Sunday 14 Jul 2024
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This article first appeared in Personal Wealth, The Edge Malaysia Weekly on July 15, 2019 - July 21, 2019

A few years ago, Ronnie Tan Tai Ngee found himself increasingly frustrated with the pace at which the financial services industry was developing. Despite the advances made in technology, the industry seemed to be stuck in the past and many investment services were still out of reach for many retail investors.

A tech expert who had spent three decades in the financial services industry, Tan decided to take matters into his own hands when he saw a window of opportunity in 2017. That was the year the Securities Commission Malaysia (SC) launched the Digital Investment Management (DIM) framework.

The framework included the requirements for a licence to offer automated discretionary portfolio management services. In other words, this would allow the setting up of local robo-advisory firms.

Struck by the ease of this investing approach and low barrier to entry for retail investors, Tan presented the news to Goh Peng Ooi, founder and group executive chairman of Silverlake Axis Ltd (parent company of Silverlake Capital Market Solution). Being a tech whiz and an entrepreneur himself, Goh was all for it.

“He asked me to look into the DIM framework to see what we could do. Silverlake is a technology company. So, we wanted to explore how we could play a role in this segment,” says Tan.

“I went about looking for partners because I believed that to do this, we needed to address the importance of investing and not just approach it from a technology perspective. We wanted to build an entire ecosystem.”

Silverlake is a pioneer in the financial technology (fintech) space. It provides financial software to 40% of the banks in Southeast Asia.

It was this exploratory mission that led to the launch of robo-advisory service MYTHEO. It is operated by GAX MD Sdn Bhd, a joint venture between Silverlake Digital INX Sdn Bhd and Japanese fintech player Money Design Co Ltd. Tan is currently CEO and managing director of GAX MD.

MYTHEO is a portmanteau of Malaysia and Theo, the younger brother and confidant of Dutch post-impressionist painter Vincent van Gogh. The platform — the second to be approved by the SC — is a vehicle Tan wishes existed when he started investing decades ago.

“Traditionally, when it comes to investing, most people go through financial institutions, hoping that the customer relationship managers will guide them through the process. But from my personal experience, many of them push investment products without really considering the individual’s needs,” he says.

“If you really think about it, these managers are not customer-centric at all because they are pushing products to maintain their position as top sellers. The majority of them do not understand or care to understand whether the client needs a particular product. They do not really check to see whether the funds are suitable for your risk appetite.”

This drove him to look for a suitable platform — one that leveraged technology and was accessible to anyone and not just the privileged few. The platform would also play to his strengths and personal interest.

At 59, Tan has been with Silverlake Capital Market Solution for a little more than two decades. He has been responsible for its business growth, strategic collaborations and value creation. He also leads Silverlake Group’s fintech transformation strategy.

Prior to joining Silverlake Group, Tan was group head of IT and operations at HwangDBS Investment Bank. Before that, he was vice-president and chief information officer (group IT and banking operations) at OCBC Bank.

“I have come a long way and fintech has always been my passion. My experience in the banking sector has given me a lot of exposure to the demand and supply sides. The entire experience has given me a very good perspective of the overall marketplace. But one of the greatest things I have learnt at Silverlake and from our chairman [Goh] is entrepreneurship and how we can make things better,” says Tan.

Both he and Goh felt that using a tried and tested model would be the best way forward, instead of trying to reinvent the wheel. Tan approached several robo-advisory platforms but decided that Money Design would be the best fit as its culture and values reflected those of Silverlake Group. At the time, the firm was looking to expand beyond Japan’s shores.

Founded by Mamoru Taniya and Tomoyoshi Hirose in 2016, Money Design’s THEO is currently the largest robo-advisor in Japan, with 70,000 unique users and US$400 million (RM1.65 billion) worth of assets under management. The founders have extensive experience in fund management companies such as BlackRock Inc and Nomura Holdings as well as technology giants such as Google Inc.

According to Tan, the founders decided to call their platform THEO in reference to Theo van Gogh as he was a strong pillar of support, both emotionally and financially, to the renowned artist who suffered from mental illness for most of his life. “We want to play a supportive role in creating awareness of the importance of saving and investing in Malaysia,” he adds.

By combining the expertise, technology skills and extensive networks of Money Design and Silverlake Group, the management teams are able to harness the best of their “collective intelligence” for MYTHEO, says Tan. “That is because the whole is greater than the sum of its parts,” he quips.

Research reports indicate that robo-advisors are the future of investing. According to global consulting firm Deloitte, the future of advisory services will likely combine digital investing services with robo-advisory platforms. A Bloomberg research report notes that robo-advisors’ assets under management is expected to grow to US$2 trillion in the US by 2020 from US$50 billion in 2017.

 

Functional portfolios

The initiative for MYTHEO was parked under Silverlake Axis’ Growth Accelerator Exchange (GAX), which was set up in 2015 to help micro, small and medium enterprises in Asean gain access to financing.

On May 6, GAX MD was granted a Capital Markets Services Licence by the Securities Commission Malaysia to carry out regulated fund management activities in relation to digital investment management. Its services were made available to the public on May 23.

“Our platform is already up and running because we adopted a proven methodology and proprietary algorithm from our Japanese partner and combined these with our technology expertise. The investment technology is based on the established THEO digital investment strategy developed by Money Design,” says Tan.

The end-to-end digital discretionary investment service provides client profiling, risk assessment, compliance checking, asset allocation, payment settlement, trade execution, portfolio rebalancing and reporting. “The suite of services is delivered digitally and seamlessly at low cost via web and mobile application. We plan to approve investor applications and execute trades by the next business day at the latest,” he says.

Based on the answers to questions such as age, income, investment horizon and risk tolerance, the platform proposes a diversified portfolio that best suits the individual’s needs. The platform then manages the portfolio automatically.

Tan says the entire application process takes four minutes. But unlike its approved counterpart, the platform requires a minimum investment amount of RM500 up front. He stresses that clients can deposit and withdraw their funds at any time at no cost.

The portfolios are constructed based on the clients’ answers. The algorithm then proposes an optimal investment plan, selecting 29 exchange-traded funds (ETFs) from an internal pool of 59 ETFs in the MYTHEO universe, which have been filtered and selected from more than 6,000 ETFs on US stock markets.

The ETFs undergo a two-stage

filtering process. Tan says MYTHEO’s ETFs are chosen mainly for their high liquidity.  The robo-advisor, however, avoids those with high volatility and inverse ETFs. The platform buys into ETFs provided by firms such as BlackRock, Vanguard and State Street Global Advisors.

With 29 ETFs, MYTHEO has the highest number of securities in a robo-advisory portfolio. “This allows investors to have access to a wider basket of ETFs so they can enjoy potentially better returns and diversification,” says Tan.

The platform’s algorithm automatically rebalances portfolios every month. “We charge an annual fee of 0.5% to 1%, depending on the size of the assets under management,” says Tan. All other fees are borne by the company.

He adds that MYTHEO uses AI Assist — a proprietary machine-learning algorithm that uses market data as well as that of market sentiment indices, derived from huge amounts of local language text from global news sites, blogs and social networks. “Our artificial intelligence is risk-based and it looks at economic news and events or tweets by leaders of countries, for example. It does not jump to conclusions based on just these but uses such information to monitor the performance of ETFs and determine whether there is a correlation [between the news and their performance].

Tan says if investors had stayed invested in the equity markets since the collapse of Lehman Brothers — the US investment bank that went bust in 2008 and triggered a recession that turned into a global financial crisis — they would have made a return of more than 200%.

According to international specialist banking and asset management group Investec, those who invested £10,000 in the MSCI AC World Index at the start of 2009 would be sitting on a portfolio worth £30,961 (RM160,080) now.

“The algorithm examines whether specific securities in a portfolio are at risk of a significant decline in the next investment period. If the risk of a significant fall is high, then MYTHEO shifts to a more conservative portfolio construction with the aim of reducing the size of the decline,” says Tan.

He adds that to celebrate the recent launch of its business, the firm will contribute an uplift amount (or a rebate) of 25% of its monthly management fee for a period of one year to the accounts of those who sign up for the service during its promotion period, which ends Nov 22. There are no account opening fees, commissions or trading fees and investors are free to close their accounts or withdraw money at any time.

 

Different strategy

Something that sets MYTHEO apart from its peers is that its investment strategy is not goal-based. Instead, the platform’s algorithm is based on functional portfolios that have been segregated into income, growth and inflation-hedged asset classes.

“We have observed that no matter what your goals are, you want your assets to grow. You would want income from the assets and you want it hedged against inflation,” says Tan.

“By using multiple ETFs that have global exposure and diversified asset classes that are listed on the US stock markets and combining these assets, MYTHEO can develop optimised portfolios that meet the needs of each investor. We have back-tested the system using financial data from the last 20 years to see how the portfolios will perform during a financial crisis, so that we can try and protect investors as much as possible.”

While the algorithm calibrates and allocates investments based on one’s risk tolerance, users still have the freedom to adjust their portfolios. “Let’s say you want to control your own portfolio now that you understand how the three functional strategies work. You can then customise your portfolio,” says Tan.

“For example, MYTHEO has allocated 30% of your assets to growth, 30% to income and 40% to inflation-protected funds. If you believe you can take on more risk, then you can adjust the allocation according to your risk tolerance. You just need to slide the bar and choose a higher allocation, say, 50% to growth, 30% to income and 20% to inflation-hedged funds.

“After that, you have to continue monitoring your portfolio. And if you are doing well, then you should maintain that allocation. But if you feel you have made a mistake, you can opt to go back to MYTHEO’s recommendations.”

He adds that the option of customisation was included to give investors the opportunity to take charge of their portfolios. Users will be kept abreast of their portfolios’ performance on a regular basis.

“The platform is built to be very transparent. You will know how much money you have made from your investments, what the management fees are and the dividends you are getting. You will also be continually informed of your portfolio’s performance,” says Tan.

“We use a lot of big data to power the platform. The artificial intelligence tracks the news you read and web pages you access often as well as monitors how often you deposit and withdraw money, among others. All this information enables us to gauge our customers’ [preferences and monitor their interests].

“For example, if a user reads his portfolio performance reports every day, he is automatically given daily performance updates compared with those who only read the performance reports once a month, so that the user is not bombarded unnecessarily with information that he is not interested in. However, he can always choose to change this preference at any time.”

To ensure investor protection, security and minimal service disruption, the robo-advisory platform is hosted on a tier-3 (which indicates the level at which the hosting systems are robust and less prone to failure) verified data centre. Also, investors’ assets are held by a custodian, Malaysian Trustees Bhd, a subsidiary of RHB Bank Bhd and an independent trustee licensed by the SC.

 

Getting the message across

While investing via robo-advisors is a lot simpler than the name implies, getting the message across to Malaysians — especially millennials — is a challenge, says Tan. He finds that the majority of young Malaysians, who make up about 29% of the population, have shown very little interest in investing beyond unit trusts and directly in the stock market.

“There are many reasons for this. But mostly, it is because many in this category are faced with high [financial] commitments and low wages,” he says.

That is why MYTHEO’s primary target group are those under the age of 40. Tan says the firm’s Japanese stakeholder uses the same strategy, where 80% of its clientele are people without prior financial knowledge or investing experience. An estimated 40% are below 40 years old.

“This is a group of people that I feel are underserved. That is why we wanted to create a platform that allows for financial inclusiveness,” he says.

Nevertheless, the numbers are picking up. In 2017, Bursa Malaysia revealed that there had been a 36% jump in the number of Central Depository System (CDS) account holders aged 25 years and below. This age group was the fastest growing of all the bands of CDS account holders in 2016. There were a total of 27,252 account holders in this age group as at Dec 30, 2016.

“Coming in second — and also an encouraging sign to the stock market regulator — were investors between the age of 26 and 35. There were a total of 192,123 CDS account holders in this age group,” says Tan.

“Generation X, or those between 46 and 55, remained the largest group of CDS account holders. This was followed by the 56 to 65 and 36 to 45 age groups. There were 2.49 million CDS account holders last year, an increase of 0.4% year on year.”

These statistics are encouraging as they indicate that more people are showing interest in exploring the different areas of the investment space, says Tan. He adds that MYTHEO is most relevant to those who are currently invested in unit trusts. The SC stated in its 2018 Annual Report that the assets under management of unit trust funds stood at RM426.18 billion that year.

Tan believes that giving people the option to invest in robo-advisory platforms via the Private Retirement Schemes (PRS) or Employees Provident Fund (EPF) could draw the younger group of investors. “If digital investment management firms can qualify and be included as one of the PRS funds, it will definitely boost the industry’s net asset value and be a viable investment option for investors,” he says.

“Financial inclusiveness can be accelerated if EPF allows depositors to withdraw funds to invest in digital investment platforms. Currently, depositors can only withdraw a portion from their Account 1 to invest in approved unit trust funds, which impose higher fees than digital investment platforms.”

As rosy as this may sound, Tan recognises that onboarding this group of people is still a mammoth task. “We did a number of surveys before setting RM500 as the minimum entry amount, but there are many who would think this is a big commitment. If you think about it, you will realise that if you are willing to spend on two to three cups of artisanal coffee a day or branded shoes or handbags, you can put aside RM500. All you need to do is cut down on your coffee or beer because all these add up,” he says.

It is for this reason that MYTHEO has planned aggressive awareness campaigns, both online and offline, over the next 12 months. “Investing is like running a marathon — it is tiring and you need a lot of stamina. But you will get better at it if you start by running 5km or 10km and then increasing the distance as your stamina improves,” says Tan.

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