Vanguard Investments, one of the globe’s leading managers of retirement savings, has lowered its long-term forecasts for investment returns across most asset classes in Australia and globally.

Jeff Johnson, the head of investment strategy in the Asia Pacific region, told The New Daily that his company was “somewhat muted” about the prospects for Australian equities matching returns of the last 60 years.

“We would generally share the view that valuations (for listed shares) are higher than they have been for a few years,” he said.

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“Our outlook for global equity returns and Australian equities is somewhat muted against historical averages.

“Having said that, our forecasts still call Australian equity market returns in the range of six per cent to nine per cent in the next 10 years.”

According to Vanguard research, Australian and international shares delivered average annual returns of 10.2 per cent between 1958 and 2014.

Vanguard manages more than $3 trillion worth of investment assets around the world, including products marketed by local super funds such as CBus and Legal Super.

The Philadelphia-based fund manager is the latest in a clutch of investment managers to alert investors to the possibility that global share markets are over-valued.

In recent weeks, Black Rock and Perpetual Investments have suggested that local and offshore share markets might be fully valued.

Vanguard: ‘the most guarded in nine years’

In its 2015 investment outlook report Vanguard stated that it had not been as guarded about global equity markets since 2006 because “global growth is likely to remain frustratingly fragile for some time”.

While acknowledging downside risks in equities markets, Mr Johnson said it was important that investors did not abandon their exposure to this asset class.

“While we are guarded in our outlook, we’re not advising investors to abandon equities,” he said.

“We would advise investors to rebalance.

“We’ve seen, historically, that making a call on an asset class is one of the ways in which investors can miss out on the benefits of a rally.”

Mr Johnson said investors reviewing their retirement savings strategy might look to divert some funds towards defensive assets such as government bonds while continuing to have some exposure to shares.

“It is very difficult on an ongoing basis to anticipate short-term inflection points in investment markets,” he said.

“Our advice would be to set asset allocation near to your long term goals and revisit that asset allocation on a yearly basis.”

Lower inflation may boost ‘real returns’

Although Vanguard expects lower comparative returns from most investments in the next decade, lower inflation might enhance the relative value of those gains.

Australian investment markets surged in the mid 1980s but the double-digit returns on share and bond investments in those years were eroded by price inflation that ranged between five per cent and 11 per cent for most of the decade.

The latest official data show that Australian retail prices rose at an annualised rate of only 1.7 per cent in December.

“Investors should also remember that inflation is at historically low levels,” Mr Johnson said.

“That means inflation-adjusted returns might not be so dour.”

Implications for investors in the next decade

Vanguard’s modelling of risk in capital markets has thrown up the following scenarios in the next decade.

Australian and global shares are forecast to generate average annual returns of between six per cent and nine per cent.

Australian and international bonds to deliver annual returns of between three and four per cent compared to an average return of 10.1 per cent between 1958 and 2014.

Australian equities may underperform international shares in the next decade.

What should super investors do?

If you’re actively engaged with your super get advice on how best to allocate your cash across different types of investment assets.

Focus on your investment costs: every dollar spent on asset management fees reduces returns.

Lower returns expectations.