UK investors are expecting an average annual return of 8.7% on their investments over the next five years, according to fund manager Schroders which warns that these expectations are unrealistic.

With Schroders economic experts forecasting annual returns of 5.4% for UK equities (2.4% after inflation) over the next five years, the company says that many UK investors may fall short of their expectations.

Schroders’ annual Global Investor Study, which surveyed over 22,000 investors globally, including over 1,000 in the UK, found that 58% of UK investors were expecting an average return of up to 10% over the next five years. Just under a third (31%) were expecting a minimum of 10% a year.

Millennials (mainly investors in their 20s and thirties) were even more optimistic. Nearly half (43%) expect a minimum return of 10% a year, including almost a quarter (23%) who expect more than 15%.
UK expectations were in line with Europe overall at 8.7% but less than the global average expectation of 10.2%.

Schroders questions whether investors are expecting too high a return. It says for equities, historic performance has been lower than the expectations recorded in the study. The Schroders Economics Group has forecast a 5.4% annual return for UK equities over the next seven years, or 2.4% a year after inflation is taken into account

The fund manager says that world stock markets have provided average annual returns, with dividend income reinvested, of 7.2% over the last three decades, as measured by the MSCI World index. For example, world stock markets have provided average annual returns, with dividend income reinvested, of 7.2% over the last three decades, as measured by the MSCI World index.

The chart below shows how the two compare, and also highlights other key figures.

Sources: Schroders Global Investor Study 2017, Thomson Reuters Datastream and the Bank of England. Global stocks is the annual total return MSCI World Index between 1987 and 2017. UK inflation is based on the Consumer Price Index averaged out over the last five years. 10-year gilt yield and UK interest are current as at 20 October 2017.

Despite the high expectations, the study also found that UK investors were currently “averse” to taking too much risk, due to the uncertainty caused by international events. When asked about current uncertainty surrounding international politics/world events, 48% of UK investors said they were keeping more of their money in cash. Additionally, 59% said they do not want to take on as much risk in their investments now.

The cautious approach continued when investors were asked to think about their priorities on disposable income for next year. The most popular answer was that UK investors are planning to keep their disposable income in a bank savings account (20%). This was followed by investing in another type of investment, like equites, bonds or commodities (17%), or spending it on a luxury purchase (17%).

The majority of UK investors (83%) feel the need to improve their understanding of investments. This is compared to 84% in Europe and 88% globally. Just under a third (30%) would specifically like to improve their knowledge and understanding of tax efficient investments.

James Rainbow, co-head of Schroders UK Intermediary Business, said: “Investors’ expectations for returns of nearly 9% over the next five years look very optimistic.

“The UK stock market has seen a remarkable rally in recent years, which has probably buoyed confidence. But much of the strong performance is due to the extreme actions taken by central banks to stimulate the economy. The broader picture is that we’re in an age of low rates and low growth. It’s therefore wise to expect lower returns.”