With this in mind, what should investors be expecting from here? Gilt yields are currently below 1%. This is the risk-free rate and any returns higher than this must necessarily involve some risk to capital.
Clearly, given the higher return expectations of investors, many still consider these lower bond yields to be temporary. But is this likely? The low interest rate environment has now persisted for seven years. The markets currently expect no interest rate rise for another two years and for interest rates to still be at 1% in six years’ time. Low interest rates can no longer be seen as a short-term measure to boost a flagging economy, but they represent a structural shift in monetary policy unlikely to be fully reversed for a decade.
This drags down the return potential for all asset classes. The dividend yield on the FTSE 100 is now over 4%, which – in spite of some high profile dividend cuts – looks sustainable, though capital values may fluctuate. Any investor who wants anything much higher than this needs to take some risk to achieve it.
Our view is that 4% is a reasonable expectation for decumulation portfolio. Investors can draw around 4% of their portfolio every year, while preserving the inflation-adjusted capital value of their portfolio over time. We believe this is possible even with the global economic pressures detailed in the McKinsey report, but it will require some judicious filtering of more highly valued assets and selection of better value assets.
Investors have not yet had to experience a truly ‘low return’ world. Investor return expectations have remained high, with many believing that the current monetary policy environment is temporary and will be reversed. We make no forecast on the future, but would suggest that investors will need to adjust their expectations looking forward.
