Investors still rely too much on past performance instead of trying to pick out the trends that will deliver growth. So it is worth starting a long-term investment plan now to catch the future growth curve as early as possible.

Of course, this is easier said than done. Perfect hindsight is a wonderful thing. If we had an infallible crystal ball that would tell us exactly what the best performing investment was going to be over the next five or ten or 20 years, the whole process would be a lot easier.

In reality, even the professionals have a tough time trying to spot the key themes and trends that are going to deliver returns in the future. However, fund managers and investment advisers who spend their working lives grappling with these issues should be best placed to make at least an intelligent guess as to where we should be looking for future growth.

So we asked a selection of industry commentators to try to guess what the future might hold and examine how investment trends may develop over the next 20 years.

The world is growing
Tom McPhail, head of pension research at IFA Hargreaves Lansdown, said the UK classic portfolio model, in terms of geographical split, for long-term growth equity is probably shaped along these lines. ‘Roughly 55 per cent of a UK investor’s portfolio targets the UK, 10 per cent the US, with 15 per cent in Europe, five per cent in Japan and 15 per cent in Asia and the emerging economies.’

Investors in the future will need to follow growth wherever it occurs. Predictions suggest the Chinese economy will overtake the United States by 2050, while on a micro level the Middle East and North Africa have also outperformed in the last 12 months.

Figures from Baring Asset Management show how these economies have come on in the last decade. The proportion of total market capitalisation represented by the emerging world has increased by an annual equivalent of almost one per cent per year since 1999. This growth curve will also get more dramatic over the next ten years, according to analysis of MSCI statistics.

Barings expects emerging economies – which include Hong Kong and Singapore – to account for up to a third of global market capitalisation by 2018. Yet, Investment Management Association (IMA) data reveals that UK investors currently allocate just 1.6 per cent of their total portfolio to global emerging market equities.

James Syme, head of the global emerging equity team at Baring, comments: ‘Recent moves to floating exchange rates, the independence of central banks, current account surpluses, declining interest rates and reduced levels of debt have all made emerging markets an increasingly attractive investment proposition for investors prepared to take a medium to longer-term view.’

Potential closer to home
Growth is key for any investor, but if the risk outweighs the opportunity then most investors won’t want to take it. The fact is many of the emerging economies have riskier characteristics than the UK. Lack of supervised regulation, unstable political regimes or financial systems liable to change the rules on the treatment of listed stocks, particularly when they are in the hands of foreign investors, can make them reluctant to part with their cash.

However, it is not always necessary to go to exotic locations in order to secure attractive returns. Many investment professionals argue that the potential of Europe has been ignored for too long.

McPhail says ‘Europe has become a hunting ground for income investors and more companies are paying greater attention to their shareholders by rewarding them with dividends.’

One of the many attractions of Europe is its diversity, says James Davies, investment research director with independent financial adviser and fund manager Chartwell, who says, if anything, the right time to invest is now.

‘The European Union as a trading block is going to gear up and there is going to have to be far greater cross-border co-operation to compete with China and the US. People should already have a far greater equity exposure to overseas markets.’

But where will investor’s interest be in 20 years’ time? Neil Cumming, manager of the UK growth fund at PSigma Asset Management, says the UK could even have embraced the euro, although everything right now points in the other direction. He says, ‘A change to the euro could really open up investment frontiers.’

He points out that the London stock market already lists more international stocks than any other bourse and joining the euro could pave the way to a more pan-European trading platform.

It pays to be green
So the received wisdom suggests that, in the hunt for growth, UK equities will no longer have the same prominence in the portfolios of UK-based investors as they have in the past. But how will the world and investment portfolios have changed in all other ways by 2028?

There is considerable agreement among fund managers and analysts that environmental sustainability will have made a very real impact on everything from how companies are audited to energy prices.

Chartwell’s Davies says the increasing global population will set the agenda for many of these trends. ‘Increasing demands for fresh water, derived from a growing global population and higher levels of consumption, will mean global investment in desalination, filtration and infrastructure maintenance.’

The UK is already seeing spiralling fuel prices and more investment in renewable energy. As the world has to accommodate more people, even more work will have to be done on renewable energy, as well as nuclear and gas.

Davies says the world can expect huge investment from both governments and individuals in wind and wave technology, solar power and carbon scrubbers – devices that absorb carbon dioxide. But watch out for carbon offsetting or carbon trading, which is also set to be a boom industry.

‘Carbon trading could eventually be rolled out to individuals, not just large corporations,’ says Davies. ‘Think of it like Catholic indulgences – carbon trading allows CO2 sinners to buy credits from atmospheric angels, thereby offsetting their own carbon impact.’

Firms will probably have to approach their accounting and reporting systems from an environmental and ethical stance in the future too. When it comes to the annual audit, companies are likely to have to present themselves very differently and demonstrate credentials on everything from the environment to child labour.

Colin McLean, CEO at SVM Asset Management, argues: ‘The United Nations is set to produce standards on issues like child labour in the next five years and beyond, so companies will have to be far more ethically and environmentally aware. Although ethical funds have hardly taken off, social responsibility will add a new dimension to investing in future years.’

Reverting to type
What about the types of investment we will be using in 20 years time? McLean observes that the sector has been predicting the imminent demise of closed-end investment trusts for years, because of their perceived inflexibility. He says, ‘Unless investment trusts return to looking more like absolute return or hedge funds, they [will] shrink in relevance in comparison with more popular investment funds.’

However, Chartwell’s Davies suggests that, precisely because closed-end vehicles seem so unpopular now, their stars may have risen by 2028. However, one financial product he does see declining is the investment bond, which he predicts could ‘die a slow and painful death’.

‘The reason why investment bonds are held in such high esteem is their usage as sympathetic taxation vehicles and importantly, that they come stacked with extremely high levels of commission for financial advisers.

‘But from a taxation point of view, they are already less attractive than before, which makes the point that investing in any vehicle solely for its use as a taxation shield makes you vulnerable to a tax regime change.’

Another aspect of the investment landscape that will come under greater scrutiny is how much these packaged investment products will cost. Several commentators suggested that investors will become less tolerant of high fees and low returns, making them far less willing to pay out for indifferent performance or funds that simply track an index. One or two even suggest that fees for the top managers could substantially increase, on the basis that investors will be prepared to pay for outperformance.

Passive investing
Conversely, there is a body of opinion that suggests that tracker funds will dominate the investment landscape by 2028. James Dixon, director of Evolve Financial Planning, says, thanks to their lower fees and the fact the average index funds’ assets grow exponentially, trackers have to be a sensible bet. ‘The US sets the trends and a huge number of investors already invest in trackers there. I’ve yet to see some academic research which actually supports active fund management [but] I have seen plenty of research supporting trackers.’

Stockpicker Colin McLean says he also feels a lot more of what fund managers do could be diverted to tracker funds, making exposure to assets like gold cheaper for investors to access. ‘That way, you might see IFAs making more use of indices and Exchange Traded Funds (ETFs), left alone to constitute the long-term core of a portfolio, which could be bundled up to offer the cheapest market return they can find. This way, investors may be more inclined to pay higher fees for more active fund managers.’

By 2028, specialist funds are likely to be more accessible and, therefore, likely to play a bigger part in the average portfolio.

The BlackRock Absolute Alpha fund is the rock star of the absolute return world right now and commentators suggest the appetite for this type of fund, which has only been available for two years, will go through the roof.

Increasing familiarity
Colin McLean suggests IFAs are getting more comfortable with both absolute return funds and ETFs, broadening their appeal. ETFs are bundles of shares or bonds or commodities – or, indeed, conventional indices – traded as a single share. Their attractions are low costs, tax efficiency and liquidity, while retaining many stock-like features.

In a survey of investment professionals from US financial advisers State Street conducted in March 2008, 67 per cent called ETFs the most innovative investment vehicle of the last two decades and 60 per cent reported that ETFs have fundamentally changed the way they construct investment portfolios.

But, no matter how cost effective and liquid investment vehicles become, the ability to understand how to use them effectively remains a key theme. Tom McPhail, for one, says he hopes for less talk and more action when it comes to teaching personal finance in schools in the UK.

‘I do genuinely hope that, in 20 years’ time, the government will have got round to putting personal finance on the national curriculum, allowing more of the population to understand and gain control over their finances.’