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Daily Intelligence Briefing – August 15, 2017
Machine learning and AI is on the rise across all sectors, and the financial field is no exception. “Robo-advisors” rely on complex algorithms which follow patterns to decide which assets are probable money-makers. While this sounds like a newfangled concept, firms such as Goldman-Sachs have been delving into quantitative investment strategies and algorithms for over a decade. However, the degree of success and popularity attributed to quantitative investing has a varied history. In 2007, the infamous “Quant Quake” saw three quarters of Goldman’s assets wiped out in a five year span following
sudden liquidation by a multi-strategy fund or proprietary-trading desk likely caused algos to run awry and ignite firesales in similar quantitatively constructed portfolios.
Such formulaic analysis, though, has rebounded in the past few years to become very popular once again with the help of AI. Familiar firms already utilizing robo-Advisors today have seen hugeasset growth in the last couple of years. Vanguard has almost quintupled its assets since 2015, rising from $17B to $83B, while Betterment has seen growth just shy of 700% over the same timeframe. Alongside them, big name investment banks like UBS are moving robots onto the trading floor while JP Morgan is utilizing machine learning for analysis of big block trades. Goldman itself has even managed to recover without abandoning its quant strategy, creating algorithms with less leverage and more diversity. Financial services research firm Cerulli Associates estimates that assets under management of robo-advisors will soar by 2,500 percent to $489 billion in 2020 from $18.7 billion in 2015. That’s roughly 22 percent of the estimated $2.2 trillion independent registered investment advisors manage today.
Today’s robo-advising is becoming more reliable and successful as a result of greater human integration, relegating machines to more of a robo-analyst
role. Many of the tasks performed directly by robo-advisors are low value added services such as determining and communicating asset allocation strategies. Human advisors, working alongside the AI, are now handling more oversight to add long term, value-oriented advice and fiduciary duty of care to programmed algorithms. Currently, there are 6,300 data scientist jobs within financial services advertised on LinkedIn. The number of roles advertised in the sector using the terms data scientist, machine learning or artificial intelligence, has more than tripled over the past two years.
This phenomenon is not unique to the Financial Services industry. In fact, it is the same cooperative pattern occurring across many fields incorporating robots: this is known as the “cobot” connection. As opposed to robots fully automating and eliminating occupations, they are used in tandem with human laborers to increase overall efficiency and, in the case of asset management, returns. Betterment, for example, offers automated portfolio management, but now anyone who has signed up for an account can send text messages to human advisors and get a response within 24 hours. Similarly,
Morgan Stanley is in the process of augmenting its 16,000 financial advisers with machine-learning algorithms that send advisors multiple-choice recommendations based on things like market changes and events in a client’s life.
While returns can be significant, they can also be widely disparate as robo-advisors tend to diverge significantly in their investment strategies. In 2016,
Condor Capital Management analyzed yearly returns from 9 accounts they had opened at different firms using robo-advisors. The greatest yield at the end of the year came from Charles Schwab at 10.75%. The worst performing portfolio was Vanguard at only 5.55%, almost a two-fold difference. However, it is important to note that robo-advisors are normally operating to build long term portfolios and one year cannot completely define the strength of an algorithm.
The advance of quantitative analysis is one that should continue on for years to come as incorporation of greater data becomes more accessible via advancements in machine learning and AI to increase productivity and accuracy. There is a definite learning curve which, for both machines and advisors, retains some the “Quant Quake” risk for investor. But with all else considered, robo-advisory and analysis is here to stay. Still, robo-advisors have never been so widely operating through a big bear market. Its effect on portfolio performance in the next major downturn remains to be seen: it may not be pretty.
are some of the latest articles about robo-advisors (these stories are summarized in the
- Robo-Advisors – Goldman’s Quant Unit Rebuilt on Lessons Learned in 2007 Meltdown
- Robo-Advisors – FSC lifts ban on ‘robo advisor’ services for securities trading
- Robo-Advisors – NSR Invest and LendingRobot merge to become the largest robo-advisor in the alternative lending space
- Robo-Advisors – Asset Management Is Not a Commodity
- Robo-Advisors – Robo Wars Lead FAs to Bypass Big Names and Upstarts
OTHER STORIES HIGHLIGHTED IN TODAY’S DIBS:
- Cryptocurrency – Bitcoin Surges Past $4,000 on Speed Breakthrough
- Economics and Trade:
- China Economy – The China Growth Slowdown Has Arrived
- Ireland Economy – Ireland’s rebound puts its credit on par with France
- Politics and Policy:
- Asia – China Bans Key North Korean Imports
- Monetary Policy:
- Venezuela – Venezuela debt reaches flashpoint in political
- Manufacturing and Logistics:
- Defense – German weapons makers profiting from Korea tensions
- Applications – In-app ad spending to hit $201B by 2021
- EVs – The Market is Right: Car Stocks Are Cheap for a Reason
- Digital Banking – Emerging Technologies Outpacing Digital Banking Transformation
- Aerospace – SpaceX Launches its 12th Resupply Mission to the ISS
- Shipping – Clarkson sees break in storm that has lashed shipping sector for years
- Aviaton – Airlines Dial Up Pampering for Business Class
- Commodities – Why Chinese Commodity Prices Are Exploding
- Energy & Environment:
- Wind – Europe Must Triple Offshore Wind Growth Rate To Bring Paris Goals Within Reach
- Renewables – Chile’s Energy Transformation Is Powered by Wind, Sun and Volcanoes
- How More Americans Are Getting a Perfect Credit Score
JOE MAC’S MARKET VIEWPOINT
Mac’s Market Viewpoint: The Trump Trade & STATUS QUO BIAS
Mac’s Blog: Time to Call the Oil Bulls Back Home
Mac’s Market Viewpoint: Why India Now
Mac’s Market Viewpoint: Contrarian Crude Call
Mac’s Market Viewpoint: Gold Shines Even Brighter
CURRENT MRP THEMES
Emerging Markets (L)
Oil Services & Equipment (L)
Oil & U.S. Energy (L)
Long Dated Treasuries (S)
Robotics & Automation (L)
U.S. Financials (L)
U.S. Regional Banks (L)
Value over Growth (L)
About the DIBs: MRP focuses on identifying transformational change in the global economy and offering an investment thesis whenever an opportunity arises that has not yet been recognized
by the market. The DIBs are MRP’s compilation of articles and data from multiple sources on subjects reflecting disruptive change that have potential investment implications for an industry or group of securities. We share these with our clients who may already
have or may be considering exposure in the industries affected. The subjects change daily and constitute an excellent update on featured topics.
- United States, Consumer Inflation Expectations, JUL:
2.54% from prior
- Euro Area, Industrial Production, YoY, JUN: 2.6% from prior 3.9%
- India, Inflation Rate, YoY, JUL: 2.36% from prior 1.46%
- Angola, Inflation Rate, YoY, JUL: 27.29% from prior 30.51%
- Slovakia, Core Inflation Rate, YoY, JUL: 2.1% from prior 1.7%
- Lithuania, Current Account, JUN:
€148M from prior
Cryptocurrency – Bitcoin Surges Past $4,000 on Speed Breakthrough
Bitcoin soared past $4,000 for the first time on growing optimism faster transaction times will hasten the spread of the cryptocurrency. The largest digital tender jumped to a
peak of $4,298 Monday, a gain of nearly 20 percent since Friday, after a plan to quicken trade execution by moving some data off the main network was activated last week. The solution — termed SegWit2x — had been so contentious that a new version of the
asset called Bitcoin Cash was spun off earlier this month in opposition.
The cryptocurrency’s staggering price surge has bolstered related businesses. Digital currency exchange Coinbase Inc. announced Thursday it’s received a $100 million investment.
The supply of bitcoin is capped at 21 million, compared with 16.5 million that had been mined as of Saturday, according to blockchain.info. Goldman Sachs technical analyst Sheba Jafari wrote in a note to clients Sunday that bitcoin could reach as high as $4,827
before entering a correction, which could erase around 40 percent of the cryptocurrency’s gains. B
China Economy – The China Growth Slowdown Has Arrived
During the first half of 2017, deflation was banished, debt defaults slowed, and growth rebounded. Nonetheless, China watchers have long warned that tighter credit would eventually
mean slowing growth again. This month, the first real evidence of that arrived: China’s official purchasing managers index was sharply lower than expected, and July industrial-production and retail-sales data released Monday were the weakest since February.
Investment growth was the weakest since December.
The slowdown may catch some investors off guard. After buoyant second-quarter data, sentiment on China is at its most bullish in years. China growth plays like miners and construction-equipment
firms will probably sell off on the news. But the very gradual ramp down in credit growth—far softer than in previous tightening cycles—still likely means a moderate, rather than drastic, economic slowdown in the closing months of 2017.
The weakness revealed by Monday’s numbers was broad-based—with the notable exception of the steel sector, where growth continues to accelerate in the wake of capacity cuts, which
have helped to boost margins. Real estate and infrastructure investment both weakened, with the former growing at its slowest pace since June 2016. Growth in China’s massive information-technology sector—a good indicator of export strength—also slowed, in
line with July’s PMI, which showed growth in new export orders weakening abruptly. WSJ
Ireland Economy – Ireland’s rebound puts its credit on par with France
Of all the European nations that plunged into economic turmoil in the decade after the global financial crisis, Ireland is the standout recovery. Seven years after its €68bn bailout,
the erstwhile Celtic tiger is booming again, and its debt costs reflect that. The spread between Irish and German bond yields — in effect, the extra amount Dublin must pay to borrow money — is back around decade-long lows, and Ireland’s debt is trading at
around the same levels as that of France, a much larger and more diversified core eurozone economy. Ireland holds single-A ratings from all the major credit rating agencies, while France is rated AA.
But has Ireland really recovered and should investors have confidence in its ability to avoid another boom-and-bust cycle? Séamus Mac Góráin, a global fixed income managing director
at JPMorgan Asset Management, said Irish assets had been performing like those of core eurozone countries “for some time now”. Ireland grew 5.2 per cent last year and is set to grow 3.5 per cent this year, according to forecasts from the International Monetary
Asia – China Bans Key North Korean Imports
China is banning imports of North Korean coal, iron and seafood, starting Tuesday, in a move that could assuage U.S. demands while enforcing new United Nations sanctions targeting
Pyongyang’s nuclear-weapons program. The trade halt, announced Monday by China’s Commerce Ministry and customs agency, follows a weekend phone call between Chinese President Xi Jinping and his U.S. counterpart Donald Trump on how to deal with North Korea’s
advances in developing nuclear weapons and missiles.
China is by far North Korea’s biggest trading partner, accounting for more than 80% of North Korea’s external trade for the past five years. Beijing had been expected to disclose
steps to comply with new economic sanctions passed unanimously by the U.N. Security Council this month. The measures announced Monday don’t go beyond the U.N.-approved curbs, and China has long shied away from severe punitive steps—such as cutting off fuel
and food supplies—that it fears could trigger the collapse of the North Korean regime.
Some analysts are skeptical of the ban’s potency, even if it is strictly enforced. Anbound Consulting, an independent economics think tank in Beijing, said signs of resilience
in North Korea’s economy suggest that it will be able to endure the new U.N. sanctions. WSJ
Venezuela – Venezuela debt reaches flashpoint in political crisis
This week, Credit Suisse circulated a memo outlining a ban on trading in two Venezuelan bonds, reflecting growing unease about the reputational risks of being associated with
a country under the increasingly autocratic government of Nicolás Maduro. Venezuelan bond yields remain elevated and prices depressed after President Maduro staged a power grab last week, pressing ahead with the formation of a constituent assembly that will
rewrite the country’s constitution after a widely discredited election. In response to Mr Maduro’s obduracy and the jailing of opposition politicians Leopoldo López and Antonio Ledezma the US has imposed fresh sanctions on several Venezuelan officials. For
now Donald Trump has held off on taking action against the country’s oil sales, Venezuela’s main source of foreign currency.
Caracas’ debt has emerged as a flashpoint in the crisis. The purchase of $2.8bn worth of Venezuelan bonds from the state oil company, PDVSA, by the asset management arm of Goldman
Sachs earlier this year attracted heavy criticism from the country’s opposition arguing that they constituted “hunger bonds” that help support the autocratic government. Now Credit Suisse has banned trading in a sovereign issue due in 2036 and PDVSA’s bond
maturing in 2022 — the issue purchased by GSAM. The bank said it would also prohibit trading in any bonds issued after June 1 from any Venezuelan entity. FT
Robo-Advisors – Goldman’s Quant Unit Rebuilt on Lessons Learned in 2007 Meltdown
Ten years ago, an abrupt meltdown in quantitative equity funds worldwide shook the burgeoning industry, spurring an exodus of investors. Goldman Sachs Group Inc. was among the
worst hit, shedding three-quarters of its $165 billion in quant investments by 2012. At Goldman, ground zero for the implosion was a hedge fund called Global Equity Opportunities, which lost 23 percent that month. The firm in a report blamed the losses on
the use of leverage in the fund and too many copycat managers making the same trades.
Today, the quant unit has clawed itself back to respectability. It manages about $110 billion in big-data mutual funds, smart-beta pools and other products — all driven by factors
such as consumer sentiment from social media. Smart-beta is the biggest piece of Goldman’s quant business, with about $77 billion in investments that track indexes based on factors such as low valuation and momentum.
QIS’s big-data strategies manage about $25 billion in a series of U.S. mutual funds and other products. Quants use machine-learning algorithms to sift through data, including
credit-card receipts, to glean clues that might translate into wagers. The big-data mutual funds generally have performed well. The nine U.S. equity Insights funds on average beat 74 percent of rivals over the past five years
Quants are more worried about overcrowding and a decline in performance than a repeat of the panic of 2007. However, Goldman in a December white paper pointed out that not all
smart-beta funds emphasize the same factors, which means the danger of crowding may be not as severe as some fear.
Robo-Advisors – FSC lifts ban on ‘robo advisor’ services for securities trading
The Financial Supervisory Commission (FSC), the top financial supervisory body in Taiwan, said Thursday that it has lifted a ban on “robo advisor” services for securities trading,
a move expected to facilitate financial technology development in the country.
Robo advisor securities services are able to allow financial firms, including securities houses or banks, to provide clients with automated investment consulting, which can adjust
clients’ investment portfolios without the need to confer with a human advisor on the basis of pre-agreed conditions between firms and their clients, when investment returns drift away from the original focus over time.
For instance, an investment contract originally written between a financial firm and its client might have equity assets account for 20 percent and bond assets 80 percent of the
value of a portfolio, but in a changing market equities might represent 40 percent of the value of total assets, up from the original 20 percent, with the value of bond assets falling to 60 percent. In such a situation, the automated investment advisor mechanism
adjusts portfolios so they return to the original investment goal by cutting equities to 20 percent and boosting bonds to 80 percent of value with no need for a human advisor, according to the FSC.
According to the FSC, the new mechanism will be initially applied to mutual funds, but based on the experience of the U.S. market, could be extended to exchange traded funds ETFs
and other financial products over the longer term. Currently, O-Bank, a commercial bank in Taiwan, provides clients with a similar choice through a digital advisory service, but any adjustment to investment portfolios must still be executed by a human advisor.
Robo-Advisors – NSR Invest and LendingRobot merge to become the largest robo-advisor in the alternative lending space
NSR Invest and LendingRobot, two of the largest specialized Registered Investment Advisors in the alternative lending space, announced today that the companies have merged to
create the leading independent advisory platform for alternative lending. Lend Core LLC, the parent company of NSR Invest, acquired Algorithmic, Inc. and all its assets, including the LendingRobot website and technology.
The combination brings together two highly complementary companies, each with an excellent reputation in the alternative, marketplace lending industry, also called peer lending.
The joint team will combine its knowledge in the industry, investment algorithms, machine learning and blockchain technologies with the goal of providing steady investment returns to more than 8000 clients.
LendingRobot Series is an alternative lending robo-fund that allows investors to achieve immediate diversification and enhanced liquidity across the leading real estate, small
business and consumer lending platforms. Uniquely, the fund utilizes its legal structure to adapt itself to each investor’s specific needs, and allows each investor the ability to invest according to their specific duration and risk tolerance. In addition,
LendingRobot Series leverages blockchain technology to securely publish an immutable ledger notarized by the Ethereum Blockchain, which allows it to be one of the most transparent funds in the industry.
Robo-Advisors – Asset Management Is Not a Commodity
at dramatically lower prices than human managers has contributed to the idea that asset management is quickly becoming a commodity. Consider the following:
The 5-year annualized returns for US Large Blend actively managed mutual funds ranged from a high of 17.22% to a low of 5.21%. Internal expenses ranged from 2.16% to 0.15%. The
5-year annualized returns for US Large Blend ETFs ranged from a high of 16.73% to a low of 12.18%. Internal expenses ranged from 1.25% to 0.03%. The 5-year annualized returns for US Large Blend index mutual funds ranged from a high of 16.51% to a low of 12.31%.
Internal expenses ranged from 1.57% to 0.01%. The 5-year annualized returns for managed ETF portfolios with an equity range of 50% to 70% ranged from a high of 13.69% to a low of 3.35%.
Clearly, there are large differences in performance, even among apparently similar investment products. It obviously matters which humans are making the decisions. There is also
an astonishingly wide range of internal expenses among these products. These differences alone could cost an investor with a modest sized investment portfolio hundreds of thousands of dollars over the course of a 20 or 30-year investment horizon. Even “passively”
managed portfolios can produce wide variances in performance based on the decisions humans make in constructing and managing them.
The performance generated by robo advisors also shows a similar pattern of dispersion. Condor Capital has been tracking the performance of a number of prominent robos and the
results show variations in the investment results achieved by these firms. Seemingly small differences in performance can significantly impact the financial security of an investor over time. A $1 million portfolio that achieves a 6 percent return over 25
years will produce a $4,291,871 retirement fund for the investor. The same sized portfolio that achieves a 7 percent return over the same period will produce a $5,427,433 retirement fund. The $1,135,562 difference could fund years of additional retirement
for the investor. Outcomes matter. Asset management is nothing like a bag of sugar, a hill of beans or a truck-load of sand. Regardless of how much we rely on computers to help us manage portfolios, asset management is ultimately driven by human decisions.
The quality of those decisions greatly impacts investor well-being.
Robo-Advisors – Robo Wars Lead FAs to Bypass Big Names and Upstarts
Robos don’t appear to be in jeopardy of fading away. Indeed, a new forecast by Standard & Poor’s market intelligence unit predicts robo assets under management will increase 46%
from 2016 to nearly $144 billion by year’s end. Within four years, the research firm estimates it will top $450 billion industrywide.
But it’s not looking like a straight-line growth pattern for all competitors, says S&P analyst Tom Mason. In fact, Mason says only three indie robos managed more than $1 billion
– a generic rule-of-thumb metric for survivability – at the end of 2016. Those were Betterment with around $8 billion, Personal Capital with $4 billion and Wealthfront with another $4 billion or so.
Advisors at Savant Capital in Rockford, Ill., say they’re also consciously sidestepping market risks and any looming consolidation in the ranks of indie robos. Savant is moving
to license several off-the-shelf software suites which the firm believes can offer clients more “robust” features and focus on more “sophisticated” planning issues than most retail robos tackle.The wealth manager is also building specific algorithms on its
own to help integrate such store-bought packages and build out its electronic services menu.
“Tomorrow’s bionic advisor isn’t going to try to be superhuman,” says Brent Brodeski, chief executive at the indie RIA. “But they are going to act smarter about using all of the
latest technologies on the market today.”
Defense – German weapons makers profiting from Korea tensions
The German cruise missile Taurus KEPD-350 has a lot of demand in South Korea. The nearly 1,000-kilogram high-tech weapon made by an eponymous German firm, Taurus Systems, has
a range of almost 500 kilometers. It has been specifically designed to penetrate highly capable air defense systems in low-altitude flight. But cruise missiles were only a part of the armaments bought by South Korea last year. In the first half of 2016, South
Korean purchases of German military gear amounted to over 200 million euros, according to German government data. The sales encompass a broad spectrum of weapons systems, including, but not limited to, submarine parts, combat ships, missiles, missile defense
systems, rocket parts, components for combat tanks and armored howitzers. This meant that in the first half of 2016, South Korea was the fourth largest buyer of weapons made in Germany.
But this is not a one-off occurrence. In fact, South Korea has regularly figured among the top five destination countries of German armaments over the past several decades. The
biggest deals in recent years were struck in the years 2001 and 2008. At that time, South Korea acquired new submarines, frigates and combat ships made in Germany. DW
Applications – In-app ad spending to hit $201B by 2021
In-app ad spending is expected to reach $201 billion worldwide by 2021, a 3x lift over $72 billion in spending in 2016, per an App Annie post. The report pointed out mobile accounts
for 51% of digital ad spending, and that brands are now embracing mobile since users in top markets are spending more than four hours per day on their smartphones. The outlook reflects a global advertiser mobile spend that will grow from $13 to $52 per user
over the forecast period. App Annie also pointed to regional differences with the Americas expected to maintain the lead in mobile ad spending at $100 billion by 2021. Mobile ad spending is on the rise across the globe, with growth forecast for Europe as well
as the Middle East and Africa, although at a slower pace.
The App Annie report highlights how marketers are trying to advertise where the audience can be found, which is increasingly on mobile devices inside some of the most popular
apps, like Facebook, Instagram, Snapchat and others. Overall, consumers are spending more with digital media. While apps have a smaller overall audience compared to the mobile web, 58% of total digital media time is in apps. MDive
EVs – The Market is Right: Car Stocks Are Cheap for a Reason
In an expensive stock market, car makers are sensationally cheap. Sadly, though, this looks less like a buying opportunity than a rational response to the radical uncertainty
created by the industry’s transition to electrified and self-driving vehicles. GM shares trade on six times forward earnings, compared with 17 times for the S&P 500. The biggest U.S. car producer isn’t alone: Globally, the average earnings multiple for big
car manufacturers is about seven times. The usual suspect when automotive valuations appear low is the cyclicality of car sales. True to form, they are now at or close to a peak in the key developed markets. Earnings are likely to fall, pushing earnings multiples
up towards more normal-sounding levels.
But this isn’t the whole story. A cyclically-adjusted valuation measure— share prices relative to average profits over 10 years—puts automotive stocks (including better-loved
suppliers) on 16 times, compared with about 24 times for the wider market and 26 times for other industrial stocks. Even adjusting for the industry’s current profitability car stocks look very cheap. So should investors pile in? Probably not. For one thing,
cyclically-adjusted valuation measures only make sense if the company survives the next bust with its equity intact. WSJ
Digital Banking – Emerging Technologies Outpacing Digital Banking Transformation
As we look at the transformation of the banking industry, the ability to leverage and profit from new technologies is at the core of future growth and survival. The problem is,
the digitization of banking is happening at a faster pace than most organizations can handle. In sync with these changes, consumer expectations are increasing as well, putting additional pressures on financial executives to deliver services in alignment with
what is by the most progressive eCommerce giants like Google, Amazon, Facebook and Apple.
In 2007, PwC first measured an organization’s ability to harness and profit from technology. This measurement – Digital IQ – has actually declined over the past 10 years across
all industries. In fact, while 67% of companies rated their Digital IQ as strong last year, only 52% gave themselves a high rating in the most recent period (an all-time low). Why does this matter? Because there is a direct correlation between Digital IQ and
financial performance, according to PwC. At the foundation of the challenge may be trying to define “digital”.
Part of the challenge with keeping up with the digital revolution is that many of the tasks related to digital transformation, including investment prioritization, innovation
and product development reside only at the CEO and CIO levels of the organization instead of across all senior executives. Companies are also falling short because they rely on ad hoc teams or outsourcing to determine prioritization of technology and innovation
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