Strong pension, no problem? Maybe.

jamal-blogWe all recall last year’s demise of BHS and its failure to protect the company pension scheme.  Frequent news headlines report huge numbers where future pension liabilities exceed assets, and estimates of overall underfunded final salary (defined benefit, or DB) schemes are at 80 percent.

Years of low interest rates and increasing lifetimes have made it difficult for pension investment trustees and their actuaries to ensure that there’s enough in the pot to make good on pension promises.  DB schemes were originally designed for folks living 10 years into retirement – not 30.

It’s no wonder we worry about the ability of our companies to still be around when it comes time to draw our pensions.  And if a company goes bust, we have the PPF (Pension Protection Fund) in the UK, although there are limitations on that as well.

So your DB pension scheme’s not in deficit, life’s good? Not necessarily.

While many DB schemes (including all of the FTSE 100) have been closed to new employees for years, the cost of providing for existing members is still there and growing.  Increasingly, even well funded schemes are at this and concluding that changes must be made.

Marks & Spencer closed its scheme to new accruals from March 2017.  No additional benefits will continue to accrue to existing members – they’ll still get their pension, but future work won’t count.  Royal Mail made a similar announcement earlier this year, one that is likely to lead to a postal strike in the UK very soon. A company does not have to be in a situation like Tata Steel where the choice is closing the pension fund or closing the company.

34% of the FTSE 100 schemes are now closed to future accruals and the number is likely to rise. Some companies are rewriting other aspects of their schemes, such as making a “final salary” now a “career average earnings”.

There are a number of reasons for the large number of people transferring their pensions out of their company’s plan.  High transfer values (the multiple of an annual pension), wanting to take control of probably one’s largest asset and underfunding concerns may all play a part.  Considering a transfer out is a big decision and needs professional advice.  But uncertainty about changes to even strong plans is now adding another consideration to that decision.







Pamela Morgan CPA
UK Liaison and Guest Blogger
Investme Financial Services LLC


Why I love ETFs — but sometimes love can be blind

5Looking through the newspaper or on the Internet, I often see investment fund companies listing funds they’re offering – and most of these are highly rated 4 and 5-star funds.  So surely that’s the company to choose — are these guys smart or what?
But to quote Winston Churchill “I only believe in statistics that I doctored myself”.

This is because the funds listed do not represent the entire universe that the fund group has — or have had. Fund groups tend to close or merge under-performing funds, distorting the statistics and giving you a false sense of security.
It is a well-known fact that almost 90% of all funds perform less than their benchmark.  So — maybe not so smart after all.

Think of it this way: If I offered you an investment that has only a 1 in 10 chance of beating its no-brainer benchmark and asking you for a lot of fees just to be able to underperform, wouldn’t you would question “why”?
This is one of reasons we are seeing a huge shift in money moving into passive funds, i.e. ETFs. An ETF (”exchange traded fund”) is similar to a mutual fund in that it’s a basket of investments.  An ETF tracks an index, the original and best known, SPDR (Spiders), tracking the S&P 500.  There are a lot of mutual funds that also track the S&P as well, (these tend to be called closet trackers pretending to be active funds to justify the high fees). But with a mutual fund, there is an active fund manager and all of the resultant costs that go towards actively trading every day to achieve the same result at the end of that day – so your return is minus fees: commissions, redemption fees, operational costs, etc. – that can be as high as 3%!  No wonder the size of the ETF market is expected to surpass mutual funds by 2023. Last year USD 326 billion left mutual funds, with an additional USD 429 billion going to ETF’s.  In the last 10 years, USD1 trillion has left mutual funds and flowed to ETFs.  There are also other benefits of ETFs (trading flexibility, tax efficiency) that I won’t go into here, as I’ll bore you another day on those.

Mutual funds can easily be 10 or 20 times more expensive than a passive fund (ETF), which has a cost of about 0.10% and will most likely follow its benchmark. So the goal of the ETF is not to beat the market but to match the market’s performance. The role of an active mutual fund manager is to spot better growth opportunities, achieve better returns and avoid the bad investments.

But as these 90% underperforming statistic shows, the majority of these active mutual fund managers have a poor track record. So why does your advisor show you active funds that can be 10 – 20 times more expensive than a passive ETF – and with historically the 1 in 10 chances of beating the market — versus a passive ETF fund that basically does what the market does. Perhaps one of the reasons why many advisors suggest these types of funds is because they historically pay a trailing commission to the advisor where an ETF does not (this is no longer the case in the UK and other jurisdictions resulting somewhat in a reduction of mutual fund fees). While many active managers are trying to reduce fund costs, there’s a very long way to go (perhaps never) before this benefits clients and results in slightly higher returns.

So, I can see why ETF index funds play an important role in a portfolio, and yet I say my love can be blind as there can also be some dangers lurking.  More on this in my next blog.

If you would like to know more from the author then please contact me at


Benchmarking and Why Insurance Backed Investment Projections are Bad for Your Financial Health

jamal-investme2It is standard that all investment managers who either have separate investment mandates or mutual funds will benchmark their performance against an index.

This helps the client and advisors in setting expectations and giving themselves the ability to compare an active investment manager vs a passive investment.

However, Insurance backed savings and investment schemes do not do this.

They take a gross performance of an underlying asset class and then make projections on the return of your savings or investment plan.

These projections have nothing to do with reality and as such set the wrong expectations for the investor.

It is a well-known fact that 50% of investors do half of what the market does. Also, the projected returns by the insurance companies do not include the fee structures which at the time of writing can be as high as 4-5% p.a.

It is not surprising that clients are feeling disappointed. In this instance, the wrong expectations are being set and, it is most unlikely the client will achieve his or her goals.

Why are these projections from insurance companies not based upon the average return of their clients?

Take time to absorb that statement.

The insurance companies have empirical data to be able to benchmark their clients returns against the index’s so it is not a lack of technology.

I will make an intelligent assumption, if they showed the average performance of client’s vs the projection, no one would invest this way.

Protection and Investments do not belong together. They contradict themselves. Investments are a cost conscious structure, insurance is not.

The END GAME, Rip Off Savings Plans Adeiu!

I remember talking to friends and colleagues about it being harder to become a real estate agent than a UAE financial advisor. Blank stares, open mouths, bewilderment stared back at me. Although it reflected the IFA market, it also included the banks

There is a minority of advisors in the UAE who are dedicated and ethical, however they are overshadowed by a lot of unregulated, unqualified people even qualified advisors that sell investment products and savings structures, either through a regulated company, unregulated company or through a bank. They all however had one thing in common. Insurance Backed Savings Plans or Investment Plan that served the institution and advisor and not the client.

Over the last few months we have seen and heard very clear messages coming from the regulagors.

First, we had SCA regulating funds, companies, demanding education, qualifications and annual CPD targets.

Then we had the Insurance Authorities starting with Circular 33, and after much consultation with the various stakeholders they announced Circular 12. The end of consultation was May 11 with an intended rapid introduction of the new laws. It was regulations, qualifications, fees and sanctions.

Thirdly we had the Central Bank on May 11 throw their hat into the ring. They did not wait for the response of the IA (bearing in mind that the Central Bank does not regulate the insurance side), however they do regulate the banks.

The message has been repeated time and again from all regulatory authorities.

“The responses provided to the Consumer Protection Department at the Central Bank in relation to these ongoing complaints were not satisfactory”

The words being quoted “customer profiling”, “suitability of products”, “transparency” “grievances redressal mechanism (handing complaints)”. “qualifications”

Very similar words from the IA and Sca.

Then you hear the voices of the product providers, banks and IFA’s, we welcome those changes.

Well why did it take the IA, SCA and the Central Bank to step in and say STOP! We have had enough.

The blame lies on the industry, the companies and the advisors, despite what was happening in other jurisdictions and we knew why these changes were happening they still continued making hay while the sun shone even though the clients were suffering. The providers were also happy to deal with unlicensed companies, with products that fail to deliver what is promised. Products that they knew benefited themselves and the sales people more than the clients. Fee structures that were so opaque very few people could understand them let alone clients. These stakeholders had little moral compass to make a stand and either change or demand change.

Yet there were other individuals and companies that did make a stand, did change and become more client focused. They should be applauded and continue to flourish.

The message is now clear, The Game is Over.

For unlicensed companies, just close shop and move on.

For individual IFA’s go to work for a regulated company, become regulated, registered, do the exams, do your CPD and take this Holistic view you keep talking about, bring clients products and fees that are designed for the client. If you are unable to survive in this new environment, then move on.

For companies and banks, train up your staff, do wealth management with the customer first. Do what you should be doing “Wealth Management” not selling overpriced, inflexible savings plans,

The clients were not there to service you, you were there to service the clients. The clients need help to save and plan, do that, help them.

To those who said you can’t survive on the new fee structure, this may be so, but in the last century when I worked for an investment house, our fee structure for the clients worked out at 1% p.a. and it was success. For the clients, for the company and for the employee. It was a win win solution.

I and many other professionals look forward to the new future.

Have a great day.


UAE Insurance Intermediaries to be regulated

There has been a lot of articles about the new regulations regarding products, but nothing about the proposed regulation of intermediaries. It has currently only been issued on the Circular 22, however if no objection the consultation period will end May 12. It is expected that this will be quickly be adopted with an implementation period of two years.

I have put together the proposed new regulations.

Application for license and registration.

Application form to include:

a.   Name of applicant, nationality, address and place of residence.

b.   A copy of the Emirates ID for a resident and passport for the non-resident

c.   A certified copy of the minimum qualification and membership from the entity accredited by the Authority.

d.   A declaration that they have never been subject to disciplinary actions by any professional body that they belong to, or by the supervisory authorities in other jurisdictions.

e.   A certified copy of the academic and professional qualifications.

f.     An official certificate proving that the applicant has never been convicted for an offence involving moral turpitude or trustworthiness along with a declaration that the applicant has never been declared bankrupt or bankrupt and rehabilitated.

g.   An undertaking to comply with all regulations and laws issued by the Authorities.

h.   Proof of payment of the fees as per the regulations as well as any other documents requested by the Director General.

Approval/Rejection will be issued by the authorities within 20 business days from the date of completed application.

a.   If any request for more information or documents, this must be submitted within 60 days of the date of the notification.

b.   Failure to supply the information will result in the application being cancelled and a wait of 3 months before the applicant can submit another application

c.   If approved and after payment of fees they will then be entered into the official register.

d.   If rejected, they can appeal within 30 days of the rejection. (The Board of Directors decision shall be final)

e.   The licence has a validity of maximum one year and expires on December 31.

f.    On an annual basis, the insurance intermediary will submit a renewal with supporting documentation no less than 30 days prior to expiration of the license.

g.   The intermediary must inform the authorities within 10 days of any change to the intermediaries’ documentation to ensure continued compliance


a.   All forms of commission abuse are strictly prohibited.

b.   All complaints if in violation may subject the offender to suspension, non-renewal of withdrawal of their licence.


Once the new laws are published in the (monthly) Official Gazette, the new laws will be implemented as follows:

a.   Fees and commission abuse effect on announcement in the Official Gazette.

b.   Commissions, disclosure and regulations regarding pure protection is one year after the announcement in the Official Gazette.

c.   All others have a two-year implementation period.

As can be seen, many of the proposed changes will be seen by the UAE advisory industry as Draconian, and will change the entire industry – to the benefit, many of us believe, of the industry’s clients.

The biggest news is that of the minimum requirements to become an insurance intermediary.

Consultation period will end May 11. If no change they will implement the new rules in a short space of time.

What Does 2017 Have in Store for Portfolios?

5I first wanted to write about predictions for 2017, to do that I was going to talk about the predictions for 2016 that were almost all wrong except for the USD and Euro exchange rate.

If you had followed the advice of those experts with warnings such as “sell everything now as we will have a crash as bad as 2008” this was RBS, or perhaps as Goldman Sachs predicted in 2014 USD 200 for a barrel of oil, wrong, so in 2015 they predicted USD 20 wrong again.

To have followed the advice of these experts would have resulted in losing a lot of money.

However, you may be thinking that even your portfolio is not doing what the market is and wondering why?

As such I thought I would look at the stock indexes to help explain why your portfolio may not reflect the performance of the stock market indexes such as the Dow Jones or the S&P 500. Worse still, you may wonder why the market is going up but your account is going down.

Now we keep hearing on the TV and reading on the internet about the Dow Jones and the 20,000 level, the Nasdaq and S&P are steadily hitting new highs. Even the Russel 2000 gained 20% in one month.

However, this does not actually reflect what is going on in the market, as such it may not reflect what is going on in your portfolio.

The US has almost 5,300 listed companies in the NYSE and Nasdaq, yet the Dow Jones only has 30 companies and the S&P 500 only has erm.. 500.

If you have a mutual fund, it will most likely have a maximum of 50-60 stocks. As such it would be unlikely to mirror image the index unless it was a closet tracker. An ETF however is composed of all the same stocks and weighting as the index.

Let me explain how the index distorts the true state of the market.

The S&P has 500 companies, but the calculation is not 500 stocks equally weighted giving an index price of 2,300.

The top two companies from these 500 have a weighted value of 5.87% of the index and the top 10 have a weighted value of 17 pct.

Think about this, if the top 10 stocks went up by 25% and the remaining 490 stocks went down by 5%. The market would still be showing a gain of 0.1%

Ie these 10 stocks only represent 2% of the companies in the index but they have a huge effect on the index performance and the index performance does not really show the actual performance of the majority of the stocks. Confused? You should be. You could be in a bear market but still have a rising index.

This is not just confined to the S&P it is the same with the Russel 3000. This index gives a better representation of the US economy due to the number of stocks in the index. However again the top 1,000 stocks are the equivalent of 90% of the index and the remaining 2,000 only representing 10% of the index.

This is one of the reasons most mutual funds have a problem outperforming the index unless they take a few big bets on a few stocks or is a closet index fund.

If you want to mirror the index an ETF is ideal. It will not beat the index but it should track the index.

It is time to distance oneself from the way the main stream thinks about performance and benchmarking.

It is also not about making predictions, even a broken clock is right twice a day, the clock however is still broken and I would not use it for investing, i.e.. Market timing, guessing the market is a fool’s game.

Reduce risk and costs using ETF’s and don’t forget to diversify into other asset classes.

Have a great and prosperous 2017.

Gordon Robertson

If you have any questions just mail me at

The IFA industry in the UAE is not prepared for this 2017 shock


We have read articles about the coming changes proposed by the Insurance Authorities on insurance backed savings and investment products. Most of the articles I have read have only  covered a few points and as such have been incomplete. I have put together a very informative article which covers the most  important points  relating to the new proposals: These proposals if enacted in law will alter the face of insurance backed lump sums and savings programs in the UAE.

This has come as a result of the huge number of mostly justified complaints coming in from clients because of high fees and lack of disclosure

Commissions – The total commission charged should be spread over the life of the policy and no longer upfront.

  1. Regular premiums will be charged monthly over a period of not less than 5 years instead of the Traditional 18 months in so called “initial units”.
  2. Single premiums will be charged monthly over a 12-month period.

Savings Products

1. maximum fee is now 4.5% and charged over the first five years. The overall cap is 90% of the first year’s payment. (based upon a monthly saving of aed 6,000 the initial units would eat up 108,000 in the first 18 months. This will be reduced to 64,800 spread over 5 years)

2. Single premium will now be a maximum of 4.5% and charged over 12 months

Term Products

  1. Maximum commission deducted is 10% of the whole premium or 160% of the annual premium whichever is less, paid over the first 5 years.
  2. Maximum commission is 10% of the premium deducted over 12 months.

Short Term Products

  1. Maximum for Life and Takaful is capped at 25%

Indemnity Commission (commission paid to the advisor)

This is being stopped. Commission will be paid when the client pays the premium.

Multiple Channels

No longer will clients subsidise other sales channels. This will help reduce costs to the client. They will pay just for the sales channel they are using.


  1. The advisor will no longer ask for full documentation such as passport copy etc, before they receive a proposal/illustration.
  2. The declaration will say that the client knows the returns in the illustration are not guaranteed.

Free Look Period

  1. The client has 20 days from the start of the investment to decide if they want to stay or cancel. The advisor is not allowed to pressure the client to recoup the cost of the advisor time and effort in preparing the structure.
  2. The client will be refunded their entire money plus any profit or minus any loss on the investment.

There will be no bid offer spread in the calculation.

Illustrations for the client

  1. Mode of payment such as monthly/quarterly/annual/single
  2. Name of Plan, Sum assured, coverage term, and premium payment term.
  3. Death benefit, account value and surrender value should be clear and distinct.
  4. The premium shown should always be gross of all fees but the death benefit, account value and surrender value should always be net of all fees.
  5. Any illustration should state that it is either “Illustrative Value” or “Guaranteed Value”
  6. Cumulative Plan Premium should be indicated.
  7. All compulsory charges have to be disclosed.
  8. Details regarding top up premiums have to be disclosed separately.
  9. The Life insurance company has to quote the gross return based upon cash flow and then deduct all other charges so the client can see if there is a benefit in having this type of policy. All charges have to be deducted before they can show the cash surrender/redemption value.
  10. Two scenarios at a minimum should be illustrated. Maximum investment return is based upon EIBOR (emirates interbank offer rate) plus 3% rounded up to the next 0.5%. example current EIBOR (Dec 22) 0.55714 plus 3% is 3.55714, rounded up 4%. The first calculation is based upon 4%. The second calculation is based upon a lower number.
  11. There has to be an illustration based upon 0% rate of return but reflecting all charges.
  12. Any fees paid by the fund to the IFA or to the company belongs to the client and should be reimbursed to the client. It is normal in the UAE that funds pay a so-called retrocession/trailer of up to 1%. This ultimately comes from paying a higher expense ratio in the fund. Once this is removed the returns to the clients should rise.
  13. With profit policies, any illustration must be certified by a qualified and appointed Actuary. This should now be consistent with the valuation reports, if not the actuary may have to justify why it is not consistent.
  14. The annual valuation report has to be sent as a separate document and not bunched with other documents. The “font” has to be red and the client has to sign receipt.

Declaration by the policy holder.

  1. The client has to sign a declaration stating that they have received a copy of the illustration, and that non-guaranteed elements are subject to change. They are aware it is not guaranteed and that the advisor has never promised them anything else either verbally or electronically.
  2. A similar statement has to be proved by the advisor.

Historical Performance

They have to quote the last 5 years performance of the top 5 funds in the policy.

Minimum Protection

  1. Policies which were previously sold with 1% or 101% of the cash value are no longer deemed to be an insurance policy due to the minimum amount insured.
  2. In future the minimum insurance will be 110% of single insurance if over the age of 45 OR 125% of the premium if under the age of 45.
  3. Regular premium/savings will be 7 x annual premiums or 0.25 x term x annual premium whichever is higher if over the age of 45. OR 10 x annual premium or 0.5 x term x annualised premium whichever is higher.

Protecting the policy holder

  1. Surrender values in the future will be equitable to both the client and the provider. Ie the provider should not benefit to the detriment of the client.
  2. The calculation to determine the redemption value has to be disclosed, ie if the charges are deducted linearly it is easier to reflect the true charges on the redemption value.


  1. Banks often buy insurance at a discount from a provider. The banks are no longer allowed to mark up the price when selling to the client. The bank has to be compensated from the provider and not the client.
  2. Banks are no longer allowed to just represent one provider but to offer choices to the client or allow the client to obtain their own life insurance.


Once the new laws are published in the Gazette the providers have up to 6 months to implement the new laws.

As can be seen, these new changes are draconian and will change the entire industry here in the UAE to the benefit of clients.

I have been harping on about this for several years. I think the fees are still too high, but the full disclosure will help clients achieve better returns, better flexibility and understand the cost of the products being recommended.

Do you know what fees you are paying with your advisor?

5The UAE is currently is about to implement changes to the way investors who invest through an insurance product is charged and how the advisor is compensated.

These changes are long overdue, I have reviewed the Circular 33 and see that the massive changes will only benefit clients. However, I still believe the fees are still too high. The fees will go down, the insurance portion will rise.

I know that I go on and on about fees, and may sound like a gramophone record that has stuck and repeats itself.

However as this is your money, (I am only trying to help). I have a template which you can use to identify all the costs. (this exercise may be outdated when the law changes in the UAE).

The regulators (not the product providers) are pushing for more transparency and fewer fees. In a very clear format. It used to be that funds paid a trailing commission to the advisor. This will stop, if there is a trailing commission this will be paid back to the client.

Due to the power of compounding, fees that may look reasonable can have a substantial effect over time.  This can reduce your returns and affect your goals.

If you are a low risk investor, then you can expect lower returns, the effect of fees can make a huge difference.

Research has proven that the higher the costs then the lower the statistical probability that an investor will receive good returns (despite what some advisors may say).

There are some very good managers available, but the higher the costs the greater the difficulty in beating the benchmark.

Often a fund will be shown to a client with healthy returns, however it does not reflect the other costs you have to pay such as platform fees, commissions, account charges etc. etc.

At the same time, paying lower fees does not automatically mean you get better returns, (price is what you pay, value is what you get)

However, there is generally a strong relationship between costs and performance.

The charts below shows the effect on investing 100,000 using a gross return of 6%

It then compares a 2%, 3% and 4% annual cost structure.

At 6% the 100,000 would grow to 320,000 in 20 years,

If you had a 2% fee then it would only grow to 220,000, a difference of 100,000.

If your fees were 4% p.a., then the investment wold only grow to 149,000

graphDo not forget that a portfolio should reflect your risk (diversify into other asset classes), and that emotional decisions tend to have a negative impact on performance.

Wanted to invest and save in the UAE but heard too many scare stories? – Use these tips for successful investing


There are new UAE rules regarding insurance products about to be introduced. They will benefit the consumer but I still think they do not go far enough.

Most of my readers know that I am not a fan of insurance backed investment products, due to the lack of flexibility. The fees involved, the punishing exit fees, the lack of clarity no disclosure and almost impossible to make money.

It is because I believe that the costs still far outweigh any service received. To quote one of my favourite investors Warren Buffet:

“Price is what you pay, value is what you get” jam

If clients knew what they were paying for a typical insurance backed savings account. They would run a mile. 18 months’ premium in fees? Redemption fees that almost wipe out your savings. Total fee structures that can work out about 6% p.a.

There is a change coming, the industry is fighting this change, but it will come.

Let’s look at alternatives.

There are three ways we can invest or save.

a. DIY investing: cheaper and can be fun with lots of risk and most likely underperformance.

b. Advisor directed: a qualified advisor giving advice, you say yes and “caveat emptor” is the result.

c. Discretionary investment management which should only be offered by individuals who have extensive experience in the investment industry and advanced educational credentials, with many investment managers possessing the Chartered Financial Analyst (CFA) designation. Discretionary investment management used to be generally only offered to high net worth clients who have a significant level of investable assets. However this is now changing and can even be used on a savings account.

If only it were that simple.

Yes, fees do make a difference, but unless you put all the pieces of the puzzle together it will not work.

What will affect my returns

  • Costs
  • Advisor remuneration
  • Market timing
  • Asset allocation
  • Investor psychology
  1. Costs:

Paying exorbitant commissions does not mean you get value. The higher the total fees, the more you must make just to stand still.

Fees can be broken down to

  • Advisory fees
  • Platform fees
  • Transactional fees
  • Discretionary management fees
  • Fees within the underlying assets such as mutual funds, Exchange traded funds etc.

It is imperative that you get all these fees to below 2% p.a.

  1. Advisor remuneration:

If an advisor is paid commission, he has a short-term goal and little incentive to look after the client long term. As such the investment structure, may be good for today, however where should you be tomorrow?

If an advisor is paid an ongoing fee, he is rewarded if he looks after the client. As client’s needs change then the advisor will be there to help and advise. When the markets get volatile the advisor will be the steady hand guiding you past these difficult times.

Compensation drives behavior, the wrong compensation drives the wrong behavior.

Ensure that the advisors goals are aligned with yours.

  1. Market timing:

I can name many top investment managers, but I am unable to mention one single top market timer for the simple reason that market timing does not work

There is empirical data that shows that market timers underperform the majority of the time.

In fact, market timing is one of the most dangerous words when it comes to investing.

Just as people go to Vegas to beat the bank, some may beat the bank, however most will not.

Market timing will often result in not being in the market when it goes through above average returns.

  • The market returned 8.18% on average during these 20 years.
  • However, if you missed the best 10 days then returns dropped to an average of 4.49%.
  • If you missed the best 20 days during these 20 years, the returns dropped to 2.05%
  • 60% of those best days happened within 10 days of the worst days.

I.e. when the market capitulates, you are either already out or this is where most now leave. They then miss this massive rebound. That is why we have this huge under performance.

  1. Asset allocation:

Asset allocation has a bigger effect on people’s portfolios than one imagines.

Diversification reduces risk and volatility. Many people buy different equity investments and think that they have diversified. However, if they are similar assets all you have is a concentration of risk without even realizing until it is too late.

As an example, we have seen equity draw downs from peak to trough of 54.5% yet a diversified portfolio into low or non-correlated assets would have seen peak to trough of about 25%.

In fact, over a 20-year period an asset allocation model had an average return of 8.27% (20-year average to Dec 2013) while the S&P average was 8.11%

  1. Investor psychology:

We often hear about performance numbers, but as Winston Churchill once said “I only believe in statistics that I doctored myself. Herein lies the problem.

The stock market returned on average 8.18% (S&P 500 1996-2015) however the average investor only managed about 4.5% during the same period.

Why such a discrepancy? A. Investor Psychology.

An investor will use his logical thought process to help determine his risk profile. However, when markets get volatile the investor then reverts to emotional behavior.

The result is panic and exiting the market and beginning to revert to market timing. This is the worst thing that can happen.

One of the ways to prevent emotional decisions is to work with an advisor who will guide you through these tough times or to have your funds managed by a professional discretionary manager. This mistake costs the average investor 4% p.a.

To summarize,

  • Very hard to do yourself.
  • Keep costs low
  • Your advisor is your employee, the advisor is not a friend, he performs a service and is paid for it.
  • Only fools think they will win long term with market timing. It does not work.
  • Spread your risk in different asset classes
  • Remove your emotional buying and selling decisions by having your portfolio managed by professionals.

Gordon Robertson ACSI

Investme Financial Services LLC – Dubai

Investing in Government Bonds would this be low risk or high risk?

I was visiting a friend of mine a few days ago and she showed me a suggested investment strategy offered by her bank. She asked me to have a look and voice an opinion.

She is slightly risk averse as this is her retirement money.

The suggested investment was a mutual fund owning government bonds with a maturity of 20-30 years. The bank suggested that if she leverages this investment her returns could be very attractive.

It is true that the fund has had good performance in the past, and was not very volatile. However, this is where we come to the terminology “past returns are not a guarantee of future returns.”

So, I decided to sit down and explain the way bond markets work. We have had 30 years of declining interest rates, as such the only way for bonds to go, were up, a continual price increase with declining interest rates. We are now already in negative yields and if you were to buy bonds now or invest in a bond fund it would be in the hope of capital appreciation and not yield (interest income). I saw a blank look on her face, so I decided to do some basic explaining how the bond market works.

I wanted to explain the terms coupon, yield and yield to maturity and explain how the interest rate moves affect bond prices.

For the sake of simplicity, I decided to start with simple explanations about what these terms are:

Bonds: governments finance deficits by issuing Bonds. These are none other than an I.O.U. (Promise) that the government will pay you interest and a return of your investment if you lend them money. This will have a fixed interest rate and duration.

Coupon: The interest paid on a bond expressed as a percentage of the face value. I.e. the bond is priced at 100, the interest paid is 7 so the yield is 7%

But bonds prices go up and down and rarely would stay at the price of 100.

We refer to this 7% as the “nominal yield”

Yield: Current yield = nominal yield/market value of the bond.

I.e. The bond is trading at 90 and you are getting 7 coupon, then the yield would be 7/90 = 7.8%

However, the bond trading at 90 would go to 100 at maturity. As such you would receive the coupon of 7 plus an annual growth to 100. This is referred to as Yield to Maturity.

Yield to Maturity: This is the total return expected on a bond if held to maturity.  This is important as this is the true yield and value that you are getting.

Here the calculation gets a little more complicated as it assumes the coupon is reinvested.

To keep things simple, we will assume that the bond is trading at

  1. 90
  2. It has a 7% coupon
  3. and this bond will mature in 20 years.
  4. This will create a rising value of the bond from 90 to 100.
  5. Then the Yield to Maturity is 8.02%

The bond may be expressed as ABC Corporation 7% Dec 30 2028 price 90

The 7% reflects the interest based on a price of 100. The date is when the bond matures and the price is the market price.

  1. You have a 7% coupon
  2. The yield is 7.8%
  3. The yield to maturity is 8.02%


We have seen that the price of the bond fluctuates, and this affects the yield and yield to maturity.

To understand how the price is set, it is compared to the current yield in the market plus a certain amount of risk premium.

I.e. Government bonds have a lower yield than a corporate, lower grade corporate bonds have higher yields to compensate for the additional risk.

Let’s now look at that suggested low risk strategy from this bank.

They suggested buying a fund (which has internal costs of about 0.8%), leveraging it by borrowing money and buying more.

Now we have been in a 30 year declining interest rates scenario, where the yields have gone from 18% down to in many cases zero. We are in bubble territory, it could stay like this for years, but it is still a bubble. The only way this fund can continue to create growth is if the yields keep moving further into negative interest rates. This would have to be substantial to cover the cost of the fund, the borrowing costs and any other commission and fees applied.

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Let’s look at the effect of a 1% interest rate movement on a 30 year government bond. Example if interest rates go up, bonds go down. If interest rates go down then bonds go up.

The longer the maturity date the greater the price movement on the bonds. The greater the profit or the bigger the loss.

If the interest rates were to fall by 1% then the value of the bond increases by 19.6%. This explains why for the last 30 years we have seen strong growth in the bond market.

If you believe that the negative or near negative yields will go down further, then prices will continue to rise. However, many people believe we are in bubble territory and this bubble will burst at some stage. In the UK the Prime Minister has said that the wealthy have benefited from low interest rates, but savers and pensioners have suffered. This may be an indication that she is thinking of reversing interest rates. Inflation is due to rise in the UK due to the falling pound, this will also put pressure on raising rates.

We know that if interest rates fell by 1% then we could expect to see a value of the bond rise by 19.6% however if the opposite happened and the rates rose by 1% then the value of the bonds would drop by 20%.


Think of this, a so called low risk investment can easily suffer a 20% loss by a mere 1% interest rate increase, and if your portfolio was leveraged two times, then the losses would be 40%

Be wary of the bond market. It has more risk than most people expect.

If you have any questions, please contact Gordon Robertson