First major test for Malaysia’s robs-advisors

In many ways, this is considered the first major test for Malaysia’s robo-adviser industry, which was introduced in the country about two years ago. 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-adviser 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-adviser.

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-adviser that allows investors to manually change the weightage of their allocations to the growth, income and inflation hedge segments of their portlios. 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 an other that they can adjust themselves. Investors should allow the robo-adviser 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-advisers 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-advisers 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-adviser’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.

Is this a good time to invest?

Robo-advisory platforms have several qualities that make them a good investment vehicle in this environment, according to the players. These include their diversification of assets, low cost and accessibility.

All three platforms in the country invest in multiple asset classes, including US, European and Malaysian equities, bonds and sukuk, US Treasuries and gold. During the onboarding process, investors can determine their risk profile by setting goals or answering quizzes, after which they are provided with a diversified portfolio that has been tailored to their needs.

“We are democratising the investment space. Before this, if you wanted a diversified portfolio, you would probably need a personal wealth manager, or you would need to be savvy enough to make allocations to various types of unit trusts. We also have lower fees [than other investments in the market] as most of the robo-advisers charge service fees of less than 1%,” says Mohd Izzat.

For Wahed Invest, which has the most exposure to the Malaysian market among the robo-advisers in the country, the sell-offs since the political turmoil in February have lowered the overall valuation of the market.

“The ETF that we use for the Malaysian market tracks high-dividend players. In terms of capital gains, we may not see a recovery soon. But because the ETF is mostly geared towards high-dividend players, we hope some of the dividends that are reinvested will help the performance. If you want to be invested, now is the perfect time to get a good discount in terms of valuations,” he says.

Robo-advisers allow investors to diversify into global assets at a low cost. Although MYTHEO and StashAway invest in US-listed ETFs, these assets also track indices in Europe and Hong Kong, for instance.

“If you have a medium to long-term horizon, there is still no other more cost-efficient platform that invests your money in multiple asset classes with global exposure. Taking a local view with the weakening ringgit and a stock market that has been depressed for years, it is not a bad idea to diversify some of your assets overseas,” says Wong.

Each of StashAway’s portfolios has a different effective exposure to the US dollar or US companies, ranging from 13% to 85%, according to him.

Is the US market attractive now, given that the longest bull run in its history has just ended? Tan observes that as the largest market in the world, it could potentially outperform other developed markets after this crisis.

“It is important to understand that US companies operate and generate revenue across the globe. So, they are not entirely dependent on the performance of the US economy,” he says.

Less than 45% of MYTHEO’s equity holdings are US-based assets.