Building a diversified portfolio online

Sammeer Sharma, managing director and head of wealth management, Standard Chartered Malaysia. (Photo credit: Sammeer Sharma)

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KUALA LUMPUR (Oct 5): Managed portfolio services, in which a professional investment advisor manages a diverse portfolio based on the client’s preferences, used to be only accessible to the wealthy. However, more companies in Malaysia are starting to use technology to lower investing costs and offer digital managed portfolio services to the masses.
 
Two such services available locally are iFast Capital Sdn Bhd’s FSMOne managed portfolios and Standard Chartered’s SmartGoals. These services are entirely digital, offer diversified portfolios across multiple asset classes based on investors’ risk preferences, and are affordable, according to the players.
 
“We launched the managed portfolio services in 2017. We do the asset allocation, pick the unit trusts, construct the portfolio and do the rebalancing for clients,” said Jerry Lee, assistant portfolio manager at iFast (pictured below). The typical minimum investment amount previously needed for such a service can start from a few hundred thousand to a few million ringgit, he added.
 
“Instead, we are offering this service to the mass public. When we first started, the minimum amount was RM5,000 or RM10,000. We lowered it to RM1,000 earlier this year. With this amount of money, they can invest in a well-diversified global portfolio.”

Lee (Photo credit: Jerry Lee/iFast)

These managed portfolio services are similar to discretionary mandates in that the fund manager has the right to make portfolio changes, and the investments are managed according to the client’s pre-defined risk preferences. Discretionary mandates in some other companies may include preferences other than risks. 

The target audience for digital managed portfolios tend not to be the high net worth individuals (HNWI), who could be willing to pay more for in-person advisory services.

“We are starting to see an increasing demand for [digital] portfolios, especially as people become more cost-sensitive… The digital managed portfolio service is completely online, which lowers the cost,” said Lee.
 
He also observed that many Malaysian investors do not know how to construct diversified portfolios. According to Lee, many of them concentrated their holdings in the Malaysian market.
 
This lack of awareness or need for financial advisory services is also something that Standard Chartered observed. In a recent study it did on the emerging affluent in Asia, over 70% of the respondents agreed that managing their finances effectively is key to achieving upward social mobility, but almost 50% of them are relying on basic savings account to meet their investment needs.
 
“What explains the gap? It’s the access to quality financial advisory,” said Sammeer Sharma, managing director and head of wealth management, Standard Chartered Malaysia.
 
The bank launched SmartGoals in 2019. The product, which targets mass and emerging affluent clients, evaluates a client’s risk and return preferences and from there, offers a diversified portfolio of unit trusts tailored to those preferences. Standard Chartered’s clients can create an investment portfolio via SmartGoals from RM400.
 
Both FSMOne’s managed portfolio and SmartGoals can be set up and managed online. For the latter, the journey can be entirely digital, as long as they have a current or savings account with the bank. According to Sammeer, they are currently working on digitalising account opening services as well.
 
“Digital financial products are transforming the financial industry, making wealth management tools available to more people. Many wealth creators are already embracing the power of digital services to close their wealth expectancy gap… We have experienced a 300% increase in digital client engagement and a 150% increase in digital transactions this year so far,” said Sammeer.

Different from robo-advisors

Some might find digital managed portfolio services similar to robo-advisory platforms, which also has low minimum investment amounts, are digital, and aim to give investors a well-diversified portfolio based on their risk preferences.
 
One of the main differences between digital managed portfolio services and robo-advisors is that the latter is an automated, algorithm-driven service, whereas the former is run by fund managers.
 
“Markets are inherently human in nature and we believe humans can understand humans better, even more so with the help of a few machines. At Standard Chartered, our advisory unit is empowered with cutting edge research and data analytics to curate investment ideas and recommend portfolio allocations. These pre-set portfolio allocations then form the basis of our investment advisory module inside SmartGoals,” says Sammeer.
 
Compared to fund managers, Lee believes that algorithms cannot properly take into account sudden events in the market, and thus cannot be as flexible in responding to events. Adding to that, most robo-advisors invest in exchange-traded funds (ETF) instead of actively-managed funds.
 
“From our perspective, not every equity market globally [can be properly tracked by] ETFs, especially in emerging markets. For example, the Malaysian equity market is not efficient and there is still plenty of room for fund managers to outperform the benchmark. Therefore, we would use actively-managed funds [for these countries] rather than ETFs,” said Lee.
 
According to a data from Refinitiv in June, actively-managed Malaysian equity funds outperformed their ETF peers for four out of five years as at 2019.
 
When choosing the actively-managed funds to include in the portfolio, the iFast team also evaluates factors like the fund managers’ capabilities, past record and strategy.
 
“We will get this information by interviewing the fund managers. Some of this information cannot be factored into a formula [by robo-advisors],” said Lee.
 
However, the cost of investing in managed portfolio services can be higher than that of robo-advisors, as ETFs generally have lower fees than unit trusts.
 
The upfront subscription fee that FSMOne managed portfolio clients have to pay, range between 0% and 1.25% of their investment amount, based on their risk level. They also have to pay a 0.5% p.a. portfolio management fee, according to its website. Investors do not need to pay the sales fee for each individual fund or any switching fee.
 
Meanwhile, SmartGoals sales charge is between 0% and 2.5% of the investment amount. There are no annual portfolio management fees for investors.
 
In comparison, robo-advisor StashAway’s annual fee ranges from 0.2% to 0.8%, depending on the total investment amount.

How does it work?

Investors on these platforms start the investing process by answering a questionnaire to determine their risk profile. From there, they can choose the type of portfolios they want, which range from most conservative to most aggressive.
 
FSMOne’s managed portfolio draws from over 600 funds from 30 fund houses, whereas each SmartGoals’ portfolio involves a combination of three different funds to meet clients’ specific risk levels. If required, investors are given three other funds to choose from.
 
FSMOne’s investors can switch their risk profiles if their situation changes, but the asset allocation is up to fund managers.

“We don’t advice our clients to change [their portfolio asset allocations] too regularly, otherwise it’s like they’re timing the market,” said Lee. Investors who have questions can contact their investment specialist team via email or phone call, he added.
 
Standard Chartered’s clients, meanwhile, are expected to review their profiles every two years and similarly, update their investment profile when their circumstances change.
 
“For SmartGoals, in the next phase, we are developing the journey whereby customers would be able to edit their portfolios and amend their goals electronically, as and when their profiles change,” Sammeer said.
 
According to Lee, the returns for FSMOne’s five managed portfolio funds in 2019 range from 9.7% for its most conservative portfolio to 18% for its more aggressive portfolio. Over the past six months, the returns ranged from 3.5% to 12.7% (as at August).
 
Over the last twelve months, SmartGoals’ portfolio returns ranged from 2.7% to 15.1% (as at September), according to Sammeer.
 
Going forward, iFast is considering the addition of ETFs from some countries into its managed portfolio service. This will be enabled by the brokerage service that iFast is planning to launch by the end of this year.
 
“We do realise that for some efficient markets like the US, Europe or Japan, it makes sense to use ETFs instead of actively-managed funds [to track the markets]. We can actually include ETFs in our portfolios now but operationally, there is some difficulty in doing so, without having our own brokerage platform,” Lee said.
 
Meanwhile, Standard Chartered is focused on digitising its wealth management segment including by making virtual advisory the go-to model, and transitioning to 100% paperless transactions by 2021 for investment products.
 
“We also plan to offer client-facing investment [products] across categories and we will be launching our online FX trading platform soon, which will be one of its kind,” said Sammeer.

Tho Li Ming