Money Farm's aim is to provide Asset Allocation based investment at low fees
So okay, it's a great pleasure to meet Richard Flax who's the CIO of Moneyfarm. So what I wanted to do today is to get a little bit of insight into how you allocate your capital, how you keep your fees so low because I'm investing my own money in your funds so I'm very keen to know. I had a great experience with the onboarding, your site was incredibly slick, it was very easy, your questionnaire was simple. But what I'd like to do is, look under the hood. So maybe we start with what really motivated you to create the company in the first place. What is the ethos behind Moneyfarm?
Thank you very much. So the ethos, I think, when the founders created Moneyfarm, and that's true to this day is to be able to provide a very strong compelling and robust asset allocation at a very competitive fee. You know that the starting perspective was that the fees that retail investors were being charged were high, and that through technology there was the opportunity to bring that those fees down in a scalable and ultimately profitable way.
No Management Fee below £10k
So these fees, I really couldn't believe it when I saw that under £10k you don't charge a fee at all, so I was very careful not to go over the 10k limit initially, while I was trying it out. But how do you keep the costs so low?
Look, I think that when we think about the customer, clearly what we want is for customers to grow with us over time, so that the customer is attracted perhaps initially by the website, by the fee structure but that over time that they and we will grow together in terms of building up their wealth over time and up their wealth over time and so you will begin to be well above the £10,000. Remember we have some evidence to support that from our experience in Italy as a company we have been operating for much longer.
Strategic & tactical asset allocation approach
Okay, and in terms of the asset allocation process what I was very keen to find out is you know how do you approach it? For a robo fund there are two ways it could be "robo": one is matching the questionnaire to the portfolio with a suitable risk profile, and the other way is actually managing the money with an algorithm. For some robo funds, like Nutmeg, there's an asset allocation team which does the actual investment process whereas Scalable Capital it has an algorithm. So where do you sit on that continuum?
So we broadly speaking are in the first of those two camps. We have a quantitative process in the sense that we run a strategic asset allocation once a year to give ourselves an expected return and risk profile for a range of asset classes that underpins our asset allocation. From there we have a tactical overlay that is driven by the investment committee which is made up of the asset allocation team, our chairman and our CEO. We meet every two weeks and we have boundaries within which we can operate in terms of looking tactically at markets and seeing if there are opportunities. Again, bear in mind the strategic asset allocation is a multi- year allocation so the exact path by which you get from here to there is not necessarily going to be a smooth one. And that human overlay gives you some elements of control and importantly accountability for the decisions that we make.
So just to explain for people who aren't familiar with strategic and tactical: strategic is your kind of long-term view about how markets are going to operate so you have to have a view about which assets will give you the best return over the long term. Yes. And then tactical is your kind of short-term strategy which has to be very nimble.
Exactly. The only point that I would add to that is that tactical is not when we think of shorter term we're talking three, six, nine months not three days, three weeks. So, you know, the whole kind of premise of the offering is that clients and ourselves should be thinking about building their wealth over the longer term by which we mean a multi-year period. So thinking about you know the return of any single year we would argue is not the right way forward. And again when you think about our fee structure and the you know the advantage that a client gets from having very low fees you know they realize that most clearly if they invest with us over a multi-year period because you have the effect of compounding of those fees, so every year you're getting an additional benefit and as that, you know, the longer you do that for the greater the benefit the greater the benefit is over time.
Developing a portfolio based on investors risk appetite
Okay so you're really trying to entice people to invest with a long term horizon. Ultimately they have to trust you as a money manager because it's your decisions which drive the returns on those funds. But one of the questions I have is you know how do you... because you have multiple funds with different risk. How do you decide on the allocation for each of those funds? Is it quantitative or is it a human which decides?
So when, for the strategic asset allocation you're going to come up with a set of expected returns predominantly quantitatively for a range of asset classes and that will give you can optimize that and that will give you a portfolio, and then you have the human element which is the overlay which is effectively tilting in certain cases where you think, you know, this may be true over the long term but in the meantime, you know, we think there's an opportunity somewhere else. But to your point around risk, yes, you know, our clients are in one of six different risk buckets you know we measure risk in a variety of ways, be it volatility, be it drawdown and we build portfolios that are consistent with those risk targets. There are obviously a number of different you know, there is, there is, there are those guardrails but there is obviously discretion within that because you can you have a range of assets and you can get to a particular risk target in a variety of different ways you know that, it depends on where you see opportunities or risks in particular asset classes. So you've got these fairly defined guardrails in terms of what we're going to be providing to clients based on their risk profile but within that there are a range of tools that you can use to get you where you want to be.
Human intervention provides flexibility during regime shifts
Okay I talk about volatility a lot because I think a lot of people don't understand it, but it's so important when we come to invest. So if we could maybe move on to markets now, it's a nice segue into risk. The volatility index in the United States the VIX index which has a one month horizon that it looks ahead in terms of volatility, currently it's crashed, so it's below 11%.
So in that kind of environment do you think that's complacency given the valuation of US stocks is very high. So it's an interesting and important question it's one that we talk about a lot because clearly if you're targeting different levels of risk, you know, risk is not as stable as, those measures of risk are not as stable as we would like them to be. Is it low versus history? Yes it appears be very low versus history. How do you... what does that mean for portfolios? One of the things that it means is that we have to have a debate around you know how hard do we need to try to target a particular risk level? Is that appropriate? And one of the things that the investment committee does in terms of that thinking about that human interaction is - is not just to look at the historical implications but think about the future implications and say, well what is truly appropriate for our clients? So when you think of if you look at our portfolios across the board the realized volatility of those portfolios is probably a little bit below target over the last three or six months. Okay. Now we effectively have said it's trying to get to very high levels relatively higher levels of volatility is not entirely prudent given where realized volatility is in the world and we need to reflect that. And we do that because we think that's in the best interest of our clients. But it is, you know, it's something that that we think a lot about that we worry about in terms I think of what might cause a regime shift of one degree or another in terms of volatility normalizing and we think that we've made a conscious decision I would say to consider that when we think about the asset allocation that we provide across the board.
I think it's cool that you have the human element so when vol does crash you don't slavishly dial up the risk. I think that's great.
No I mean look the accountability is very clear, it sits with us.
Emerging Markets - not aggressively positioned but valuations look attractive
That's good to know. Reassuring for me, as an investor. So in terms of how markets look at the moment, or at least the global economy looks at the moment. In developed markets you've got growth of about 2 percent. Everyone was cheering that Europe is like above 2 percent but it's just the fastest snail in a kind of snail race. Whereas Emerging Markets you've got China still at around 6% India above that, so long term do you see value in Emerging Markets at the moment?
So I would say the short answer is that we do see value in Emerging Markets. We don't have a very aggressive position in Emerging Markets but we think it's appropriate that you should have Emerging Markets in a diversified portfolio. You know there are a couple of drivers behind this. One is, as you mentioned, that while GDP growth may not be as robust as it was in previous decades it has certainly improved and it is a bit more synchronous than that maybe it has been in recent years and so you have more parts of the global economy doing a little bit better. And that is positive for thinking about value for equities depending on starting valuation but also positive for Emerging Markets. So when you think about Emergents since you asked about it I mean a couple of interesting points. The first is the impact of better global growth, the second is the starting valuations is not bad it's not extremely cheap versus history but it's not bad and it looks relatively attractive compared to some other, some other parts of the equity universe and I think the third part is one about market expectations where if you look at consensus earnings for instance, that historically have started at quite a high level and steadily been downgraded over the course of the year not just in Emerging Markets but more broadly as well so far this year at least you know those expectations have held up maybe a little bit better than they did in the past and has historically been an important underpinning for equities generally and for Emerging Markets more specifically.
It's funny in EM every year it would start at 12% earnings growth every year and then it would just plummet every year to about 3%.
And that has been the case for for the last four kind of five the last five years but you know the evidence seems to suggest that maybe those starting expectations are now a bit lower and maybe a bit more realistic and a bit more achievable.
But trade is picking up. The wheels haven't fallen off the bus in China, that's quite positive. They seem to be de-levering their economy, a massive enterprise, but they seem to be doing that rather well.
Policymaking as everywhere is a challenge they have managed to prove the doomsayers wrong repeatedly in recent years hopefully that will continue to be the case. But again getting back to starting valuations around for large parts of the market reflect the challenges.
Which bit of EM equity do you like best?
We haven't taken a strong we haven't taken a kind of strong regional view in EM. One of the benefits of EM is that if anything it is a more diversified asset class now than it was maybe historically in terms of sector [composition] but it still has meaningful exposure to cyclicality, to stronger growth, even if its weightings in traditional cyclicals like energy and materials is lower than it once was.
An ageing population is a problem worst in Developed Markets which will have implications for asset class performance
And in terms of demographics, is that something you think about? Because if you do look over the long-term as the global population ages you expect lower returns over the long term so whereas in the past we saw I don't know, six, seven, eight percent growth in equity markets as earnings grew at eight percent as the population ages, I guess, what we'll see is a slower growth in earnings and GDP but also lower interest rates over the long term. So is that a challenge you think about?
Look, I think there's a general challenge and I that's one of the components. The general challenges for a variety of reasons expected return you have to think that expected returns looking forward from where we are today will be lower than they have given in the last 15 or 20 years. So we need to think about that. That has a variety of implications for savers, for governments and it's a challenge that clearly we're trying to solve. Now where does it work for us? Clearly in a low fee world if your expected gross returns are not going to be as high as they once were the relative impact of the fee becomes even more significant, right? So the benefit that you gain from having relatively lower fees should rise.
You know the demographic side of it is an interesting one I mean you kind of neatly positioned the two sides of the coin which is that you may see slower growth and you know we may see lower interest rates as a result of it, the budget work done around that around that question you know and demographics is a challenge across the board even in China where you know the population growth is slowing materially and for various reasons, some policy driven, some not. And it's a more pronounced problem in developed markets when you think about the dependency ratios that we're coming to see. There's a set of implications for asset classes there's obviously a set of implications for savers as well. The unfortunate message is to save more and save earlier which is easy to say...
It's such a hard sell.
It's easy to say but not so easy, always so easy to do but you know I would struggle with somebody who comes to me and puts forward this idea that there at these, that you know, that returns in the future will be as high as they were in the past. Unfortunately it's not a view we would subscribe to.
Competition could compress fees more but having a strong product and good customer service is also very important
In the FT today there was an article about Vanguard opening up a website so that you can buy their Life Strategy funds where the fund itself charges 0.22% per year and then you add 0.17% fund management fee so that's only 0.37% per year. That's going to shake up the fund management industry in a fundamental way I think. So how do you see yourself positioned versus Vanguard? I know this is a difficult question...
So look Vanguard will be a strong competitor, they are obviously an important supplier as well in terms of the providers of ETFs along with other other providers in the market. I think that we all face a variety of challenges, the fee compression is good, it's good for consumers it will affect, it has affected, the fund management industry and it will continue to affect the distribution chain i.e. from the fund manager to the final retail customer which is a rather more opaque but very significant cost base that has got a little bit less attention. I think that that's true across the board.
That's right the fund managers have been the whipping boy haven't they? Everyone's blaming the fund manager. "Look, we're paying you all this money for your active funds. You're not outperforming the index that's not fair". But we we don't think about the the next level which, as you say, is from the fund to the end client.
Yes. And I think when we think about where we you know, the pools of the fees that we're trying, we're squeezing you know some of it is on the fund management side, obviously with the ETF exposure but I think increasingly it's going to be a focus around the distribution costs that people have been paying historically and some of the fees there. But as to the specific challenges, these are the same: you have to provide a really strong product, and you have to provide the technology that'll provide great customer service and, hopefully, you have to provide strong investment performance as well. And putting all of those things together will allow you to compete because the challenge isn't to compete on any one part of the pattern, the challenge is to provide a complete service to people. And then obviously there's the question about where we are today versus the things that we can try and provide to clients going forward. And there's a pipeline of innovation that hopefully will come forward.
I'd love to know about that when it happens.
We will be very happy to share it with you when it's released.
I've got to say, one of the things that does set you apart in my opinion is your app because I've got lots of questions on the YouTube channel that we run based on you know, "Do you like the app?", "Is it a useful app?" Whereas Vanguard seem to spend very little on marketing It's a very dry product. Even their term sheets are just monochrome. They don't use color in any of them. Even iShares tries to put a bit of colour in to kind of spice it up a bit. So I think that's the hard sell for Vanguard it's the presentation but also the user experience is quite low.
Look, I haven't had a chance to see the product so it's hard to comment what is clear is that the competitive environment in the UK is a very strong one and hopefully consumers will benefit from that.
Anyway, it's been a great pleasure talking to you, thank you very much for your time, and hopefully we'll meet again.
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