US billionaire Warren Buffett had once recommended that the cash left to his wife be invested 90 percent in a low-cost S&P 500 index fund, preferably a Vanguard fund, and the remainder in short-term government bonds.
Active funds like long funds and hedge funds have failed to beat the benchmark in the medium and long term. But index funds are very attractive for medium and long-term investors since they have much lower costs.
That explains well why the Hong Kong government is keen to cap the annual management fee of the ‘core fund’ in Mandatory Provident Fund (MPF) at 0.75 percent. In the long run, one percent savings in management fee could make a big difference in investment performance.
For most ordinary investors, cost savings is the easiest way to improve fund performance amid negative interest rates and increasing market uncertainties.
In the investment world, there are no guaranteed returns.
Pershing Square fund managed by renowned investor Bill Ackman slid by 25 percent this year. Sequoia Fund has been hit hard by its stake in Valeant, which dropped more than 90 percent since the second half of last year. The fund has bet heavily on a handful of stocks.
Reality is cruel. Investors have no attachment to fund managers; they will rush to redeem their money when things go bad.
In the meantime, index funds are far less risky and costly. They are usually made up with a portfolio of bluechip stocks, and the investment committee would adjust the portfolio periodically.
The Man AHL Diversified Futures fund has posted a 400 percent jump as of February since its inception in 1998. That has far exceeded the performance of the Hang Seng Index, the China Enterprises Index and S&P 500 Index. The volatility of the fund is much lower.
The fund adopts trend strategy and automatic program trading, which helps avoid emotional decision-making in investments. The fund invests in 300 markets covering various investment products to achieve risk diversification.
Programmatic trading works far more efficiently than human beings.
Large funds are working toward increased use of artificial intelligence (AI) in stock selection. BlackRock and Bridgewater both have built teams to develop AI technology.
Rebellion Research, a New York-based hedge fund, has become so famous for predicting the market crash in 2008 and 2009 using a machine-learning program. The program is now used only on macro and ETF products.
Following the financial crisis, global regulators have become more stringent on financial institutions that are involved in selling financial products or offering investment advice to customers.
Developed markets like the UK have asked intermediaries to charge annual fee or consultant fee rather than trading fee or commission in sale of financial products. The move aims to ensure sustainable service for customers, as well as minimize conflict of interests.
Hong Kong’s Securities and Futures Commission has conducted consultation in this regard. It might have limited impact for big clients, but small and medium clients may find it difficult to adapt to pay financial planning fees, management fees or consultant fees rather than trading commission.
Hong Kong has lagged behind in Fintech. If the city wants to transform itself as the wealth management hub for China or the whole of Asia, it should step up efforts in development of the Fintech sector, leveraging on technology and robust regulation advantages.
This article appeared in the Hong Kong Economic Journal on March 31.
Translation by Julie Zhu with additional reporting
[Chinese version 中文版]
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