By Nicos Cotsapas
In the last six months during which my articles have appeared in the Sunday Mail, I have received quite a few emails from readers.
Below I share some of them. I removed names and references to individual funds as the purpose of this article is discussing general topics of interest to the readers rather than analysing specific products.
Q: I was alarmed by your recent article on fees. I have a Qrops held in a portfolio bond, and I am wondering if there is any way to reduce the running costs.
A: While there is not much you can do to reduce trustee and portfolio bond fees (both of which are fixed for a the long term), you should ask your advisor to break down the fees that you are paying in the assets that you hold inside the portfolio bond (including any trail fees/commissions that the current assets have generated).
You may also want to contact the Trustee and ask for a better deal on the annual fees you are paying.
Q: I hold what you called a “too good to be true” fund. It is the “XYZ Land Fund”. I bought it on the recommendation of my advisor in 2011, and it is up almost 40 per cent. I am happy with the performance, and thought of adding more, as it has been very stable. Should I?
A: This fund might be a perfectly good investment but I would not buy it for myself, as it ticks several of the boxes that I mentioned in my article. First, it is not liquid.
Second it does not trade on a recognised exchange which would make its pricing and valuation more transparent.
Third it has a high expense ratio.
Fourth, it may have provided inordinately large commissions to intermediaries, which in the end comes out of your pocket.
I would be extremely happy with a 40 per cent return in less than three years and happily take the profit rather than invest more. Sometimes it’s good to know when to cash in a winner without being greedy. It is also good to know that the profit was indeed “real”.
Q: My advisor is buying structured products for me, and I am very happy. Why are you saying I should be worried?
A: What I am saying is that the risk/reward of structured products on average is not that good, as many of them include hidden fees and risks.
It is true that recently, structured products in general have done well. But note that the markets have been “flying” during the last five years or so.
For your information, world equities are up by 16 per cent, 46 per cent and 95 per cent in the last one, two and five years respectively. They are up 182 per cent since the market bottom in March 2009.
Although not directly comparable, are your returns from your structured products similar to these numbers? My guess is that they are not even close – advisors and issuers of the products have probably made the same amount of money as you (in commissions), without any risk! Only over a complete cycle will you be able to see the true risk/reward of such products.
I repeat from my article: “it is not a coincidence that such products target retail (and hence largely unknowledgeable) investors”. I remind you that financial authorities, eg FCA and SEC, have issued warnings about structured products a long time ago.
Q: More than two years ago I was convinced that Frontier Markets were promising and asked my advisor for suggestions. He showed me the “ZYX Global Frontier Market Fund”. I agreed to invest in it as a long term holding, as he warned me that it was bound to be volatile. It has not really gone anywhere. Should I hold on?
A: This is a case of potentially choosing the “less appropriate” fund. Frontier markets have indeed done well in the last two years, and some funds have prospered.
For example you could ask your advisor to look into ETFs that have done almost 40 per cent in the same period. You could also ask him to propose some of the top funds in this space, as some of them have done even better than the ETFs.
While there are many reasons for underperformance – and in this case the underperformance seems huge – one of them might be the high fees that are charged by the fund you hold.
You should ask whether it is a fund of funds, as these have an extra layer of fees. You should also ask your advisor what the Total Expense Ratio of the fund is.
If you still believe in Frontier Markets, ask your advisor for alternatives. You should nevertheless be aware that Frontier markets are in a very specialised and small space and I am generally worried about lack of liquidity and also the fact that corporate governance in many of these countries is not up to the standards expected by western investors.
Nicos Cotsapas is a partner of Cyprus-based Elgin AMC and Swiss-based Elgin Group LLC. Opinions expressed in this article are those of the author and do not constitute financial advice in any way. Please visit www.elginamc.com for more information. If you would like further information on how to structure your portfolio, please send an email to [email protected] or call 70000065