New analysis from Asset Risk Consultants (ARC) reveals that inflation has dented the ‘real’ value of private client portfolios despite generating above-average returns in 2024.
Equity investors enjoyed a stellar 2024, with global indices rising by 19% in US dollar terms but real returns continue to lag following 2022’s re-adjustment of bond yields, which resulted in a downward shift in the wealth of investors.
- private clients made average nominal returns of 8.4% in 2024 vs historical average of 6.1%*
- adjusting for inflation, most private client portfolios* are 12% below 2021 levels
- adjusting for inflation, most private client portfolios* are at 2017 levels
- real returns need to average 6.6% over the next 10 years to revert to the historical norm of 4% per annum real returns
In its 2024 Annual Review, ARC highlights that financial markets were supported last year by interest rate cuts across most of the developed world as inflation rates fell back towards central bank target levels. Subsequently, returns for private client investors will have been above the long-term averages for the second year in a row. The majority of investors will have recouped their 2022 losses in nominal terms, it says.
However, ARC adds that while 2024 was a relatively “stress-free” year (at no point in the year did investors experience a peak-to-trough drawdown greater than 3.6%) average portfolios* remain 12% below 2021 levels in real terms – and significantly below private clients’ historical 4% per annum real target return. For real performance to revert to this historical norm requires a decade of ‘real’ returns averaging 6.6% per annum. Last year, real returns for the average steady growth portfolio were 6.1%.
Shaun Le Messurier, Director, ARC Research, says: “Investors may be relieved to see the value of their portfolios back at pre-2022 levels but it is important to consider portfolio returns after inflation has been taken into consideration. Our data shows the extent of the damage caused by the market events of 2022. Despite Steady Growth portfolios, which are the most popular among private client investors, generating above-average real returns for the second consecutive year, these portfolios remain 12% below 2021 levels in real terms – and significantly below the 4% a year real target return.”
How private client portfolios have fared in real terms
The chart below plots the ARC Sterling Steady Growth Private Client Index* (based on the most common risk profile run by discretionary investment managers) since inception against a trend line of inflation plus 4 percentage points per annum. That target is a common expectation for a multi-asset class portfolio and suggests that an investor in such a strategy should be able to sustain a withdrawal rate of up to 4% per annum over the long term.
ARC STERLING STEADY GROWTH PCI: Cumulative real returns since inception
The light blue shaded periods are punctuated by three market drawdown events that lasted more than one year: the 2008 financial crisis; the 2015 sell-off; and the 2022 energy crisis. Up until 2021, the ARC Sterling Steady Growth PCI was delivering real returns of circa 4 per cent per annum. However, the most recent drawdown has caused a very significant gap to appear.
ARC’s latest investment manager sentiment survey of CIOs shows that while positive sentiment towards equities has increased with a new year on the horizon, several key risks will challenge investors in 2025. Thequarterly poll examining the 12-month outlook for the major asset classes and sectors showed that the net sentiment towards equities had increased to 56 per cent from 21 per cent over the past 12 months. The 98 CIOs that took part highlighted three key risks that face investors in 2025, namely trade wars, inflation and equity sector concentration caused by unease overvaluations and dominance of a few companies, creating potential systemic risks
The ARC survey also showed that the sentiment towards UK and European equities has fallen (with net sentiment towards the latter now in negative territory). Bonds have also fallen out of favour (with net sentiment of +5 down from +43 last quarter) but sentiment towards small caps and private equity has increased.
