June 15, 2021

Invest to the dictation of the machines

Robots also want to manage their investments. Process automation, a trend present in all sectors of the economy, is already an integral part of the competitive mutual fund industry. And it does so in two main ways: helping to determine the client’s risk profile or actively participating in the management of the financial product. The ‘robo advisor’, or automated managers, represent a profound revolution in a sector constantly pressured to achieve higher returns by charging lower commissions. Robo advisor can be very efficient at automating repetitive processes and allowing workers to focus on tasks where they can add value. This leads to a reduction in staff that can translate into cheaper commissions than the competition. Likewise, by means of a questionnaire they can better identify which products are the most appropriate for the client, or even take charge of managing a fund based on market fluctuations. The robot will adjust the portfolio according to a pattern previously determined by a human manager. One of the pioneers in Spain in the automated management of index fund portfolios is Indexa Capital. Through the use of ‘robo advisors’, the company automatically adjusts its portfolios based on a ‘model portfolio’ that is reviewed every three months. “A quarterly committee assesses market conditions and updates the ‘model portfolios’,” says Unai Asenjo, co-CEO of Indexa Capital. Subsequently, the robot will balance the distribution of assets depending on how the market evolves according to the established parameters until the committee meets again. Provide value Thus, Indexa allows its human capital to focus on tasks that add value, while leaving the most automatic services in the hands of the ‘robbery advisor’. This formula has allowed it to incur lower personnel costs than other management companies, which are reflected in its competitive commissions. According to the company, the average annual commissions on its portfolios was 0.48% in 2020. This is a lower figure than the average commission of 1.83% applied by equity funds in 2019, according to a Morningstar study. Other companies that also manage portfolios with ‘robo advisors’ in Spain are InbestMe and Finanbest. According to its web pages, the management commission varies between 0.25% and 0.42% in InbestMe, while in Finanbest it is around 0.39%. It is important to note that in these two cases we only speak of management commissions, that is, later we must add others such as subscription, success or reimbursement fees. That will depend on each manager. In turn, automation helps in the search for returns higher than those of the benchmark. «We have ten levels of risk, with one less and ten being the most risky. Within this group, the most demanded by our clients is portfolio six, which since December 31, 2015 offers an annualized return of 6% per year, “says Asenjo, from Indexa Capital. Profitability The profitability of this type of product is similar to those advertised by InbestMe and Finanbest on their respective websites. On the one hand, InbestMe estimates the average profitability of its index funds since 2015 at 5.12%, while Finanbest calculates a net annualized return of 6.1% for its ‘profile blue’ portfolio, designed for investors seeking a level of Medium risk. According to Asenjo, there are about seven independent companies that manage about 1,000 million euros with ‘robo advisors’. This group includes Indexa, InbestMe and Finanbest. Meanwhile, financial institutions in our country manage nearly 5,000 million in an automated way in index fund portfolios, according to this expert. Óscar Gil, professor of finance at the Institute of Stock Market Studies, considers that a large part of the already automated processes in the investment fund industry are those related to identifying the client’s risk profile. However, the management of the portfolios depends on the decisions of the managers and not on the robots. “The use of automation for risk determination is already in the majority, while in the management part there is still a long way to go. There is still quite a bit of classical management, ”says Gil. In the opinion of the expert from the Institute of Stock Market Studies, ‘robo advisor’ in asset management make decisions based on what has happened in the past, which is why they work very well in replicable market situations. On the other hand, its performance is not so good in unusual situations that are outside the norm. An example would be the falls in February and March 2020 caused by the spread of the new coronavirus (Covid-19), an atypical situation in the history of financial markets. Despite this drawback, ‘robo advisor’ can be very useful to assist managers in their day-to-day activities. Among other possible services, they can help to schedule purchase and sale operations when a certain market level associated with the client’s risk profile is reached, or they can also suggest investment ideas that perhaps the manager had not detected. “Digitization in all production processes is accelerating and the investment sector is no exception,” says Professor Gil. Go to extremes The financial world is progressively pushing fund managers to offer the most competitive costs as a way to attract customers. This situation means that market participants have to adapt and lower costs, so the trend is to automate all processes in which no value is added. “My impression is that professional management will go to two extremes. On the one hand, indexed passive management instruments and, on the other, pure active management in which the manager contributes additional value, ”concludes the IEB finance professor. .

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