent) believed they needed to take on more risk to do so. This reflects more confidence in meeting targets than in recent years. In 2017, about 60 per cent of the respondents were confident of meeting their balanced fund return target. One year earlier, that figure was a mere 30 per cent.
Over the last few years, many funds have dropped their targets to reflect more realistic expectations in a difficult market. About 1 in 5, 20.8 per cent, of 2018 respondents said they had lowered their stated return targets on their balanced portfolios in the last year. For the 2017 survey, this figure was almost 40 per cent. (The survey shows that the average balanced fund return target was CPI + 3.6 per cent.)
Frontier Advisors’ Bowater acknowledged there had been a trend towards lowering return targets for default options in recent years.
“While lower returns have not yet eventuated, it has made sense for investors to consider if their return expectations are realistic over a five- to 10-year timeframe in the context of the prevailing interest rate environment,” she says. “The survey results suggest this has continued over the past year. They also show a relatively high conviction that these objectives will be reached over the coming year. This will depend on global growth remaining strong over this period.”
Last year, Investment Magazine predicted that the multi-year trend of skinnier risk targets would draw to a close, with only 10 per cent of CIOs expecting to lower targets in 2017. In 2018, this trend does appear to have peaked and begun to subside.