Fund managers could see an expected return of as little as 3% for global equities in the next 20 to 30 years, according to Professor Paul Marsh of the London Business School (LBS).

Addressing delegates at the National Association Pension Fund’s (NAPF) investment conference, Marsh highlighted findings from research he conducted jointly with Elroy Dimson and Mike Staunton at LBS that draws from data covering the rates of return in areas such as stocks, bonds and inflation in up to 22 countries from 1900 to 2012.

He said: “The equity [projection] is more controversial, whether it is based on the equity risk premium of about 3 ½ per cent – I am taking the upper bound of our range of possibilities and adding on to that a return on cash which is slightly negative.

“So we’ve ended up with world equities, global equities, with an expected return for the next generation of 20 to 30 years of as little as over 3%.”

The research indicates a stark contrast between the high returns experienced in the 1950s and 1980s that Marsh described as the ‘high return world’ and his projections for the next 30 years, described as ‘the low return world’.

He said based on annualised real returns on equities and bonds, since the 1950s, the baby boomers had enjoyed very high equity returns in the order of 6% to 7% real-term, and pretty good returns on bonds.

He added that their children – the generation born from 1980 onwards – had also experienced ‘extremely good’ returns in equity and bonds, and that equities had only been disappointing in Japan.

He concluded: “We are indeed living in a low return world. We are also living, I think, with some unrealistic projections and with some stresses.”

He added: “A lot of people are still making projections and living in a world where, in our judgement, the returns are unrealistically high, given what we know about current market rates and what we know about historically asset return.”

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