The search for yield continues

Josh Mahoney, market analyst at IG

Mr Mahoney says every investor faces exactly the same problem at the moment: safe havens such as cash and bonds don’t give you anything.

“That forces people to take a greater risk by investing in riskier assets such as the stock market or property,” he says.

He advises against shunning equities altogether. “Stocks are not necessarily a bad place to be. Central bankers are not suddenly going to stop the medicine and leave the patient to die.”

Mr Mahoney says the economy and stock market do not always move in lockstep. “The economy could go down the pan but stock markets would hold up because of easy monetary policy, which is all anybody cares most about these days.”

Even in today’s turbulent world, old investment mantras still apply. “Diversification is important, you need to spread your money between different companies, regions and markets. The best way to do this is through low-cost exchange traded funds (ETFs), which allow you to invest in hundreds of different stocks across a range of sectors,” Mr Mahoney says.

He suggests avoiding the banks, which remain mired in financial trouble almost a decade after the fin­ancial crisis, with low and negative interest rates squeezing margins.

The oil price appears to be recovering but, again, Mr Mahoney is cautious. “I do not expect crude to climb that much as US shale isn’t going anywhere, and if the price rises supply will increase.”

However, he expects further growth in the mining sector and recommends a spread of big-name stocks such as Anglo American, BHP Billiton, Glencore and Rio Tinto.

Mexico and Latin America could be an interesting play as well, he says. “The Mexican currency has been hit hard by Trump’s aggressive talk about immigration but if Clinton wins we could see a big reversal.”

Emerging markets have done well lately but Mr Mahoney warns of further headwinds. “They have a lot of US dollar-denominated debts and could struggle if the Fed starts raising interest rates, as servicing these debts will become more expensive.”

Christopher Dembik, head of macro analysis at Saxo Bank

Investors need to be selective in their search for yield, says Mr Dembik.

“Emerging markets are tempting but not all of them. My bet is that the Philippines peso, Mexican peso and Indian rupee will perform quite well in the coming months, due to improving domestic figures and the positive influence of the US economy, especially on Mexico.”

The US green energy sector could benefit if Hillary Clinton wins the presidential election, while the unmanned aerial vehicle drone surveillance and biometrics industries in France and in Germany are also promising, Mr Dembik says.

He recommends avoiding property in global cities across Canada, Switzerland, Australia, Singapore and the UK, where valuations have become too stretched. “Property prices in these areas can only go down in the coming years.”

But he tips Paris for further growth. “The Parisian real estate market has seen three housing bubbles burst over the past 30 years, but each time the drop in prices was very low, compared with, say, the UK or US. Low housing supply means that any drop is quite limited and prices quickly recover, which makes it very interesting for investors.”

Mr Dembik also calculates that traditional safe havens such as gold, the Japanese yen and US dollar will thrive. “Gold may still represent the best non-taxable investment in case the worldwide economy derails.”

But the gold price has fallen by about 4 per cent in the past 30 days to about US$1,262, as initial Brexit fears subside and the Fed cools on interest rate hikes. Even US electoral uncertainty has failed to excite gold bugs.​

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We live in an age of investment bubbles. Stock markets, property and bonds have all been blown to unnatural highs by years of monetary stimulus and rock-bottom interest rates.

Nobody knows how this will end but the signals from history are worrying: ultimately, bubbles always burst. And the bigger they are blown up beforehand, the messier the explosion. So how on earth do investors respond?

How bubbles form

Every time central bankers cut interest rates or announce yet another burst of virtual money printing, or quantitative easing (QE), asset prices surge as a result.

We live in a back-to-front world where bad economic news is greeted by yet another stock market surge, because it means the sugar rush of central banker stimulus will continue for that bit longer.

This means that despite – or because of – growing concerns over global economic growth, the US S&P500 and Nasdaq flew to all-time highs in August. Even more astonishingly, the UK’s benchmark FTSE 100 index of blue-chip stocks has blasted through 7,000 to near its all-time high, helped by a Bank of England stimulus after the shock Brexit result.

This is a remarkable turnaround after January’s traumatic start to the year, when global markets crashed on fears of a Chinese meltdown. Many markets are up by almost 30 per cent since those early-year lows.

Yet this is the bull market that nobody trusts or loves, because it appears to have been built on false monetary foundations.

Josh Mahoney, a market analyst at the global online trading company IG, which has offices in Dubai, says that most investors suspect the stock market has been driven far beyond its natural level by easy monetary policy. “Share prices have looked artificially high for a few years but they keep going up. We expect them to continue rising into 2017 as well,” he says.

The European Central Bank, Bank of England and Bank of Japan are all pursuing easy money policies, launching fresh rounds of QE and cutting interest rates even lower, with rates now negative in the euro zone, Switzerland and Japan. “There is no sign of a rate increase anywhere in the world aside from the US,” Mr Mahoney says.

The US Federal Reserve was supposed to hike rates at least four times this year but so far hasn’t moved once. Even if the Fed does increase rates by 0.25 per cent in November or December, they will remain astonishingly low by his­toric measurements.

Stocks and shares are not the only asset class that has been driven to new highs by easy money.

Global property markets continue to spiral, with urban house prices across 150 key cities rising at 5.5 per cent in the year to June, their fastest rate for more than two years, according to research from Knight Frank.

More than 30 cities posted double-­digit growth, including Beijing, Shanghai, Budapest, Vancouver, Istanbul, Amsterdam, Auckland, Seattle, London and Ahmedabad.

Kate Everett-Allen, a partner for international residential research at Knight Frank, says China is growing fastest. “The average annual rate of growth for the top 10 performing Chinese cities was 22 per cent in the year to June, according to China’s National Bureau of Statistics. One year earlier the comparable figure was minus 1.1 per cent.”

China’s debt is growing faster than its economy and the Japanese bank Nomura recently said it now totals almost 212 trillion yuan (Dh115.54tn) or 309 per cent of GDP, up from 78 per cent in 2007.

Markus Rodlauer, the deputy director of the IMF’s Asia-Pacific department, has warned that the country is flirting with “financial calamity”.

“The level of financial and corporate debt and the complexity of the financial system and rapid growth in shadow banking is on an unsustainable path,” he says.

Globally, debt has hit a record high of $152tn, weighing down economic growth and risking stagnation or even recession, the IMF says.

Yet the banking system remains fragile, notably stricken Deutsche Bank, which has an unfathomable $47tn derivatives book.

Brexit, growing trade protectionism, Vladimir Putin’s mischief-making and the prospect of a Donald Trump presidency add a layer of political uncertainty as well.

The storm may eventually break, the problem is that nobody knows when.

The best strategy

Simply running for cover isn’t an option, as nobody knows when the bubble will burst.

In December 1996, for example, Alan Greenspan, then the chairman of the US Federal Reserve, made his famous “irrational ­exuberance speech”, warning that stock markets might be overvalued.

“The S&P500 dipped a little on that speech and then peaked nearly four years later after rising more than 140 per cent. Trying to predict short-term stock market movements is a mug’s game,” says Guy Stephens, the managing director at advisers Rowan Dartington Signature.

Ursula Marchioni, the chief strategist at the specialist exchange traded fund (ETF) manager iShares Emea, says that despite the recent spike in volatility, particularly for foreign exchange and commodities, investors are still happy to accept risk. “This is mostly attributable to the Federal Reserve holding rates and to marginal changes from the Bank of Japan’s purchase programme.”

Monetary stimulus has also helped to revive emerging markets, with investor inflows now at their highest since 2012. “The emerging markets asset rally could have more room to go,” Ms Marchioni says.

But she warns that volatility is likely to increase in the final run-up to the US election.

Trend isn’t your friend

Christopher Dembik, the head of macro analysis at Saxo Bank, says prolonged low interest rates have created speculative bubbles in the technology, internet and biotechnology sectors.

“It is best to avoid ‘trendy investments’ because sooner or later they will certainly result in major losses. One example is Twitter: it has changed the way people communicate and reinvented the media industry, but it is clearly not profitable enough.”

Another problem with cheap money is that it keeps many companies alive, whereas under normal credit conditions they would have gone bankrupt or been bought out a long time ago, Mr Dembik says.

Investing in the age of bubbles is tricky but there is no point in running away from financial markets, he says. “The only solution is to find a balance between growth and safety. There will be a new global crisis in the coming years but for now the situation is under control, thanks to the actions of central banks, who have become key market players in the US, Japan and Europe.”

This makes markets surprisingly safe because central banks are buying up a growing stock of the world’s bonds and shares and “will never commit hara-kiri” by allowing major losses. “They will be inclined to support financials markets well beyond 2020, by keeping interest rates low or buying further assets in the market.”

A balanced view

Eoin Murray, the head of investments at Hermes Investment Management, says today’s era of low natural interest rates is likely to continue for the next decade and beyond, squeezing the returns on assets such as equities and bonds.

“Long-term investors need to make a radical response: go for growth. This means substantially reducing exposures to low or negative-yielding bonds in favour of assets with strong prospects of generating positive real returns.”

This could mean investing in higher-risk, higher-growth sectors such as smaller companies or commodities and high-yielding stocks for income.

Others are more sanguine, including Tom Stevenson, the investment director for personal investing at global fund manager Fidelity International, who questions whether we are in a bubble at all. “The US may now look quite fully valued but this is not widespread. Japanese and European stock markets are not expensive and there are even opportunities in high-grade corporate bonds, although government bonds offer minimal returns.”

Even if the bubble does burst, solid, established, global companies should still emerge relatively unscathed. “Today, an investor can still find good investment opportunities in dividend paying equity income stocks, commercial property and in parts of the bond market. Selectivity and a disciplined approach are key to avoiding the overblown areas of the market,” Mr Stephens.

Vaqar Zuberi, the senior portfolio manager for alternative investments at Mirabaud Asset Management, expects further volatility in the years ahead.

“Central banks worldwide have injected unprecedented levels of liquidity in global markets. This abundance of liquidity has caused absolute and relative levels of mispricings across asset classes. As the Federal Reserve moves towards normalising monetary policy, volatility in asset price levels should materially increase.”

Mr Zuberi says these are attractive conditions for hedge fund managers, who can use price volatility to buy or short various assets and securities, including foreign exchange, interest rates and equities.

Hedge fund managers may be able to take advantage but ordinary investors will want to approach with greater caution. However, that doesn’t mean you should leave all your money under the mattress, or in a zero interest savings account. You have to take risks to get any kind of return these days.

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Bitcoin: to invest or not?

In another volatile year for global currencies, one has stood head and shoulders above the rest.

It isn’t a traditional currency such as the US dollar, Japanese yen and certainly not the British pound.

In fact, this year’s big winner isn’t a currency at all in the traditional sense, but a digital currency, otherwise known as a cryptocurrency – the Bitcoin.

Bitcoin began the year priced at around US$430. By October 12, the price had risen to $641, a rise of almost 50 per cent.

This is no flash in the virtual pan. In January 2011, you could buy a Bitcoin for just 25 cents. Growth since then has been a spellbinding 2,564 per cent, reaping large rewards for early adopters.

That isn’t bad for a paperless currency that exists only on computers, with none of the traditional underpinnings and the security of a state, government, central bank or regulatory authority.

No wonder ordinary investors have been sitting up and taking notice. Is this something you should be investing in?

Before you even consider investing in Bitcoin or any other digital currencies that have followed in its wake, such as Litecoin, Namecoin and Ethereum, you have to understand what it is and how it works.

What is Bitcoin?

It is a decentralised digital currency created by a small group of hackers and developers in 2008. Their identity largely remains unknown. It is an open-source software that no one person actually controls.

The coins are made by computers solving a series of complex maths problems, with so-called Bitcoin “miners” using their computers to make coins and record transactions.

Users trade Bitcoin on exchanges such as San Francisco-based Coinbase, with all transactions recorded on a public ledger, called the blockchain.

A key feature of Bitcoin is that it has a finite supply of 21 million coins, of which more than 15 million are now in circulation.

Its growing army of supporters say this limited supply means its value will inevitably rise over time, with some claiming the price could hit $10,000 a coin. If correct, this could make Bitcoin a fabulously rewarding investment, but there are no guarantees.

Fans also claim that Bitcoin is inherently more stable than government-backed “fiat” currencies that can be devalued by central banks printing money, as we have seen with quantitative easing.

Obi Nwosu, managing director of London-based Bitcoin dealing exchange Coinfloor, says investors believe Bitcoin is the most perfect form of money ever invented, because it is portable, divisible, durable and scarce. “Therefore, in time more people will come to use it over less perfect alternatives, unless a sufficiently superior alternative comes along.”

The investment case

Bitcoin has two practical uses. The first is as a global online payment method, which allows expats to send money home faster and more cheaply than by using their bank or a conventional money transfer service.

A growing number of businesses now accept Bitcoin, including Tesla Motors, Virgin Galactic and Dell, as well as The Pizza Guys restaurant in Dubai, while Umbrellab launched Dubai’s first Bitcoin ATM in 2014.

Bitcoin’s other key attraction is as a long-term investment, which you buy and hold in the hope that its value will increase dramatically over time. Early adopters have been well rewarded, but you are effectively speculating on future price movements and must brace yourself for plenty of volatility.

For example, while Bitcoin peaked at more than $1,000 in 2013 the price soon trailed downwards to as low as $225, hurting those who bought at the very top of the market. It has recovered over the last 18 months but the volatility continues, helped by a couple of high-profile hacking scandals.

In August, for example, almost 120,000 Bitcoins worth around $78 million were stolen from Hong Kong-based Bitfinex, one of the most popular cryptocurrency exchanges. When the news broke, Bitcoin fell 20 per cent as panicked investors sold up, although it has picked up since.

Mr Nwosu says investors should put some of their money into Bitcoin as part of a balanced portfolio. “It has had extremely good returns, outperforming all other world currencies for all but one of the last five years,” he says. “Some consider it digital gold.”

Lex Deak, chief executive of alternative investment aggregator Off3r, says investing in Bitcoin isn’t for the fainthearted. “You should only invest a small proportion of your money and be prepared for massive swings in value.”

Buyers shouldn’t treat it as a get-rich-quick scheme and must be aware of the risks. “You could double your money within a year, but you could easily lose it all,” Mr Deak says.

Dave Hrycyszyn, of digital agency Head, which advises companies on new technologies, says the lack of regulation appeals to some, but also means it has none of the stability mechanisms typically associated with a currency, which can make it volatile.

Bitcoin is also an anonymous way to make large cross-border money transfers, so has inevitably become linked to illegal goods and services. The first people heard of it was when it was used on the online black market site Silk Road, known as a platform for selling illegal drugs.

However, Bitcoin cannot be blamed for that outcome any more than the US dollar can be blamed for drug dealing.

How to buy it?

The currency can be bought via online exchanges and platforms, with an increasing number of UAE options, notably BitOasis, which allows you to buy via bank transfer in the UAE, Qatar, Kuwait and Bahrain.

You can buy fractions or “bits” instead of a whole Bitcoin, with investment from as little as $10 on some sites.

Globally, there are dozens of online Bitcoin exchanges and brokers, including Coinbase, Poloniex and LocalBitcoins in the US, Coinfloor and CoinCorner in the UK, Vaultoro in Switzerland and Coinhouse in France.

Transaction fees vary according to the exchange or broker, but typically range from 0.2 to 1 per cent of the currency bought, plus bank transaction charges. Fees of up to 1 per cent can apply on sales.

You store your Bitcoins in a “digital wallet”, either in the cloud or on computers, which can be linked to your bank account. You must be sure you can trust the provider, because if hackers breach its security measures, the Bitcoin could be stolen and your chances of compensation are slim.

Typically, you can pay by bank transfer, mobile payments or with a Visa or MasterCard, or at Bitcoin ATMs such as one based at Dubai Media City.

Ola Doudin, the Jordanian founder of Dubai-based broker exchange BitOasis, says UAE residents with local bank accounts can sign up to its platform and buy vouchers to exchange for the digital currency. “We have Bitcoin and are looking to add Ethereum and other digital assets soon. Investors can safely store their assets with our secure multisig wallet security and we are also looking to provide insurance and other safeguards in future.”

Ms Doudin says the Bitcoin technology and network is itself secure but the exchanges where you hold your coins can be vulnerable so you need to find one with strong security measures. “We always incorporate the latest security policies to make sure our users are well protected.”

Bitcoin has been a successful investment for Ms Doudin, who suggests the price is now stabilising.

Sceptical voices

In September, the Swift Institute published a new research paper saying that Bitcoin is unlikely to crowd out traditional fiat currencies such as the US dollar.

It predicted that it will mainly be used as a speculative investment rather than a medium of exchange.

It added that there is no correlation between Bitcoin and traditional asset classes such as stocks, bonds and commodities, either in normal times or in periods of financial turmoil.

Mr Hrycyszyn warns that Bitcoin may be superseded at some point. “As with all computer technology, something better will come along. When that happens, it’s going to collapse in value to near-zero, probably in a matter of hours or minutes, in a spectacular ball of flame. It has no support structure to prop it up, as a normal currency does.”

And it may have some limited uses, he adds. “As a weird short-term investment to bore people at parties? Maybe. As a long-term store of value that will see you through to retirement? Not a chance.”

Tarik Kaddoumi disagrees. He is a Bitcoin enthusiast and the co-founder of Umbrellab, a consultancy and software company that launched the UAE’s first Bitcoin ATM in Media City in 2014. “Bitcoin is an attractive investment vehicle, but as with any investment offering high returns, it comes with high risks,” he says.

“So you need to look closely at it and learn how the price is affected by movements in the market, for example, acceptance by a large company, a blockade by a bank, or a fiat currency crisis.”

Bitcoin has attracted its share of visionaries and sceptics. If you are tempted start with small amounts, and remember the old investment mantra that continues to apply to radical new ideas like this one: never put all your eggs in one basket, as Bitcoin is just a little bit risky.

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By their very nature, expats live transient lives. They may settle somewhere like the UAE for several years, but at some point they will be ready to move on.

Most could not say where they will be in the next five, 10 or 15 years, so why do so many lock themselves into inflexible 25-year savings plans? Frankly, this is the last thing they need to do.

Unfortunately the answer is simple: in most cases they have been badly advised by unregulated, commission-hungry financial advisers.

It is perhaps the most common financial trap set for newbie expats. The pit is costly to fall into, and even more expensive to escape, if escape is possible.

What makes it worse is that committing to spend over a third of your life paying, say, US$1,000 a month into an investment plan is completely unnecessary. Instead, you can set up a low-cost, flexible portfolio of funds that you can change any time, and with no penalties for doing so, either on a do-it-yourself basis or using a reputable adviser. Twenty-five years can feel like a life sentence, so here is the alternative:

Avoid long-term plans

Many sign up to a 25-year savings plan without fully understanding what they are getting into.

Chartered financial planner Stuart Ritchie of AES International, a UK and DFSA-regulated firm based in Dubai, says the schemes are “horribly outdated” and banned in the UK. “The danger is that too few expats understand the rigid nature of the contract they are signing. You are locked into an extremely long-term plan when you have no idea what the future holds for you.”

Worse, these plans are “front-end loaded”, which means the adviser gets a fat chunk of commission straight after selling a plan. “Say you commit to paying in $2,000 a month over 25 years – that’s $600,000 in total,” says Mr Ritchie. “The insurance company [the creators of these financial products] may reward the adviser with commission of up to 4 per cent of that sum, which in this case is a hefty $24,000 on the very first day you make a contribution.”

The insurer needs to recoup this money from your future premiums so imposes heavy penalties for customers who realise their error and start plotting to escape after just a few years.

And most do quickly: analysts claim that savers stick with their plans for just 7.6 years on average.

Mr Ritchie says barely one in 20 run their plan for the full 25-year term, the vast majority falling by the wayside. “Investing, say, $1,000 or $2,000 a month may be affordable when you are living tax-free in the UAE, but it can be a real burden when you move on.”

Worse, he says the penalties for breaking that contract are severe. “Typically, if you dump your plan after one year, you will lose all of your money. Penalties are stiff and even people who run their plan for five, 10 years or longer will get little back if they cash in early.”

For those who do continue to term, investment returns can often be very disappointing. That is because plans also have expensive product charges, of between 4 and 6 per cent a year, plus another 2 or 3 per cent for the underlying funds, Mr Ritchie warns. “This means your money needs to grow by between 6 and 8 per cent a year just to break even.”

This level of return is increasingly hard to secure in today’s low-growth world, so the value of your pot may be shrinking.

Getting out if you are already in

Breaking out is expensive but may be a price worth paying, especially in the early years, Mr Ritchie says. “If you have been running your plan for 15 or 20 years, then you should probably continue to term if you can afford the monthly payments. Others should consider heading for the exit. It can sometimes be more cost-effective to wave goodbye to years of saving and tens of thousands of dollars than to remain locked into an inflexible plan with poor performing funds and sky-high charges.”

Damian Hitchen, director at UAE-based investment platform Swissquote, says most long-term savings plans do have a facility allowing you to exit the plan before its term or policy date. He says a reputable adviser can obtain a plan surrender value and provide a transparent breakdown of options. If you want to go ahead and leave, then you will need to complete an encashment form.

“Ask your adviser or the product provider when exit fees cease, as it may be more sensible to keep the plan for a little longer, to avoid these expensive charges,” he adds.

What’s the alternative?

If you are confident making investment decisions yourself, you can set up your own portfolio of funds far more cheaply using a low-cost online investment platform available to those in the UAE.

These include Luxembourg-based offshore broker TD Direct Investing International, US-based Interactive Brokers and Danish private bank SaxoTraderGO.

For example, TD Direct offers both low-cost passive funds known as exchange traded funds (ETFs), with no initial charges on more than 900 funds, while Saxo focuses more on shares, ETFs, futures, bonds and foreign exchange, although it doesn’t cover mutual funds.

Charging structures vary, but you typically pay an underlying platform charge of between $100 to $150 a year, plus trading charges starting at around $15 on stocks, and fund charges, plus annual charges of as low as 0.5 per cent a year for ETFs.

Another option is the UAE-based online trading platform Swissquote, which offers a local office and relationship managers in the Dubai International Financial Centre.

It allows private investors to open a multifunctional account which includes an offshore online bank account with a multi-asset class trading platform.

“We offer stocks and shares, ETFs, bonds, mutual funds, options, futures and foreign exchange across more than 60 global markets,” says Swissquote’s Mr Hitchen, adding that most platforms work on an “execution-only” model without advice and give you convenient online access and low pricing.

“Typically fees and charges are much lower than from traditional ‘packaged products’ such as the 25-year savings plans. This gives you a head start as your investments are not 3 to 6 per cent down on day one purely due to product charges.”

Those less knowledgeable but still keen to avoid the 25-year plan trap, can choose from a new breed of regulated advisers, which charge upfront fees rather than commission.

Companies such as AES International and Killik & Co offer a range of individual stocks, ETFs, mutual funds and other financial instruments.

They publish their fee structures online, so you know exactly what you will be paying. But it will work out far more expensive than taking the DIY approach.

AES, for example, charges from 1.25 per cent of your portfolio’s value for investment advice; somebody with a $250,000 portfolio would pay $3,125 a year. Annual fees start at 1.75 per cent for full financial planning.

Killik charges 1.25 per cent on the first £250,000 held in a managed portfolio of funds, with a minimum charge of £250 a quarter. This falls the more you hold, to a minimum of 0.5 per cent on sums over £750,000.

However, as Mr Hitchen adds: “In both developed markets and the Gulf, private investors are increasingly making investment decisions for themselves.”

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Steve Cronin, founder of Wise (wiseuae.com) a non-profit organisation to help UAE expats invest their wealth, is campaigning to alert people to the dangers posed by 25-year investment plans.

He says expats would do far better building a small portfolio of low-cost passive funds that track key stock market indexes because they give you access to a diversified range of stocks and their low costs boost your overall investment return.

Funds in your portfolio should vary according to your attitude to risk and the investments you already hold, Mr Cronin says.

He has produced four sample portfolios for The National, each containing a balanced blend of five different funds covering asset classes and markets. The funds listed below boast total annual charges, as measured by the total expense ratio (TER) of as low as 0.2 per cent a year.

1. The Abra – slow, steady and cautious

20% inflation-linked government bonds (global): iShares Global Inflation-Linked Government Bond ETF USD (IGIL). Total expense ratio (TER): 0.25%

20% government bonds (global): iShares Global AAA-AA Government Bond ETF USD (IAAA). TER: 0.2%

20% short-term government bonds (US): iShares $ Treasury Bond 1-3yr ETF USD (CSBGU3). TER: 0.2%

20% corporate bonds (global): iShares Global Corporate Bond ETF USD (CORP 0.2%)

20% equities (global): HSBC MSCI World ETF USD (HMWO). TER: 0.15%

2. The Reliable Brunch – a conservative choice with a bit of everything

25% cash: in a long-term savings account,

25% long-term bonds: iShares $ Treasury Bond 20+ year ETF USD (IDTL). TER: 0.2%

25% equities (global): Vanguard FTSE All-World ETF USD (VWRD). TER: 0.25%

25% gold: iShares Physical Gold ETC USD (SGLN). TER: 0.25%

3. The Desert Safari – a great adventure that still gets you home safely

20% government bonds (global): iShares Global Government Bond ETF USD (IGLO). TER: 0.2%

20% corporate bonds (global): iShares $ Short Duration Corporate Bond ETF USD (SDIG). TER: 0.2%

50% equities (developed): Vanguard FTSE Developed World ETF USD (VDEV). TER: 0.18%

10% equities (emerging): Vanguard FTSE Emerging Markets ETF USD (VDEM). TER: 0.25%

4. The Supercar Roller Coaster – exhilarating but not for the over-50s

20% corporate bonds (global): iShares $ Short Duration Corporate Bond ETF USD (SDIG). TER: 0.2%

30% equities (developed): Vanguard FTSE Developed World ETF USD (VDEV). TER: 0.18%

30% value equities (global): Vanguard Global Value Factor ETF Shares USD (VDVA). TER: 0.22%

10% equities (emerging): Vanguard FTSE Emerging Markets ETF USD (VDEM). TER: 0.25%

10% small cap equities (US): iShares MSCI USA Small Cap ETF (CUSS). TER: 0.43%

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UAE expat stuck with a poor investment product

British expat Adam Loosley was talked into investing in a 25-year investment plan after contacting a UAE financial advisory firm about writing a will in March 2014. “After my initial request, it all just snowballed,” he says.

Mr Loosley, who moved to the UAE in 2007 and works as a project manager for an audiovisual company, was advised to set up a 25-year offshore savings plan.

Despite telling his adviser he wanted complete flexibility and transparency, he ended up with neither. “I was told it was similar to a pension and it seemed the right thing to do, but it wasn’t.”

Like so many expats before him, the 37-year-old had locked himself it into a poor-value product that would run for decades. “A friend pointed out that I had made a huge mistake and when I took a closer look at the paperwork I was horrified. My signature was above all the elements that make these plans inflexible and expensive but at no point were they highlighted.”

His friend suggested that he contact the advisory firm AES International for help. He has been advised to continue paying into the plan because the charges for cancelling are too punitive and he has taken on higher risk options to build up the fund’s value at a faster pace.

“I technically need to pay in for 25 years, but I hope I can stop paying in once the fund’s value is greater than the fees,” says Mr Loosley, who has since also invested a lump sum within a low-cost online investment platform and opened an offshore account. “I was cynical about advisory firms but still fell into the 25-year trap. I hope others can avoid making the same mistakes.”

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Passive investment is the way to go

With most things in life it pays to be active, but that is not always the case when it comes to your investments.

So-called passive investing shows that being a little laid- back is often the route to long-term success.

Passive investing involves buying funds that tracks every movement of a chosen stock market or commodity index, regardless of whether it goes up or down.

There is no expensive fund manager picking stocks or making calls on future economic trends and share price movements, in a desperate bid to beat the market. Instead, investors get whatever the index gives them, minus a tiny annual management fee.

Here’s the shocking thing: passive funds typically beat those hard-working active fund managers three times out of four, and often more. So does it really pay to display passive tendencies?

What is passive investing?

Traditional mutual funds employ a manager backed by a large research team to help them decide which regions and markets to invest in, and what stocks to buy and sell, in a bid to generate greater wealth for investors.

Embarrassingly, it rarely works out that way, with survey after survey showing that 75 per cent of the time they let their investors down.

Over the past 20 years, active funds investing in US large cap stocks beat the index just one year in four, according to fund website Morningstar.

Analysis of 25,000 funds compiled by S&P Dow Jones Indices found that over the decade to January 1 2016, some 73 per cent of active UK funds in the UK and a whopping 86 per cent in the euro zone failed to beat their benchmarks.

2016 has been a particularly poor year, with just 6 per cent of US growth funds beating the US S&P 500 index in the first three months, according to Bank of America Merrill Lynch.

This isn’t just down to incompetence: most funds will hold some money in cash, which can be a drag on performance.

Or perhaps fund managers are trying to do the impossible: Princeton economist Burton Malkiel’s book A Random Walk Down Wall Street suggests share prices move completely at random, making stock markets entirely unpredictable and as such, unbeatable on a consistent basis.

The main reason actively managed funds underperform is down to charges. Employing supposedly clever fund managers and banks of researchers costs money and this is passed on to investors in the shape of pricey initial and annual fees (on top of those charged by your adviser).

Charges can be as high as 5 per cent of the money you initially invest, followed by an underlying 1.5 per cent of your fund’s ­value year after year. That may not sound much but it can steadily erode your long-term returns.

Say you invest in a fund with an annual charge of 1.5 per cent that grew 3 per cent over the past 12 months: half your gains will have gone in charges. Even if it grew a more respectable 6 per cent you will still have handed over a quarter of your profits.

By contrast, passive funds have zero initial charges and annual fees should never top 0.75 per cent, while some charge as little as 0.07 per cent.

Over the long term, this can make a massive difference. Say you invest $50,000 in a fund charging 1.5 per cent a year for 10 years, and that fund grows at 5 per cent a year.

After a decade, your fund will be worth $70,530. However, if you had invested the same sum in a cheap tracker that charges just 0.5 per cent a year and grew at the same rate your money would be worth £77,650 (Dh380,000), or $7,120 more. That is equivalent to an extra 10 per cent.

Over longer periods, the difference is more marked. After 20 years you would have £120,585 with the low-cost tracker, $21,096 more, and after 30 years the tracker would give you £187,266, which is $46,927 more than the active fund. That extra 1 per cent in annual charges does disproportionate damage over time.

If your tracker charged just 0.07 per cent a year you would have $211,817 after 30 years, an incredible $71,478 more (and remember, you only invested $50,000 originally).

New figures show that low-cost tracker manager Vanguard has saved investors $175 billion in fees since it was founded in 1974, compared to the average expense ratio on active mutual funds.

Making tracks

The message is getting home to investors, who have been actively showing their appreciation for passive funds.

Exchange traded funds (ETFs), low-cost trackers that can be bought and sold like shares, attracted nearly $200 billion worth of new investment in 2015, while actively-managed funds suffered total outflows of $124 billion, according to research company EPFR Global.

This isn’t a blip, Morningstar says assets under management in passive funds have quadrupled since 2007.

The site runs a regular six-monthly Active/Passive Barometer comparing performance between the two fund philosophies and Ben Johnson, director of global ETF research, concluded in April that: “Actively managed funds have generally underperformed their passive counterparts, especially over longer time horizons”.

Active funds have also suffered higher “mortality rates”, which means they were more likely to be merged or closed over a 10-year period, while passive funds were typically more enduring. “The average dollar in passively managed funds typically outperformed the average dollar invested in actively managed funds,” Mr Johnson says.

That is a clear and damning statement for active fund managers, so why are they trailing the trackers?

Again, Mr Johnson’s report concludes that fees are the single biggest differentiator. “Fees matter. They are one of the only reliable predictors of success,” he says.

This does not of course mean that passive funds will always outperform trackers, but it does mean you should think carefully before choosing an active fund.

Passive aggressive

Globally, more than $5 trillion is now invested in almost 4,500 ETFs and Sam Instone, chief executive of Dubai-based independent financial advisers AES International, is a fan of their low cost and simple structures. “Investors choose them because they offer better performance and lower charges than actively managed investment fund alternatives.”

Mr Instone says too many expats in the UAE underestimate the effect of fees on their overall investment returns. “Worse, many fall victim to hidden fees, which can destroy performance altogether. They eat away any gains you are fortunate to make and in the vast majority of cases you are paying for funds that fall short.”

AES recommends ETFs for the majority of its clients. “The index funds we recommend beat 97 per cent of actively managed funds. And of those few active funds who do outperform, the majority recoup in fees any value they add, leaving little or nothing for the investor,” Mr Instone says.

The simplest way UAE investors can turn ETFs to their advantage is to track a major global index such as the US S&P 500 or FTSE 100. “These are simple and effective although they won’t track an index perfectly due to the costs of running the ETF. The iShares range is the most popular, with typically charges of between 0.07 and 0.50 per cent a year.”

Alternatively, you could invest in a balanced portfolio of passive funds designed to achieve a specific investment target.

Vanguard LifeStrategy, for example, offers low-cost fund portfolios with different objectives, for example, investing for income, conservative growth, moderate growth, and so on.

Fund manager BlackRock has a passive range of Managed Index Portfolios which offer growth, moderate or defensive strategies.

AES runs its own “White List” of recommended ETFs which include funds such as iShares MSCI World, which gives you global exposure, and further ­iShares funds targeting emerging markets, the Pacific, Japan, the S&P 500, FTSE 100, as well as funds tracking bond and property markets. You can also buy ETFs that track commodities, such as oil and gold.

Mr Instone says ETFs are typically created in two separate ways and it is important to note the difference.

Some are “synthetically” cre­ated with derivatives while others are “physically” backed with the underlying stocks, he says. “We only recommend physical ETFs as these are relatively less risky. During the 2008 financial crisis a lot of synthetic ETFs went bust when Lehman Brothers went bankrupt, as it was the counterparty to the derivatives.”

So check your own investment portfolio to see if it is full of underperforming active funds charging hefty fees. If it is then ask your adviser some serious questions. Don’t hang around, it may be time to get a lot more passive.

Mix and match

Tom Anderson, a regulated investment adviser at Killik & Co, which has offices in the UAE, charges a fee for advice rather than earning commission from fund managers so has no financial incentive to favour one fund type over the other. “I use both active and passive funds for different areas because each has its advantages and disadvantages.”

Mr Anderson uses ETF trackers to invest in major Western stock markets such as the US S& P 500, the EuroStoxx 600 and the UK’s FTSE 100. “It is very difficult for an analyst to find an undervalued opportunity in these markets as they are so heavily researched, so I use low-cost ETFs instead.”

Mr Anderson says trackers do have drawbacks, because they must buy whatever company is currently in their chosen index, regardless of its balance sheet or future prospects. “This means they may have to buy unattractive assets just because they fit the index criteria.”

The adviser says active funds are much more selective and can therefore be a superior way of targeting specialist sectors. “This might include areas like smaller companies, emerging markets or dividend-paying stocks. Some managers have an investment mandate to identify standout opportunities and outperform the index that an ETF can only track slavishly.”

Some of the best managers invest their own money into their funds, so their interests are closely aligned with yours, Mr Anderson adds. “Fees are higher but they do also offer the potential for outperformance, whereas by its very nature an ETF can never beat the market.”

Active funds may have a higher closure rate than ETFs but Mr Anderson argues there is good reason for this. “The unrelenting competition between active fund managers and competition from passive funds has led to a survival of the fittest, as managers have had to prove themselves over many years.”

By targeting proven winners you can back the handful of managers who beat passive funds, he adds.

Mr Anderson rates managers Terry Smith, who runs Fundsmith Equity; Crispin Odey, founder of Odey Asset Management, Jonathan Ruffer at Ruffer and Neil Woodford, who manages CF Woodford Equity Income. “They come with decades of experience and the flexibility to adjust as market conditions evolve – which they can do, very quickly – whereas an ETF is absolutely tied to the index it tracks,” says Mr Andersen.

Tom Stevenson, investment director at fund manager Fidelity International, argues that active management still has its advantages. “Active stock pickers can sort the wheat from the chaff, ensuring that not only the best quality investments make it into the fund but equally, avoiding any companies that are vulnerable in an unsettled market.”

Unfortunately, too many fund managers are closet “benchmark huggers”, which means they play safe (and keep their jobs) by quietly tracking the benchmark index rather than trying to beat it, while charging investors a hefty fee for the privilege. This is the type of “active” manager you should avoid, one who is essentially passive.

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What continued low interest rates mean for your finances

When central bankers around the world slashed interest rates to near zero after the financial crisis in 2008, everybody expected it to be a temporary measure.

Yet rather than lasting just a few months, low rates are still with us today and look set to remain low. Astonishingly, seven-and-a-half years after the great global interest rate cull they are still being slashed, with little sign of a reprieve.

The US Federal Reserve did take one tentative step in that direction with a single rate hike last December, but so far it hasn’t dared to repeat the experiment.

Elsewhere, central bankers have hacked at rates more than 55 times so far this year, with the Bank of England wielding the knife following Brexit. In Japan, Switzerland and the euro zone, interest rates are negative, something that would have been unthinkable a decade ago.

So what does that mean for our personal finance portfolios?

When the US Federal Reserve lifted rates to between 0.25 and 0.5 per cent in December, most analysts were predicting another four hikes in 2016, but so far there have been none.

Today, the most they expect is a single rate hike but many suspect the Fed will not even do this.

Josh Mahoney, market analyst at IG, which recently opened offices in ­Dubai, says minutes from the latest Federal Open Market Committee (FOMC) meeting show members remain split. “Markets have taken this as a sign that there may not be a rate hike in the remainder of this year.”

John Hardy, head of FX strategy at Saxo Bank, says it is increasingly likely the Fed will do nothing, while other central banks are easing as fast as they can. “The Bank of England has cut rates and restarted quantitative easing [QE], the European Central Bank may announce new measures in September, and Japan is also doing fiscal stimulus.”

Mr Hardy says this is a sign that the Fed is finally capitulating and won’t raise rates beyond one symbolic hike.

Sam Carleton, chartered investment manager at Arbuthnot Latham & Co, which advises expats in the UAE, expects interest rate expectations to remain “muted” for the foreseeable future. “As we analyse central bank policy across the world the overwhelming rhetoric supports further accommodative monetary policy.”

Low inflation is a key factor, with US consumer inflation running at just 0.9 per cent, and prices rising just 0.6 per cent in the UK and a meagre 0.2 per cent in the euro zone.

Traditionally, low interest rates would fuel inflation but companies around the world are reluctant to dip into their record cash piles because they lack confidence in future growth prospects. Cheap exports from China are also fuelling deflation, as is the country’s shrinking appetite for oil and other commodities.

Mr Carleton points out that US consumers, like many around the world, remain highly indebted and would be vulnerable to rising rates. Emerging markets that have borrowed heavily in US dollars would also be hit hard.

The world, it seems, cannot afford an interest rate hike. Analysts have unwittingly fallen into the habit of predicting rate hikes two or three years down the road and today they are talking about 2019 or 2020. There is a fair chance they will be proven wrong again.

Instead, the world seems to be following the lead set by Japan, where interest rates have stayed near zero for more than two decades, and counting.

Low interest rates are a mortal blow for cash, savaging the returns on savings and forcing people to invest in riskier stocks and shares instead.

It is now almost impossible to get more than a fraction of a percentage point on your savings. Even beating the current UAE inflation rate of running at 1.76 per cent in the year to June is proving tricky, eroding the value of savers’ money in real terms.

Mr Carleton says the danger is that share prices are now at inflated valuations, and current political risks, including Brexit and a Donald Trump presidency, will keep markets volatile well into next year.

Instead of investing directly into equities Mr Carleton favours targeted absolute return funds that invest in a blend of assets, including shares, cash, bonds, pro­perty and complex financial instruments such as derivatives, in a bid to provide a positive return even when markets are negative.

Adrian Lowcock, investment director at Architas in London, says absolute return funds can help to protect your capital while beating the returns on cash. “However, the sector has a reputation for high fees and complex investment strategies which are not clearly explained to individual investors, so there are no guarantees.”

Mr Lowcock adds that CF Odey Absolute Return is the top performing fund in the sector in the five years to July 21, returning 99 per cent, according to figures from Trustnet.com. City Financial Absolute Equity follows with 85 per cent growth while Argonaut Absolute Return grew 50 per cent. Remember, past performance is no guarantee of fut­ure returns.

Darius McDermott, managing director of Chelsea Financial Services in London, names three more funds that should benefit from low interest rates and government stimulus.

He tips Evenlode Income, which invests primarily in the UK and US and has risen 115 per cent over the past five years, and Standard Life Investments Global Equity Income, which targets an international spread of companies and returned 100 per cent over five years.

Mr McDermott suggests balancing this with a corporate bond fund and tips MI TwentyFour Dynamic Bond, which returned 46 per cent over five years.

Corporate bond funds invest in IOUs issued by companies and give you a blend of income and capital growth.

Tom Anderson, regulated investment adviser at Killik & Co in Dubai, tips Invesco-Perpetual Corporate Bond and M&G Corporate Bond, which have both returned around 40 per cent over the past five years. “Bonds are less risky than stocks and shares, but they are expensive these days and far from risk free.”

Record low interest rates have forced more investors into dividend paying stocks, which are disproportionately listed on the London FTSE 100, which yields an average of 3.5 per cent, against just 2 per cent on the S&P 500 in the US.

Mr Anderson says you can invest in the FTSE 100 with a low-cost tracker or exchange traded fund (ETF) such as iShares FTSE 100 but yields are never guaranteed with top companies like oil giant Royal Dutch Shell struggling to afford their dividends.

Another option for income seekers is the ProShares S&P 500 Dividend Aristocrats ETF, which tracks top US companies that have increased their dividends for at least 25 consecutive years, and currently yields 2.48 per cent a year.

Sam Instone, chief executive of AES International in Dubai, says if interest rates remain low the effect could reshape the world.

Negative interest rates mean you effectively pay the bank to look after your money, and there may be other unexpected results. “There may come a time when banks stop passing on lower borrowing costs to customers for fear their business model will collapse.”

Another danger is that governments may be overzealous in their borrowing in a bid to bribe voters, storing up more debt, Mr Instone warns.

He says the only thing you can do is block out the “noise” and focus on your personal financial goals. “Even the professionals cannot say what will happen next with any accuracy so don’t hang on their every prediction.”

Invest in a balanced spread of assets that reflect your attitude to risk – shares, bonds, property and cash – and stick to it for the long term. “Don’t take fright and do something rash like piling everything into gold or emerging market bonds,” he urges.

Mr Instone adds that everybody should abide by the following four simple financial planning rules: “Stock markets will rise over the long term. Bonds are less volatile and offer important balance. Property can be excellent, especially if you want to live in it. Finally you should always have enough spare cash to keep you going for a few months if something goes wrong.”

Consider seeking advice from a qualified, regulated independent financial adviser or chartered financial planner. “They should have your best interests at heart, rather than trying to sell you products to earn commission,” Mr Instone adds.

Beating today’s low interest rates isn’t easy and the challenge will only inten­sify until rates finally start rising. Whenever that is.

The effect on property

More than seven years of low interest rates have encouraged property buyers to load up on cheap debt and chase prices higher, but this has left many vulnerable to higher borrowing costs or a crash.

Faisal Durrani, partner and head of research at property company Cluttons, says low interest rates signify a global economy that has failed to achieve escape velocity in the years since the fin­ancial crisis. “We continue to hit fresh bumps in the road in the form of the slowing Chinese economy, the collapse in oil prices and Brexit.”

Villa and apartment prices in Dubai and Abu Dhabi fell between 4 per cent and 6 per cent during the second quarter, compared to the same period last year, according to property consultants Cavendish Maxwell.

Mr Durrani says demand and transaction levels have been hit by falling oil prices, but this may be a good thing after years of record growth. “For Abu Dhabi, the effect is likely to linger for longer given the emirate’s higher reliance on hydrocarbon receipts, while in Dubai, the looming Expo 2020 is likely to spell a turnaround in the fortunes of the property market as the mega event draws nearer.”

Richard Bradstock, director for the Middle East, at property company IP Global, says safe haven property markets, including post-Brexit UK, continue to offer steady capital growth and regular yields. “Low interest rates are positive for property markets as this drives down borrowers’ costs.”

Mr Bradstock says they will continue to drive the UAE market, especially given low returns on other assets. “This should assist a move into a positive growth cycle in the latter half of the year.”

A global property crash remains unlikely while interest rates are low but almost inevitable if rates rise sharply. On current trends, that could be many years away.

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Which UAE credit card should you choose?

With more than 200 credit cards to choose from, UAE borrowers are spoilt for choice. Yet choice can also be confusing, especially given the different interest rates, introductory offers, rewards and cash back deals on the market. Find the right credit card for your spending, otherwise you risk high charges.

Check the APR

A credit card is great for short-term spending but it is an expensive way to borrow money over the longer run. Card issuers quote seemingly competitive rates of between 2.35 per cent and 3.25 per cent, but that is the monthly interest rate. When compounded up to the annual percentage rate (APR) these numbers soar to a whopping 32.15 per cent and 46.78 per cent respectively. Ambareen Musa, chief executive and founder of comparison site Souqalmal.com, warns of the dangers of reckless spending. “Credit cards offer great perks and rewards, but you only truly benefit if you pay your bills on time and avoid hefty interest repayments.”

Decide what benefits you want

If you are sure you will clear your credit card debt every single month, concentrate on the benefits it offers instead, says Jonathan Rawling, chief financial officer of comparison site compareit4me.com. “Credit card perks may include cash back, air miles, complimentary golf days, cinema tickets, free valet parking, prize draws, VIP airport lounge access and transfers.” Do not ignore the interest rate as you may end up paying it if you miss a monthly payment or run into financial problems.

Beware high credit limits

Think carefully when choosing the credit limit on your card, says Kunal Malani, head of customer value management, retail banking and wealth management at HSBC Bank Middle East. “A high credit limit may look attractive, but you should avoid a potential debt trap by choosing one that helps you stick to your budget.” Never treat your credit limit as a target. Beware, some banks extend credit limits without informing customers, which could lead to overspending.

Protect your credit status

Al Etihad Credit Bureau allows banks to check what personal loan and credit card debt applicants already have. Too much debt could hurt your credit score.

Check the annual fee

Some cards have no annual fees, others charge as much as Dh2,000 or more. Ms Musa says a higher fee may be worth paying if you get some juicy rewards in return.

Examine foreign exchange rates

Credit card issuers typically slap on extra charges for overseas use, ranging from 2.75 per cent to 3.50 per cent of any transaction, Ms Musa says. “If you’re a frequent traveller, pick one that charges lower foreign exchange fees, and higher rewards on international spend.”

Watch for introductory offers

Banks run periodic promotions on their prime credit cards. “Examples include bonus air miles when you sign up, bonus cashback, zero annual fee for the first year, complimentary gift vouchers and more,” Ms Musa says.

Do the sums on balance transfer cards

A number of UAE banks now allow you to transfer your existing card balance at 0 per cent interest for three to six months. “An interest-free period could be very useful for someone looking to transfer a considerable balance from their previous card,” says Ms Musa. However, you might have to pay an initial “processing fee” of around 2 per cent of your balance, followed by a monthly fee of up to 0.90 per cent for up to two years (equivalent to an APR of 11.35 per cent).

Consider Credit Shield

Credit Shield is designed to clear the balance on your card following death or serious illness, and can be bought for an extra monthly fee. The cost typically ranges from 0.5 per cent to 0.99 per cent of your outstanding balance, but some policies only offer limited cover. If you run a small card balance or have savings to clear your debt, you probably don’t need it. Beware though, some banks apply it automatically, so ask for it to be removed.

Terms and conditions

When evaluating rewards check: is there a minimum spend requirement? Is the cashback percentage attractive but the monthly redemption limit too low? Do the eligible spending categories include groceries and utilities? When do the air miles expire?

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