Solutions: Go passive for the long term

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 8, 2020 - June 14, 2020.
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The impact of the coronavirus outbreak on financial markets has made it even more important for individuals to think long term when it comes to their investments. While erratic market movements are bound to cause jitters, panic selling out of fear in the short term could take a big bite out of one’s returns, according to Dhruv Arora, founder and CEO of Singapore-based digital wealth manager Syfe.

The current tumultuous economic conditions may eventually be just a “blip” if one remains invested over a long period, he says, highlighting the old adage that time in the market beats timing the market.

Nevertheless, Arora admits that when the global equity markets began their steep descent in February, he too was rattled by the uncertainty in the markets. Unlike the previous crisis, the economic fallout caused by the coronavirus outbreak is happening at the grassroots level. “It is affecting the real economy. One way or another, we aren’t expecting things to go back to status quo anytime soon.

“It is almost impossible to quantify the full impact on the world right now. But at the end of the day, if you are [invested] for the long run, this will eventually seem like a blip. If you’re a day trader who is actively gauging oil prices or gold prices, be prepared to stomach the volatility.”

As there is no clear end in sight, Arora says studying past precedents for ways to manoeuvre through the current crisis is one method of moving forward. Although past performance is no indication of future performance, one can utilise historical data to create hypothetical scenarios that could offer possible outcomes.

“If you were invested for 20 years over the past 150 years of the stock markets, you would always make money no matter when you entered, whether it was at the peak of the markets in 1999, before the dotcom crash, or in 2000 just after it.

“Time is one of the biggest weapons you have and if you are going to stay invested, it will always be a good time to start investing,” he adds.

While he believes that an active investment strategy has its advantages in certain circumstances, Arora says passive investing is more effective for lay investors who are bound to do better duplicating market returns rather than trying to beat them.

Arora points out that what distinguished an active investing strategy from a passive one, and was the reason for the former’s past success was the privileged access to exclusive knowledge. To a large extent, this is no longer the case.

The lay person today has as much information as a fund manager, and at the same time, he says. “I’ve seen the epitome of active management like hedge funds that completely bet against the market and lost money. As this trend accelerates, we will see more hedge funds closing [down] than coming into existence. The reality eventually comes down to a simple thing — the dissemination of knowledge.

“Today, the minute a piece of news is out, the time gap between when the fund manager knows of it and when the common man knows about it has been reduced drastically. The reason for this is the proliferation of smartphones. If something big happens, everyone would know about it instantly.”

A lot of active funds did well because they were privy to relevant information, and advice from such firms are deemed necessary when dealing with highly complex financial situations. “But not many active fund managers have that advantage. Of course, there will be a few fund managers who will be the exception to the rule and they will continue to be there. [But] in the long run, passive investment strategies will outperform active,” says Arora.

According to the S&P Global Risk-Adjusted SPIVA Year-End 2019 Scorecard, while the Standard & Poor’s 500 gained 257%, with positive total returns in nine out of 10 years and 86 out of 120 months, the majority of actively managed domestic funds in all categories underperformed their benchmarks on a net-of-fees basis over the mid- and long-term investment horizons.

“I had seen the trend coming first-hand while I traded, even with some of my own investments. I was trying to take calls to buy and sell but they never really worked out that well. Personally, some of the best investments I have made are the ones that I have just stuck with,” says Arora.

But domestic investors in Asia are not well acquainted with passive investing strategies, he continues, despite the growing liberalisation and democratisation of wealth management.

“Family and friends would come to me for investment advice or stock tips. The presumption is that if you have a friend or a relative who works in a bank, they would know.

“That’s the reality. In the land of the blind, the man with one eye is king. While it is culturally empowering when your uncle asks you for financial advice as it is an acknowledgement that you’ve finally arrived in life, it is also a sign that there is a problem that needs to be addressed.

“If my advice or tip earns them 2%, everyone is happy but if it comes down 0.5%, they start badgering you for answers. If I could predict market movements, I would be doing just that for the rest of my life,” Arora jests.

These experiences and observations had a profound impact on Arora. It made him keenly aware that investing knowledge remains elusive and limited because many continue to believe that wealth management and investment services only cater for those who already hold substantial assets.

So, he decided to do something about it and founded Syfe, a digital wealth manager that helps individuals invest their money in a low-cost and global exchange-traded fund (ETF) portfolio. The platform was launched in Singapore in mid-2019 and is open to investors globally.

Syfe, Arora says, harnesses the power of big data and automation to offer financial advice and asset management services with minimal human intervention. The platform, which is regulated by the Monetary Authority of Singapore, neither imposes an upfront sales charge nor requires a minimum investment, but there is an annual fee starting at 0.65% for investments of S$20,000 (about RM61,300) and below.

Transparency is a key component of Syfe, says Arora. “Even before you pledge your first dollar, you can see the portfolio you’re investing in. So, if you don’t like our platform, you can go to a broker and replicate our portfolio. However, we think our proposition is more than just our portfolio.

“Our advisers are just like other salaried employees because we have no entry and exit charge — there aren’t any incentives. They receive their incentive if people stick to the platform for a long time, because that’s when the company makes money and everyone benefits.”

Using a proprietary automated risk-managed investing methodology and a complimentary consultation session at the get-go, the platform builds a personalised investment portfolio, allocating assets according to one’s risk profile.

“For some of our advanced users, there is an optional financial planning [feature] where they (the advisers) can help you plan your finances outside of your Syfe portfolio. Your investments should always be seen holistically, so financial planning is necessary for a holistic investment,” says Arora.

He explains that his platform takes a risk-managed passive investing approach, instead of one that solely prioritises returns. “Having been a trader for nearly 15 years, the one thing I know for certain is that returns can’t be predicted. This is why risk management is at the core of what we do at Syfe and this paid off very handsomely recently. When the markets were getting all volatile at the end of February, we actually made a significant allocation shift where we moved away from equities to bonds and that really helped our users to cushion against losses in the stock markets.

“And, when people are cushioned against losses, they end up staying much more disciplined and, in turn, invested, because they know that Syfe is going to keep their downside to like 15%, so they have no reason to panic sell.”

Syfe had started off by offering investors access to global ETFs, spanning major asset classes. It recently increased its offerings by including a selection of Singapore real estate investment trusts (S-REITs) that track the Singapore Exchange’s iEdge S-REIT 20 Index.

“The global portfolio is relevant to people because at the end of the day, no matter which country you’re in, you will get some level of global diversification.

“The second product was to address passive income needs. Our REIT product is the first-of-its-kind portfolio that is denominated in Singapore dollars. REITs are a great tool because of their high dividend-yielding nature,” says Arora.

Like many investments, REITs were affected by the Covid-19 pandemic, resulting in negative rental reversions and an uptick in vacancy levels. Hotel and retail REITs in the island state were hit the hardest by social-distancing measures. However, Arora says S-REITs still present an attractive upside.

“If certain REITs are not able to function as what they were intended for, nothing is stopping them from changing the scope of the REIT. This is already happening in cities in the US where a lot of office spaces that were underutilised are being converted into industrial REITs. Companies like Amazon are taking these properties in the middle of the city and turning them into fulfilment centres.

“Secondly, the market has already priced in such volatility. From the beginning of the year to mid-May, REITs were down 13%. Hospitality REITs, which comprise resorts and hotels, are down 32% but hospitality REITs are just 5% of the index. At the same time, industrial REITs are down only 2% and healthcare REITs are flat. Office REITs are down 20% and retail REITs are down 25%,” he continues.

“Essentially, you are getting an asset that is 25% cheaper. The question you have to ask yourself is, have businesses been impacted more than the 25% or are they in such a situation that they can’t even make 75% of what they used to make, either by rethinking their [business] model or doing something new? Or, do you think that the returns are going to be absolutely zero because everyone is going to work from home?”

For long-term investors willing to look beyond the coronavirus outbreak, Arora says, S-REITs hold great value with attractive dividend yields. “At the end of the day, it is still a physical asset that [people] need.

“If you are going to be looking at this with a monthly or a one-year horizon, it is almost impossible to pick what is right and what’s wrong. To be honest, at the end of March, everyone was afraid that [the REIT market] had hit rock bottom. But then, in April, we saw a 27% market rally, a huge rally that [also positively] impacted the REIT sector.”

It is for this reason that the platform does not promote one REIT over another, he adds. “We offer a blend because, in the long run, diversification is the only free lunch left in town.

“For DIY investing, even if you earn US$100 when you put US$100,000 into REITs, you are not going to reinvest it because you are going to have to pay a US$10 brokerage fee. But according to our calculations, if you reinvest your dividends, you will end up making 0.5% extra without fail. And if you don’t need the money, you should reinvest.

“Now you can automatically reinvest your dividends with Syfe. You get extra 0.5% returns and our fees pay for themselves, which is why this is a significantly cheaper option than DIY investing in REITs,” says Arora.

Depending on their risk profiles, investors have the choice of selecting either the global portfolio or the REIT+ portfolio, or a combination of both.