moneyland.ch: You are one of the first Swiss asset managers to work entirely with ETFs. What motivated you to set this precedent?
Alex Hinder: Having formerly headed the funds management department at a major Swiss bank, I had first-hand experience with the difficulties faced by active fund managers in superseding their benchmarks. At the same time, we also managed indexed mandates for large institutional clients and witnessed the benefits of these investment vehicles.
The launching of ETFs has allowed private investors to apply the same cost-effective index funds to their own investment strategies. Additionally, I always wanted to build an asset management company based on my own ideas and free from conflicts of interest.
What are the main benefits of ETFs over actively-managed funds?
Numerous studies have proven that over the long term, only a small portion of actively-managed investment funds actually perform better than market indexes. Unfortunately, there is no fail proof way of identifying these “winners” ahead of the fact.
The high costs of actively-managed funds are their biggest downside: Even the best portfolio managers struggle to beat the index when they have to deal with fees of 2% per year.
For me, asset management based on cost-effective ETFs was the logical alternative because they follow investment categories directly. In addition to having low administrational fees, ETFs are also completely transparent, have high liquidity and are widely diversified.
Even Warren Buffett has recommended to his trustees that, in the event of his death, 90% of his wealth should be invested in ETFs.
An estimate by ETF Ambassadors indicates that, in spite of the benefits, only around 7% of Swiss savers invest in ETFs, while 14% still maintain conventional investment funds in their portfolios. Why are actively-managed funds still predominant?
Because many investors have limited knowledge about financial instruments, many still turn to their banking consultant for answers to their investment questions. Banks have little reason to sell affordable index-based products to their customers, and usually recommend actively-managed funds which have a high margin.
A study showed that half of all survey participants do not even know what an ETF is. Investment funds have been around for longer, and are therefore better-known among investors. In the U.S., where many savers manage their own investments and bank consultants play a less dominant role, index funds are extremely popular.
Even passive investment strategies have an active element in that asset allocation involves actively finding the right market, sectors and ETF products. Are there any criteria for optimal asset allocation?
We base asset allocations primarily on the arrangement of individual markets within a world market portfolio, using a modular structure. Our 44 different modules cover all important markets in the bond, stock, real estate, commodity and currency sectors.
A broad diversification of different types of investments is of crucial importance. Individual asset allocation is carried out through a combination of modules, based on each investor’s personal risk profile. The higher the risk tolerance and the greater the risk capacity, the higher the proportion of high-risk investments which can be included.
What are your recommendations for asset allocation at this point in time?
At this point, we lean towards long-term strategic asset allocation in stocks and bonds. We favor European stock exchanges, while reducing investment in U.S. stock exchanges due to their inflated valuations.
In the bond sector, we have opted for less rate-sensitive alternatives like senior loans, insurance-based bonds and CoCo bonds. We don’t include government bonds at all, because the historically low yields have made cash more attractive. We pulled out of commodities a long time ago.
The current investment environment makes investing without taking on too much risk a real challenge. However, you must not allow low interest rates to drive you into making high-risk investments.
What criteria should you follow when choosing the right ETF?
As a first step, you should always decide on a long-term investment strategy based on your individual needs. This will determine 90% of your portfolio’s long-term performance. A further step is choosing the indexes which most closely represent current investment categories.
Only after taking those steps should you look into suitable ETFs. Unless you have experience analyzing ETFs on a regular basis, filtering the vast number of suitable funds is a difficult process.
The following factors should be taken into consideration during the ETF selection process: Costs, taxes, index replication methods, fund volumes, bid-ask spreads and historical performance. In our research, we make use of a monitoring system with which we track the performance across every investment category for ETFs which we consider to be relevant. This allows us to evaluate ETFs on a daily basis.
What’s the most you should pay for an ETF?
The costs of an ETF depend primarily on which investment category you choose to invest in. ETFs based on government bonds are some of the most affordable products traded on the Swiss stock market, with annual fees equal to around 0.15% of the ETF’s value. ETFs based on indexes of stock exchanges in emerging economies are the most expensive, with administrative fees of 0.5% to 0.6%.
The more complex the index used for an ETF, the more expensive the ETF will be. When choosing ETFs, however, we do not focus on the ETF fee alone, because this does accurately reflect all costs. What is more important is comparing the historical performance of various ETFs. Doing so makes it clear that the lowest-cost ETFs are not always the best investment choice.
Are there any specific ETF providers which you recommend or avoid?
We favor large ETF providers like iShares, UBS, DB X-trackers, Lyxor, SPDR Exchange Traded Funds and Vanguard. These providers offer a broad product palette and high-volume funds. These ETFs have multiple market makers, which makes for narrow bid-ask spreads. The online platforms offered by major providers are also more professional and come with exceptional support.
ETFs can be purchased directly from online brokers. What added value does an ETF asset manager bring to investors?
Many investors do not know enough about ETFs to successfully choose the right investment strategy – and to regularly review this strategy – on their own. A person looking to build a house will usually hire an architect. Getting help from an expert when building a long-term investment strategy also makes a lot of sense.
We work with our clients to define their long-term investment strategy and to implement it using cost-efficient index-based investment vehicles. Currently, over 1000 ETFS from twenty different service providers are available on the Swiss stock market. It can be difficult for private investors to sort through the huge selection to find and combine the best ETFs for their needs.
The portfolio also needs to be monitored and the makeup of ETFs must be adjusted periodically to match the long-term strategy. As asset managers with index expertise, we stay on top of the latest trends in the ETF sector and closely track financial markets.
Our exhaustive research allows for accurate analysis of market trends and the careful selection of investment categories and ETFs. Our clients profit from active asset management by proven experts.
Online asset management using ETFs is a relatively new fintech trend. What is your opinion on robo advisors?
Robo-advisors could provide a low-cost alternative for those looking to make smaller investments. In my opinion though, many private customers prefer to have their wealth managed by a financial expert rather than a machine because it enables highly-customized strategy planning, investment management and monitoring.
Machines provide a cheap and efficient tool for highly-automated processes but this only provides limited advantages for the management of private wealth. The investment principles used by robo-advisors normally aren’t shown transparently. The problem is that although the investment principles which are programmed into this software may have worked well in the past, their continued effectiveness is highly debated.
Wealth is built through a great deal of hard work, so it is understandable that investors feel insecure about the idea of turning their hard-earned fortunes over to an anonymous, automated process.
What do you expect the Swiss ETF market to look like in 5 years?
Acceptance of ETFs will continue to grow. The tangible benefits of ETFs over other investment vehicles are too big to be ignored. A look at the development of ETFs in the U.S. market shows that we in Europe, and Switzerland in particular, still have some ways to go in this area.
The "family" bank model is still the definitive Swiss model and the influence of bank consultants is still high. But ETFs already hold a lot of significance for professional, institutional investors, and there is plenty of room for growth.
moneyland.ch report, August 20, 2015