Investors searching for high returns but who remain unwilling to accept drawdown risk need to be more realistic, according to Premier Asset Management’s Simon Evan-Cook.
The senior fund manager and multi-asset specialist said high return, low risk expectations had become more of an issue as markets do not offer investors a “middle ground”.
Part of the problem, said Evan-Cook, is that cash is unappealing in a low interest rate environment with inflation on the rise.
“In the past, if we wanted a modestly higher return, but without ramping the risk up to 11, we could creep into government bonds, then corporate bonds, then high-quality, dividend-paying equities,” he said. “But the early birds have had those worms already, lifting their valuations well above ‘cheap’.”
The fund manager added: “However, while some assets look worryingly expensive - and should be avoided - many more could be described as ‘fair value’.
“This means they are still capable of making worthwhile returns over the long term, but their valuations don’t offer the safety margin that would allow them to glide unruffled through unwelcome ‘events’.”
Evan Cook said investors should be more realistic, adding: “You can have decent real returns, or you can have no risk of a sharp drawdown. But you can’t have both.”
As such, he has fully-invested his pension in the Premier Multi-Asset Global Growth fund he co-manages.
Performance of fund vs sector over 3yrs
Source: FE Analytics
“I’m mentally prepared for a rocky ride, and I’m equally prepared to deal with the regret that tomorrow may present a better opportunity,” he explained.
“I accept that, for those with a necessarily shorter time horizon, the choice may be harder, but for genuine long-term investors, I’m yet to find a better prescription.”
However, for others there are a number of factors to be considered when making a large lump sum investment.
He said: “When I speak to friends, colleagues and clients, a common refrain is ‘I want to invest, but markets have risen a lot lately, so I’m waiting for a pull-back before investing’. I’m not surprised: It’s a really tricky question.
“It’s tricky because, before the event, there are several – in fact, almost limitless – answers that could turn out to be right.”
Source: Premier Asset Management
“I’ve tried to illustrate this choice with the above chart. And it really is only an illustration: it isn’t a forecast on our behalf, much less a guarantee. And it only represents a very small number of the outcomes that, in reality, investors face today.
“One other thing it definitely isn’t is a recommendation or suggestion as to which of these paths is the right one to pick.”
The CPI line on the above chart represents the latest inflation figures from the Office for National Statistics (ONS). Evan-Cook said the figure of 2.7 per cent represents conditions over the past 12 months, but noted it may change, describing it as a “crystal ball job”.
“In short, based on this number, you’ll need £130,000 in 10 years’ time to buy what £100,000 will buy you today,” he said.
The cash line in the chart reflects the current UK base rate of 0.25 per cent. The fund manager said, based on the current rate, this will leave investors “considerably poorer in real terms” if inflation continues at 2.7 per cent.
In a ‘chronic’ scenario, valuations do not correct and the “longed-for pull-back” making equities cheap doesn’t occur. Evan-Cook said in such a scenario, he has factored in an annual return of 6 per cent, as shown on the chart.
“This is a return of 6 per cent per year, after any charges for investment and before inflation is taken into account – i.e. it’s not the ‘real’ return, which is the lower number you’d receive once you take into account how much CPI of 2.7 per cent would eat into that return.
“I’ve picked 6 per cent because history suggests, based on current valuations, that’s a reasonably conservative expectation of what developed market equities might return over the next decade – not including the US, where valuations suggest much lower returns.”
However, Evan-Cook (pictured) said valuations could be “way-out” and also would not factor in major upheaval in markets. 
An ‘acute’ scenario would involve investing on the same 6 per cent per annum. nominal return expectation outlined above, but where markets “drop like a stone” the day after investing, or “sods law” as Evan-Cook describes it.
He explained: “So, by the end of Year One, the market, and therefore your capital, is 30 per cent lower. Again, -30 per cent isn’t a forecast of any kind. It’s simply how much the UK market fell in 2008; one of its worst-ever years.
“This corrects the valuation problem, hence why it’s 'acute' and not 'chronic'. But that’s of little consequence to you as you were in the market as it fell.
“This just represents a different path to the same destination as the ‘chronic’ scenario, as the lower valuations in Year Two subsequently mean that the market rises at over 11 per cent per year over the next nine years, leaving you with the exact same result.
“What’s different is the emotional impact: it’s hard to deal with the regret of knowing that if you’d only stayed in cash for another year, it could have all been so much better.”
Evan-Cook described the ‘acute with perfect foresight’ as “the one you would love to have”. Although it follows the same pattern as the ‘acute’ scenario, investors first stay in cash during Year One.
“I think it’s this scenario that puts people off investing today,” he said, “It’s a potent mix of greed and fear. Fear that the market might drop, and greed that the 10-year returns under this scenario are so much higher.
“The rub, however, is that if the market doesn’t correct, you’ll be left Waiting for Godot. Your end result will then be that set out in the ‘cash’ scenario above i.e. a hefty real loss.
“You’ll also have ten fewer years to invest, and therefore compound returns, until you retire/pay off your mortgage/pay the kids’ university fees. “
He added: “Furthermore, it also relies on you being brave and brilliant enough to invest your full lump sum at the market low.
“That might seem easy now, but market lows don’t happen when everything’s tickety boo. The 2008 low occurred as newspapers were declaring the imminent collapse of Western democracy.
“You have to ask yourself, very honestly, are you really likely to pop all of your hard-earned cash into the collapsing stock market under those conditions? You’ll be in a small minority if you are.”
The final scenario shown above is ‘acute panic’, Evan-Cook’s worst-case scenario. It involves investment 30 per cent drop, a return to cash and locking-in of losses, before remaining in cash until markets recover.
“This is by no means an unrealistic outcome. In fact, I suspect it’s a reasonably common one,” he said. “Again, investors need to be very honest with themselves here: if you are a panicker, then you have to question whether equities under any scenario are the right asset for you.”