Will Rasmussen, a Dubai-based management consultant, feels frustrated every time a friend announces they have just signed up to a long-term investment plan with a cold-calling financial adviser.
He also doesn’t like hearing about people who make good money and leave their cash to wallow in the bank.
Ever since he graduated from the Wharton Business School with an MBA over two years ago, Mr Rasmussen, 33, has been on a mission to educate his friends and family with investment management tips gleaned from masterclasses, countless lectures and books such as Burton Malkiel's A Random Walk Down Wall Street and David Swensen's Unconventional Success.
And his action plan – to diversify, avoid individual securities and stick to cheap funds that track benchmarks – is a move increasingly used by some of the world’s biggest investors such as Abu Dhabi’s sovereign wealth fund Adia, which has over half of its investments in index tracking strategies.
Such is his acquired knowledge, American Mr Rasmussen says his portfolio has generated annualised returns of more than 14.5 per cent in the past three years.
Citing academic research showing that in any given year only a third of mutual fund managers who try to beat benchmarks succeed, the investor is now urging UAE residents with money to spare to do the work themselves, rather than rely on a bank’s investment arm or independent financial advisers.
“When I went to business school I realised a lot of these funds are swindlers, how much misleading information is out there and how one is conned by these investment professionals,” Mr Rasmussen says.
“People don’t understand it and they get scared by it so they let professionals who are meant to help them but only slap them with corrosive fees. You are better off having a broad diversified portfolio using low-cost investment vehicles.”
The world of investment can seem like a maze to the uninitiated, more akin to an art than a science. And with the 24-hour news cycle of financial professionals screaming “buy” and “sell” on CNBC, Bloomberg and their competitors, it’s easy to become confused.
For every decision you might make about an investment, you will also find compelling arguments not to do it. It’s for that reason that most of the world’s biggest investors, like Warren Buffett, recommend amateur investors pursue a passive strategy.
Do-it-yourself investor Mr Rasmussen believes that unless someone is aware of the risks when constructing a portfolio and happy to take them, it’s best to stick to low-cost index tracking mutual funds or Exchange Traded Funds (ETFs). He suggests using conservative formulas in Malkiel and Swensen’s books where portfolios are divided into stocks, bonds and property investment trusts and tips on rebalancing are given.
The investor also relies on the internet and its free supply of information for those wanting to create an alternative portfolio.
For those new to the game, ETFs are stock-like financial instruments that bundle securities of an underlying benchmark. So a ETF tracking the S&P 500 would own all the shares in that index and will rebalance whenever a stock is added or removed. They are bought and sold like a stock on an exchange.
ETFs first appeared about 25 years ago in the United States and are rapidly gaining popularity among “mom and pop” investors. They can also be found on all the other major exchanges of the world, including London and Hong Kong and also exist in the UAE.
“For investors who, together with their financial advisers, know the exposures they want to achieve, ETFs provide precise, efficient, low-cost tools to achieve them,” says Andrew MacKenzie, the managing director and head of Blackrock iShares Middle East, the biggest provider of ETFs.
Managed fund fees have been declining according to Investment Company Institute, a trade association for the industry. Still, while the average mutual fund fee is around 1.4 per cent, some can cost more than 2 per cent annually to hold while exchange traded funds can charge as low as 0.04 per cent such as Schwab’s US broad market ETF.
Mr Rasmussen adds it is important to remember there are other “crippling fees” associated with mutual funds, such as fees you pay to a broker who sets you up with the funds as well as a commission you pay to the provider of the mutual fund when you buy them that can range between 3 per cent to 5 per cent. There can also be exit fees to consider.
Those keen to access ETFs can sign up directly with a discount brokerage, such as Charles Schwab, Vanguard or Interactive Brokers. While ETFs are still small in the bigger picture of the world of asset management, according to ICI they are rapidly gaining pace. In the US, which has the largest number of ETFs, their market is small at $1.4 trillion compared to the $9.4 trillion in mutual funds but the rise of these investment vehicles has been rapid in the past decade and active managers have taken notice.
Still, experts agree that there are some instances, such as in emerging markets, where active management has its uses. In these countries, where political instability and a retail dominated market is the norm, there is frequent mispricing because of volatility. Managers there have a better chance of beating the market but ETFs have their place too.
“The per cent taken by ETFs and passive funds has increased,” says Mark Mobius, an emerging market asset manager overseeing over $50 billion at Franklin Templeton. “Now it’s about 50 per cent from nothing 10 years ago. We haven’t suffered. Our assets under management has not gone down but it hasn’t gone up as much as it could have if we didn’t have ETFs.”
Author Mr Malkiel recommends investors seeking to add active management to their portfolios – where a professional manages their funds – should consider closed-end funds, especially of asset classes such as emerging market equities where it may be easier to beat the benchmark.
Closed end funds are similar to ETFs in that they are traded on stock exchanges but are actively managed and investors can sometimes pick up a bargain when the funds are trading at a deep discount to the underlying assets owned by the fund.
Despite global trends showing a greater propensity towards dispensing with portfolio managers, or “passive indexing” in the UAE, demand for active management has actually increased, according to Emirates NBD.
The Dubai-based bank announced in December that it had partnered up with Jupiter Fund Management to offer clients access to funds that invest in global markets. Jupiter is well known in the world of fund management world for its Merlin line-up of funds that invest in other funds.
“There’s always going to be a place for passive investment and it’s become more to the fore in the past three or four years, and absolutely has a place in any portfolio,” says David Marshall, a senior executive officer at Emirates NBD Asset Management.
“What we believe fundamentally is that active management has a place, providing it adds something above benchmark, net of fees. Thankfully a track record is more important than my words alone.”