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Too great expectations?

Lex Hall  |  05 Sep 2020Text size  Decrease  Increase  |  
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One of the most oft-repeated lines in the financial world is “past performance is no indicator of future returns” or a variant thereof. Sounds good in theory but it’s somewhat counter-intuitive. I rather think the Penrith Panthers are going to claim the NRL minor premiership. Why? Well, their past performance is pretty good: they’re closing in on 13 victories in a row.

In contrast, the team that they beat on Thursday night, the Brisbane Broncos, slumped to their 14th loss of 2020, the most defeats the club has recorded in a season. Their past performance suggests it’s over for them, don’t you think? The point is, no matter how often we repeat this mantra, and as the behavioural boffins will tell you, we tend to expect good times past to roll on into the future.

I mention that because a global survey this week revealed that Australian investors expect an annual return of 8.9 per cent from their investments over the next five years. If you think that’s optimistic, consider our fellow global investors: they’re expecting returns of 10.9 per cent, according to the latest Schroders Global Investor Study.

Schroders says such high expectations may be explained by the survey findings that 80 per cent of people globally (and 75 per cent in Australia) are still basing their predictions for future returns on past returns, with a decade of strong returns potentially inflating people’s expectations to unrealistic levels. Past performance is no indicator of future returns—especially when the world has plunged into a crisis like no other.

On hearing of these elevated expectations, our Firstlinks colleague, Graham Hand, offered the following warning: “Isn't there a strong message needed that expecting 9 per cent per annum over the next five years is totally unrealistic? On a 50/50 portfolio with little return on bonds, growth assets would need to deliver 18 per cent a year with the world in a recession.”

By way of comparison, the Schroder Strategic Growth Fund posted an annual return of 8.2 per cent (pre fees as at 31 July 2020) and the S&P / ASX200 index delivered 7.8 per cent (as at 31 August 2020) over the past ten years.

Investors' expectations—down but disappointment still likely

Returns: 10 years to June 2020

Investors expectations

Source: Bloomberg, Schroders

And on the subject of lopsided expectations, consider this observation from Peter Warnes on the run-up in US stocks, particularly tech giants Apple and Tesla. "The valuations are just too high,” Warnes told a Morningstar webinar yesterday. “The things happening at Apple and Tesla are absolute nonsense. When you get Apple at basically double in six months that's telling you that average share price-to-cashflow ratio has doubled. In other words, people are paying twice as much for the same cashflow—it's just a nonsense.”

Speaking of valuations, in Firstlinks, this week, Graham Hand ponders the changing face of the industrial landscape. Salesforce, a software company, made history this week by replacing ExxonMobil in the Dow Jones Industrial Average index, which Hand argues no longer accurately represents the broad US economy. A better representation, and now more frequently quoted, is the S&P500 index, Hand says. “Technology is the big winner and energy is the big loser,” Hand writes. “Any fund manager on the wrong side of that trade should no longer have a job.”

Elsewhere this week, following the hit to tech stocks on Thursday, Morningstar’s US stock watcher Susan Dziubinski surveys the damage to see if any of the sector leaders are worth nibbling on.

Emma Rapaport picks the bones out of the latest ASX investing trends survey and discovers that women and younger people are piling into the market.

In a week in which Australia officially re-entered recession after almost 30 decades, it was comforting to see Morningstar analyst Grant Slade offer some bright news on a pick-up in housing in the new year. He singles out some companies trading at compelling discounts.

We unearth six stocks you may wish to consider in light of forecasts by Morningstar strategist Seth Goldstein that by the end of the decade, one out of every five cars sold will be a battery-powered electric vehicle.

Morningstar healthcare strategist Karen Andersen reports on three vaccines capable of US authorisation this year.

For investors seeking both revenue growth and relative stability, cybersecurity has been a reprieve from the uncertainty of the global pandemic. Morningstar's Mark Cash identifies some names to consider.

Morningstar economics strategist Preston Caldwell and senior equity analyst Eric Compton report on why we've safely averted much of what would result in a long-term financial crisis during the covid-19 downturn.

Value stocks have been out of favour for a long time but that doesn’t mean they are to be ignored, argues Morningstar director of passive strategies research Alex Bryan.

Finally in Your Money Weekly, Peter Warnes argues central banks and buy-now pay-later companies are kicking the can down the road to the general peril of all. “When the medication is withdrawn,” Warnes writes, “the full extent of the damage will become evident and there is likely more downside than upside.”

Visit Morningstar's Reporting Season 2020 coverage. The calendar will be updated daily to connect you with our equity analysts' take on the financial results.

Morningstar's Global Best Ideas list is out now. Morningstar Premium subscribers can view the list here.

is content editor for Morningstar Australia

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