Increasingly, fund managers are considering the likelihood that their biggest rivals will not be other humans operating funds, but sophisticated algorithms. The potential for automated, or robo funds to take business from traditional active managers is just beginning in the retail space.
For AsianInvestor's Year of the Dog outlook, we decided to ask whether institutional investors could begin to take advantage of the low fees that these funds offer.
Will regional Asian institutional investors embrace robo funds?
The percentage of Asia Pacific assets under management (AUM) sitting in robo (or automated) funds was estimated to be only 0.2% of total AUM as of October 2017, according to technology consultancy International Data Corporation. However, it predicted this would grow from an estimated $30 billion in 2017 to $500 billion in 2021.
That sounds impressive, but would still only represent 1% of a regional AUM that is expected to expand by $470 billion over the next three years.
Several Asian firms have started implementing robo services over the last few years. These include Algebra, a Malaysian Shariah-compliant robo adviser, Xuanji in China, Acorns and Clover in Australia, Prive Managers and 8 Securities in Hong Kong, and Mesitis and Bambu in Singapore. Taiwanese financial institutions have started offering robo services as well, including O-Bank, Tarobo Investment Advisors, and Fubon Securities.
However, so far these firms have focused on attracting retail investors, with the region’s larger institutional investors staying largely on the sidelines. AsianInvestor believes this will continue to be the case this year, for a number of reasons.
The advantages that a robo advice platform offers to retail investors—portfolio advice, access to a wider range of investments, and lower costs—are less of a concern for institutional investors. They have ready access to the markets, either directly through stock exchanges or with asset managers, and are already the biggest investors into exchange traded funds (ETFs) in Asia, the main investment vehicle for robo funds, accounting for 80% to 85% of ETFs bought in the region in 2017, according to research firm ETFGI.
Robo advisers also lack the necessary sophistication at this stage to accurately model the range of quantitative and qualitative factors that go into asset allocation strategies for institutional investors. The standardised, low-cost optimisation strategies of robo funds are not an easy fit for the large portfolios of pension funds, insurance companies, and sovereign wealth funds.
Finally, there’s something to be said about the value of human contact for institutional investors. They prefer a human adviser who knows their priorities and tendencies beyond what an electronic questionnaire may indicate, as well as the ability to provide accountability and perspective during periods of market volatility.
As one industry expert said, “Robo mostly is just online access with no human contact. Very few people like to be served that way—they choose robo because they can’t afford human contact.