Vanguard’s rise shows it is now time for UAE investors to have access low-cost funds

Vanguard attracted more inflows last year than the other 314 US mutual fund managers combined. Kristoffer Tripplaar / Alamy Stock Photo

UAE investors are calling on low-cost mutual fund managers such as Vanguard to enter the region to boost competition and drive down costs.

They say too many UAE residents continue to buy over-priced insurance-based investment plans and need cheaper and more flexible alternatives.

The entry of a major low-cost platform such as US-based Vanguard would shake up the UAE market, giving local investors more choice and lower charges.

Vanguard’s mutual funds attracted net inflows totalling about US$183 billion last year, more than the $151bn taken by the remaining 314 US fund managers combined, according to investment research company Morningstar.

Last week, Vanguard announced plans to launch a new investment platform in the UK offering its range of exchange-traded funds (ETF) direct to consumers, bypassing brokers and financial advisers. The new platform, Vanguard Investor, allows private investors to open an account with as little as £500 (Dh2,382) or a monthly investment of £100.

It will charge a flat administrative fee of 0.15 per cent capped at £375 a year, plus underlying ongoing fund charges averaging 0.14 per cent.

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Invest your time reading:

■ What the Central Bank is doing about mis-sold investment products

■ What it is about Vanguard's strategy that makes investors want it

■ What the UAE's Insurance Authority is doing to protect investors

■ Whether long-term savings products serve their customers or their sellers

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The credit analyst Moody’s has said this is “credit negative for incumbent players” such as Hargreaves Lansdown and Fidelity FundsNetwork, as it is likely to trigger a price war that would slash their profitability.

The UAE has a far smaller choice of fund platforms than the UK, with higher average charges so the potential disruption here would be much greater.

Vanguard told The National it is keen to explore new markets and although it currently does not plan to enter the Middle East, local investment experts have urged it to act.

Steve Cronin, the founder of WiseUAE.com, a non-profit community for expat investors, says Vanguard is one of the heroes of the personal finance world. “It has revolutionised the US mutual fund market and is now making waves in the UK. If it ever opened in the UAE, the local investment market would change forever.”

He said the company’s cheap, flexible and diversified products are what the UAE needs. “It would be the final nail in the coffin for fixed-term savings plans from insurance companies, and not a moment too soon.”

Mr Cronin added: “Vanguard’s platform is extremely cheap, its fees are transparent and it can give you exposure to stocks and bonds around the world. Most investors do not need anything else.”

Steve Downey, a chartered financial analyst at Holborn Group in the UAE, said consumers would welcome Vanguard’s arrival. “This would threaten the market’s high-cost, low-value players.”

Mr Downey said it would also raise awareness. “There are already investment platforms available to UAE residents but they do not have a large presence and many investors still aren’t aware of these options.”

The UAE-based adviser AES International currently runs a direct-to-consumer investment platform called the Index Account offering passive ETFs.

Although its charges of 1.25 per cent a year plus 0.50 per cent on the underlying funds are higher than Vanguards’, chief executive Sam Instone said AES would welcome the competition. “More choice is definitely needed to challenge the status quo of opaque, inflexible, expensive and outdated savings products.”

He said it would improve transparency and give retail investors better results. “We’d be delighted if Vanguard joined us in the UAE.”

Peter Hodgins, a partner at law firm Clyde & Co, said direct-to-consumer platforms are now showing “significant interest” in the UAE, either through an offshore operation or one based in the UAE.

He said both options would first need to be approved by the field’s regulator, the Emirates Securities and Commodities Authority (SCA).

Mr Hodgins, a specialist in the insurance sector, said passive investment funds are only suitable for DIY investors comfortable with making their own decisions. “All but the most experienced and sophisticated should still obtain professional financial advice.”

He also said investment platforms might be able to offer only a limited range of funds in the UAE because of the cost of registering with the SCA.

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