Fund manager AMP Henderson is warning investors not to panic and quit equity-dominated funds just because returns in the March year had been the worst for 15 years.
Chief investment officer Paul Dyer says investors had a tendency to follow returns -- using the rear vision mirror to drive.
But quitting now because of recent poor returns in the last two-and-a-half years was likely to compound the problem.
AMP Henderson managing director Catherine Savage said equity markets had stabilised in the last quarter and but for the rise of the New Zealand dollar would have been down just 1.6%.
"The free-fall seems to be over," she says.
Investors have been leaving equity and balanced funds in favour of fixed rate funds, but AMP Henderson is warning future fixed interest returns will be "materially lower than what we have seen recently".
"Investors have an inherent tendency to react to returns they have experienced in the recent past," Dyer says. "That pattern is evident everywhere."
Small investors tend to put money into funds when markets are rising strong and dump them when flows turn negative -- not considered a smart strategy.
"What matters is not past returns, but future returns," he said.
Investors had been spooked by the worst sharemarket "correction" since World War 2 and the second or third worst slump in the past 100 years.
Leading up to that "correction" starting in 2001 was a 14-year-long global sharemarket rally that gave investors "a false appreciation of what equity investment was all about".
They began to expect continued super returns.
AMP Henderson, while not suggesting shares are at bargain basement levels, suggested a more "normal" pattern of returns would resume.
That suggests an average pre-tax annual return of about 10%. Dyer stressed that did not mean a return of 10% in every year.
"But certainly the risk return prospects are very much better than at any previous point in the last three years," he said.
Global shares, based on yield and growth prospects, were priced to return an average of 8% per annum and in New Zealand dollar terms, 10.3%.
Local shares are assessed as "reasonably priced" and should return an even better 11.4%.
Conversely, fixed interest returns, where funds have been pouring in lately, are priced to deliver just 5.8%.
AMP Henderson still expects good returns from property, where the New Zealand residential market is not as over-heated as Britain or Australia, and is expected to return 9.5%. But Dyer noted property was no more immune to slumps than other markets, with the Hong Kong market two thirds down from its peak.
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