Cover Feature: Robo-advisors playing the long game

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on April 6, 2020 - April 12, 2020.
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Those who have invested in exchange-traded funds (ETFs) or unit trusts via robo-advisory platforms may be finding their portfolios in the red as global financial markets reel from the impact of the Covid-19 outbreak and other market-moving events since the beginning of the year. 

In response, these platform operators or digital investment managers are asking investors not to panic but to adopt a long-term strategy and use this opportunity to diversify their portfolios.

In many ways, this is considered the first major test for the local robo-advisor industry, which was introduced about two years ago in Malaysia. There are currently three players operating in the market — StashAway Malaysia, MYTHEO and Wahed Invest.

Their investment portfolios saw low single-digit returns or negative returns in the first two to three months of the year. According to StashAway, its year-to-date performance (as at mid-March) ranged from 2.2% for its most conservative portfolio to -4.7% for its balanced portfolio and -11.6% for its most aggressive portfolio. The portfolios have seen returns of 8.9% to 13.5% since the launch of the robo-advisor in late 2018.

“Two short years is not enough to judge the performance of our portfolios as we are built for the long term, so that investors can invest throughout the cycle,” says StashAway country manager Wong Wai Ken. 

He points out that the S&P 500 has delivered a compound annual return of 11% since 2008, even after factoring in the 29% decline in February. “Given the current situation, nobody knows when or how the markets will recover. However, we are confident that the long-term trend for equities remains positive as the market has come out of various black swan events before.

“This is an external health shock. It is not because something is wrong with the fundamentals of the financial system, like in 2008, or the fundamentals of the asset class, as with technology stocks in 2000, or the fundamentals of the economy, like the 1997/98 Asian financial crisis. We see a recovery in markets and economies as soon as the coronavirus is contained.”

MYTHEO’s year-to-date returns (as at Feb 28) were -9.05% for its growth portfolio, 4.91% for its income portfolio and -3.91% for its inflation hedge portfolio. An investor with a balanced portfolio — which has an equal distribution of all three types of portfolios — would have seen a return of -3.01%.

MYTHEO’s growth portfolio comprises equities while its inflation portfolio consists mainly of commodities and real estate investment trusts and its income portfolio is made up of fixed-income assets.

“This performance is better than those of the S&P 500, Dow Jones Industrial Average and FBM KLCI, which have gone down more. This is made possible with MYTHEO’s portfolio management strategy of having multiple asset classes and global diversification,” says Ronnie Tan, CEO of GAX MD Sdn Bhd, which operates the robo-advisor. 

Volatility will continue and investors should stick to their monthly deposit plan instead of timing the market, he adds. “It is not the time to panic and liquidate your positions. An investor who focuses on timing the market has the greatest potential of losses. But experiencing short-term losses is part of having long-term gains.”

MYTHEO is currently the  only robo-advisor that allows investors to manually change the weightage of their allocations to the growth, income and inflation hedge segments of their portfolios. Under the present  circumstances, should investors give more weight to income-producing assets?

“If you do that, you are trying to time the market. This option is given to investors who are savvier. Usually, they have one portfolio managed automatically by MYTHEO and another that they can adjust themselves. Investors should allow the robo-advisor to manage and optimise their portfolios,” says Tan.

For the newest player in the market, Wahed Invest, its year-to-date performance (as at March 19) net of fees ranged from -0.2% for its most conservative portfolio to -6.4% for its most aggressive portfolio. Its portfolios exceeded the performance of the S&P 500 and FBM KLCI in ringgit terms over the same period, according to Mohd Izzat Fadhli Azman, executive director of Wahed Malaysia.

“You will miss out on the gains if you opt out of investing or switch to a more conservative fund in times like these. Our advice is for people to stick to their risk profiles, given that the diversified portfolio we offer is a long-term solution,” he says.

But if an investor loses his job, he could retake Wahed Invest’s quiz to determine his risk profile. “A different portfolio may be recommended to him. We always remind our clients that if anything changes in their lives, especially their finances, they should take the quiz again,” says Syakir Hashim, regional head (Apac) at Wahed Inc.

Of the three robo-advisors in Malaysia, Wahed Invest is the only shariah-compliant player. It is also the only one that has invested in locally-listed ETFs and a unit trust, which track the Malaysian market, the US market, gold and sukuk. While the Malaysian market has been badly battered, the diversification of assets and shariah focus could benefit investors.

“By investing in largely shariah-compliant securities, Wahed Invest’s investors have no exposure to the conventional financial stocks that make up the biggest weightage on Malaysian or US indices that are likely to suffer as a result of shrinking net interest margins in the low interest rate environment,” says Mohd Izzat.

 

What are the robo-advisors  doing?

Of the three players, two — StashAway and Wahed Invest — have not switched their strategic asset allocations this year, believing that the fundamentals of the economy remain intact. The last time StashAway’s Economic Regime-based Asset Allocation (ERAA) system changed its strategic asset allocation was in August last year, when it switched its non-US assets to an “all-weather” strategy to reflect the lower aggregate global growth.

“The portfolio exited Asian equities and focused on international government and corporate bonds as well as European equities. ERAA did maintain its US-exposed assets in growth mode as economic growth was still positive. The recent market crash happened at an unprecedented pace and is affecting US-based equities adversely while other asset classes such as bonds and gold are holding up well,” says Wong.

“ERAA takes into account leading economic data and interest rate expectations. While it has observed that the current prices reflect a recessionary expectation, the extent of the economic downturn is still uncertain. The market has not shown signs of extreme valuation gaps, where equities are severely undervalued. Thus, ERAA remains invested in the current asset allocation.”

The markets are already pricing in a recession, says Wong. He foresees global fiscal and monetary responses reducing the severity of a recession. StashAway offers 12 portfolios of various risk levels that track multiple asset classes by buying into 32 ETFs.

Since its launch in November last year, Wahed Invest has not changed its strategic asset allocation. Mohd Izzat points out that the economy and financial system is at a much better standing now than during the 2008 global financial crisis. Corporate earnings may take a hit due to the containment measures, but a recession could be avoided through stimulus packages, he observes.

“We determine the strategic asset allocation [of our portfolios] not just by examining historical performances but also looking at long-term capital market assumptions, statistics on the economy, inflation and earnings growth of companies in the stock market. Generally, these do not change unless the fundamentals of the economy change. Of course, we will monitor to see if there is a fundamental change and act accordingly,” says Mohd Izzat.

Wahed Invest has bought into three ETFs and one unit trust across its six portfolios. It will consider adding more shariah-compliant ETFs if these are available and meet its criteria.

As at end-February, MYTHEO’s algorithms and AI-Assist engine that manages its asset allocations had increased its weightage in US Treasuries and gold to diversify from equity markets across its portfolios. It also reduced its equity weightage in emerging markets; Hong Kong, which is a proxy to China; and India, which has high volatility. Meanwhile, it increased its weightage in Japanese equities. The robo-advisor’s growth portfolio has shifted slightly towards lower volatility ETFs.

“Our rationale for not having high volatility is that it is associated with a higher chance of experiencing a large loss and a signal of market risk. Emerging markets tend to fall more during global crises. In addition, our portfolio management approach is not to keep any investment in cash as we believe investors do not use the services of asset managers just to hold their money in cash,” says Tan.

It took about five years for stock markets to recover from the 2008 global financial crisis, he observes. But in previous pandemics, it only took about three to nine months for the recovery to occur.

“The year-to-date 33% decline [as at March 20] in the US markets should already partly or wholly reflect the risks of a recession. The global economic growth is very resilient. Once the virus is under control, the global economic rebound is likely to be fast and governments will respond with a further range of monetary and fiscal stimulus,” says Tan.

MYTHEO builds customised portfolios based on the investor’s risk profile out of its growth, income and inflation portfolios. Of the 59 ETFs in its universe, it is currently invested in 29 of them.

 

What are the robo-advisors  doing?

Of the three players, two — StashAway and Wahed Invest — have not switched their strategic asset allocations this year, believing that the fundamentals of the economy remain intact. The last time StashAway’s Economic Regime-based Asset Allocation (ERAA) system changed its strategic asset allocation was in August last year, when it switched its non-US assets to an “all-weather” strategy to reflect the lower aggregate global growth.

“The portfolio exited Asian equities and focused on international government and corporate bonds as well as European equities. ERAA did maintain its US-exposed assets in growth mode as economic growth was still positive. The recent market crash happened at an unprecedented pace and is affecting US-based equities adversely while other asset classes such as bonds and gold are holding up well,” says Wong.

“ERAA takes into account leading economic data and interest rate expectations. While it has observed that the current prices reflect a recessionary expectation, the extent of the economic downturn is still uncertain. The market has not shown signs of extreme valuation gaps, where equities are severely undervalued. Thus, ERAA remains invested in the current asset allocation.”

The markets are already pricing in a recession, says Wong. He foresees global fiscal and monetary responses reducing the severity of a recession. StashAway offers 12 portfolios of various risk levels that track multiple asset classes by buying into 32 ETFs.

Since its launch in November last year, Wahed Invest has not changed its strategic asset allocation. Mohd Izzat points out that the economy and financial system is at a much better standing now than during the 2008 global financial crisis. Corporate earnings may take a hit due to the containment measures, but a recession could be avoided through stimulus packages, he observes.

“We determine the strategic asset allocation [of our portfolios] not just by examining historical performances but also looking at long-term capital market assumptions, statistics on the economy, inflation and earnings growth of companies in the stock market. Generally, these do not change unless the fundamentals of the economy change. Of course, we will monitor to see if there is a fundamental change and act accordingly,” says Mohd Izzat.

Wahed Invest has bought into three ETFs and one unit trust across its six portfolios. It will consider adding more shariah-compliant ETFs if these are available and meet its criteria.

As at end-February, MYTHEO’s algorithms and AI-Assist engine that manages its asset allocations had increased its weightage in US Treasuries and gold to diversify from equity markets across its portfolios. It also reduced its equity weightage in emerging markets; Hong Kong, which is a proxy to China; and India, which has high volatility. Meanwhile, it increased its weightage in Japanese equities. The robo-advisor’s growth portfolio has shifted slightly towards lower volatility ETFs.

“Our rationale for not having high volatility is that it is associated with a higher chance of experiencing a large loss and a signal of market risk. Emerging markets tend to fall more during global crises. In addition, our portfolio management approach is not to keep any investment in cash as we believe investors do not use the services of asset managers just to hold their money in cash,” says Tan.

It took about five years for stock markets to recover from the 2008 global financial crisis, he observes. But in previous pandemics, it only took about three to nine months for the recovery to occur.

“The year-to-date 33% decline [as at March 20] in the US markets should already partly or wholly reflect the risks of a recession. The global economic growth is very resilient. Once the virus is under control, the global economic rebound is likely to be fast and governments will respond with a further range of monetary and fiscal stimulus,” says Tan.

MYTHEO builds customised portfolios based on the investor’s risk profile out of its growth, income and inflation portfolios. Of the 59 ETFs in its universe, it is currently invested in 29 of them.

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