Investment Research for Robo Advisers
Investment Research & Methodology
The first step in our methodology to find the best investment strategies for a robo adviser is to identify a broad set of diversified asset classes to serve as the building blocks for constructing investment portfolios.
The best way to build a tailored investment portfolio is by first finding out the "risk tolerance" of a client, which can be done through a simple "risk questionnaire" which will give a score for each client.
A roboadviser uses the risk scores to invest in a diversified portfolio made of different asset classes, such as equities, treasuries, bond & gold ETFs.
We consider each asset class’s long-term historical behaviour in different economic scenarios. We look at the risk-return relationship conceptualized in asset pricing theories, as well as expected behaviour going forward based on long-term secular trends and the macroeconomic environment.
For example, we take into account an ageing population, the increasing role of technology and how medicine is keeping people living longer.
We look into each asset class with regards to returns, risk, income generation (dividends), volatility, correlation with other asset classes (diversification), liquidity, inflation/deflation protection, costs, fees and tax efficiency.
Investment Research PDFs - Whitepapers
Here, we have compiled a list of PDFs which served as a starting point for us to investigate the best methodologies & strategies for investing. We then had to choose our asset allocation & refine the trading algorithms.
Here are the whitepapers that were taken into consideration when we are constructing portfolios for clients based on their risk tolerance.
Sell in May and Go Away - Time to Reconsider?
Sell in May and Go Away – the old adage of “sell in May and go away” has worked in the past according to the Stock Almanac. However, it hasn’t worked recently for ETFs and only seems to have an historical advantage with S&P500 futures. A paper in 2014 found the Halloween effect strongly weakened or even diminished in recent years. Results were robust across different countries and against various parameter variations.
Sell in May and Go Away used to work when the U.S. was more of an industrialized economy as it was not uncommon for plants and factories to close for a month or longer in the summer to retool and allow employees to vacation.
The theory was that companies would conduct less commerce in that six-month span, which would likely translate into lower earnings.
Today, due in large part to globalization, the world is far more interconnected and competitive, and there is less room for downtime” – the Financial Times.
Index Funds Beat Active Management – here are all the various statistics available on the internet
Active Management Vs Index Investing - over a 15-year investment horizon, 92.33% of large-cap managers, 94.81% of mid-cap managers and 95.73% of small-cap managers failed to outperform on a relative basis
Financial Times - a recent survey by index provider S&P Dow Jones found that 99% of actively managed US equity funds sold in Europe have failed to beat the S&P 500 over the past 10 years, while only two in every 100 global equity funds have outperformed the S&P Global 1200 since 2006.
Modern Portfolio Theory & Minimum Variance Optimisation (MVO) - in this white paper, we outline key mathematical concepts behind mean-variance analysis with some valuable insights from Dr. Markowitz himself
A Simplified Perspective of the Markowitz Portfolio Theory
The Sharpe Ratio for Maximising Risk to Return
The Sharpe Ratio Efficient Frontier
Using Index ETFs for Multi-Asset-Class Investing: Shifting the Efficient Frontier Up
Black & Litterman – Global Portfolio Optimisation – this uses “look forward” analysis for any given portfolio
Best Practices: Monthly Rebalancing of ETFs
The Rise of the Robots - why we should be investing in disruptive technology
