On July 1, 2017, we made hypothetical investments of $1m in each of the three robo-advisors featured below. Today we complete the cycle by publishing the value of our investments one year later.
Three portfolios for each robo-advisor are presented: Cautious, balanced and aggressive.
The purpose is to highlight the practical angle – how robo-advisors allocate and how they perform over the long-term, particularly when there is a downturn.
Note that the robo-advisors operate in different markets and offer different products. In FSA‘s presentation, they are not competing against each other, but against their own benchmarks.
At the end of one year, all three robo-advisors did make money — the annual totals all exceed the initial $1m. However, not all beat their benchmarks. Below is a summary of performance.
FSA Robo-Advisor Showcase
Performance on 1 July 2018
Algebra is a robo-advisor offered by Malaysia-based Farringdon Group. It was launched in July 2017. It offers sharia-compliant and conventional portfolios. FSA features three non-sharia portfolios.
Smart beta algorithm
Algebra is not a typical robo-advisor. While many other firms, including the two other participants in our showcase, offer ETF-based portfolios, Algebra’s are based on an algorithm-driven smart-beta stock-picking strategy developed by Singapore-based Farringdon Asset Management. The portfolio consists of 25-50 US stocks from the S&P 500 universe. They are selected based on the analysis of portfolios of ten highly-rated active US equity fund managers. From each manager the algorithm chooses five stocks in which their fund is overweight, to include in the Algebra portfolio. The three model portfolios presented here contain a different allocation of fixed income to manage the risk profile. The annual fee is 0.85%.
Algebra now manages around $160m of assets and its business has grown 40% in the past 12 months, according to Martin Young, CEO of Farringdon Asset Management. While most of its clients reside in Malaysia and the UK, the firm’s services are available to investors across the region. It has also recently obtained regulatory approval in the US, and Young said its business there is growing rapidly, albeit from a low base.
Algebra’s three portfolios outperformed their benchmarks, which were combinations of the S&P 500 index and the US Aggregate Bond Index during the past 12 months. Young attributes it to the strategy’s high exposure to technology companies. He admits, however, that the portfolios had a high beta, outperforming the benchmarks on the way up and underperforming them on the way down.
While the process of selecting securities is essentially automated, human portfolio managers control the number of stocks included in the portfolio, with the intention of managing diversification and volatility. The strategy held only 25 stocks from December to February, but the number was increased to 50 in March.
Result: 3 out of 3 portfolios beat the benchmark
Note: Asset allocations may not add up to 100% due to rounding.
Beijing-based Creditease Wealth Management launched Toumi RA, its robo-advisory platform, in May 2016. It offers offshore US dollar-denominated portfolios of global ETFs, holding equity and bond ETFs as well as gold and real estate, as well as renminbi-denominated portfolios of Chinese mutual funds.
Volatility target approach
The firm serves onshore and offshore clients. The latter make up around 30% of the firm’s clients, according to Frank Wang, managing director at Creditease Wealth Management. He told FSA that the onshore business, which is smaller by AUM, is growing fast as this is where the firm concentrates its efforts.
Wang said that while the US equity and US dollar exposures benefited the portfolios throughout the year, emerging markets, Chinese equities and gold detracted from the performance.
Toumi RA’s portfolios target a specific level of volatility. The asset allocation is adjusted if the volatility deviates from the target. Since July 2017, the balanced portfolio became a bit more conservative, reducing the equity exposure to 50% in June from 70% in August, and increasing fixed income exposure to 34% in June from 15% in August. The aggressive portfolio reduced its equities and added to fixed income in May.
The 2.87% loss the firm’s aggressive portfolio suffered in June appears to be the effect of a downturn in Chinese large cap stocks. The iShares FTSE/Xinhua China 25 Index ETF, which constitutes around 25% of the portfolio, lost around 12% in June.
Result: 0 out of 3 portfolios beat the benchmark
In business since 2008, Marketriders is offered by the US-based brokerage Sogotrade. It was re-launched in March 2017 as a full service robo-advisory service targeting US and Asian clients. Sogotrade has offices in China, Hong Kong and Taiwan. Customers in the Asia-Pacific region now constitute over 35% of the firm’s revenue, according to Robert Benbenek, director of business development for Marketriders at Sogo Financial Group.
Switch to low volatility
Marketriders offers US-based accounts, and its model portfolios consist of US-based ETFs. Marketriders charges the advisory management fee of 0.265% per year and no transaction fees.
FSA started with the firm’s three core portfolios. On 1 March, our hypothetical investments were switched to new low-volatility Power Portfolios. They outperformed their benchmarks since the switch. On a cumulative basis, since March the balanced and aggressive portfolios made up much of their earlier underperformance vs their benchmarks.
The balanced portfolio ended the year above the benchmark and the aggressive one significantly reduced the gap between it and the index. The cautious portfolio stayed above its benchmark throughout the year, on a cumulative return basis.
Addressing the performance of the portfolios in January and February, Benbenek said that while the firm’s core portfolios “were fairly well positioned to reduce risk in volatile markets, they were not yet optimal”. They mostly underperformed their benchmarks on the way up in January and also on the way down in February.
Although the new low-volatility portfolios were launched soon after, Benbenek said the decision was not a direct result of the market downturn. They are designed, however, to reduce future volatility.
Result: 2 out of 3 portfolios beat the benchmark.
FSA thanks Creditease, Farringdon and Sogotrade for participating in our showcase through thick and thin of the markets. As the series of articles is meant to provide our readers with an ongoing view into the robo-advisory landscape in Asia, next month we will continue with a new set of firms and portfolios. Stay tuned!
