Inflation has dented the ‘real’ value of private client portfolios, despite achieving above-average returns in 2024, analysis from Asset Risk Consultants (ARC) has revealed.

It found that while equity investors had enjoyed a strong 2024, as global indices rose by 19 per cent in US dollar terms, real returns continued to lag following 2022’s re-adjustment of bond yields, which resulted in a downward shift in investors’ wealth.

Based on sterling steady growth portfolios, the most popularly held portfolio type by private clients, average nominal returns in 2024 were 8.4 per cent compared to the historic average of 6.1 per cent.

However, when adjusted for inflation, private client portfolios were 12 per cent below 2021 levels and at around the same levels seen in 2017.

ARC noted that real returns need to average 6.6 per cent over the next 10 years to revert to the historical norm of 4 per cent per year real returns.

Its 2024 Annual Review highlighted that financial markets were supported by interest rate cuts last year as inflation fell back towards central bank target levels.

This resulted in private client investors’ returns being above the long-term averages for the second year and a row, and the majority of investors will have recouped their 2022 losses in nominal terms.

Despite this, average portfolios were 12 per cent below 2021 levels in real terms, and “significantly” below private clients’ historical 4 per cent per annum real target return.

“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,” commented ARC Research director, Shaun Le Messurier.

“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 per cent below 2021 levels in real terms – and significantly below the 4 per cent a year real target return.”

ARC’s latest investment manager sentiment survey of CIOs showed that while the positive sentiment towards equities had risen, there were several key risks that will challenge investors in 2025.

Although the poll exploring the 12-month outlook for the major asset classes and sectors found that net sentiment towards equities had increased from 21 per cent to 56 per cent over the past 12 months, CIOs highlighted that trade wars, inflation, and equity sector concentration were creating potential systemic risks.

The ARC survey also found that the sentiment towards UK and European equities had fallen, with net sentiment towards the latter now in negative territory.

Bonds had also fallen out of favour, with net sentiment of +5 down from +43 last quarter, while sentiment towards small caps and private equity had risen.

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