Advisers face challenging decade

Michael Lang, Chief Investment Officer at NZ Funds

While considerable debate surrounds the introduction of the new rules for financial advisers, returns may prove the bigger threat to incomes. How advisers and managers navigate these dual threats will likely determine who the industry’s winners and losers will be.

Low returns are an insidious threat. Investors, and their advisers, have enjoyed a great run. Since the end of the Global Financial Crisis in March 2009, investors have enjoyed strong investment returns, both here and internationally. The NZX50 Index has risen 317%, while the global share market (MSCI ACWI Index) has returned 245%. During the same period (March 2009 to August 2018) New Zealand and international interest rates have fallen, generating capital gains for long-term bond holders.

Share and bond valuations indicate that both asset classes are now between 1.3 and 2.4 standard deviations above their long-term average. Put simply, both bonds and shares are expensive. The corollary of a decade of above average returns is that advisers will need to navigate a period of below average returns. NZ Funds, with the help of US Strategist Barry B Bannister of Stifel Nicolaus, estimate 10-year equity returns will average 2%, less than the 14% enjoyed over the last decade.

Unfortunately, while valuation is a reliable predictor of long-term returns, it is of little use in timing markets or in predicting what form returns will be delivered over the coming decade. Below average long-term returns come in two forms. Markets can either deliver weak returns though a decade-long sideways movement, creating a war of attrition during which clients slowly lose faith and seek out alternative asset classes like cash and property. Investment advisers in the United States faced just such a period between 1976 and 1982, while New Zealanders experienced a similar decade following the 1987 crash.