I`ve been waiting for the quarterly Backend Benchmarking Robo Report, to gain insights into the US digital advisory market that is the largest by many metrics (AUM, # standalone fintechs, # incumbent offerings, years in the market, types of offerings). In the first quarter of 2020 on the `positive` side, we have seen a large funding of $112 for Stash which claims to have crossed the $1billion AUM and 4.5million customers. The race is on amongst standalone robo advisors to build a full stack offering that can include investing and banking services. Stash for example, the micro-investing fintech, has already added a debit card through Green Dot (see more about Stash here). Betterment, Acorns, Sofi, and soon Wealthfront have debit cards for their saving accounts.
On the other end of the spectrum, we have Vanguard the incumbent that has the lion`s share in AUM – $148Billion – and remains a pure investment platform showing no signs of integrating any personal finance tools to its offering.
Investment accounts + saving accounts + debit cards – the new normal for standalone robo-advisors
This is clearly where we are heading to. Robo-advisors like Betterment or Acorns, that were investment offerings first, need to keep their earlier customers who moved their savings to them for a better, cheaper, hassle-free investment service. Other more recent customers may not care so much about robo-advisor performance because their reason to move may have been a high-interest rate savings account, fully digital with a branchless experience. WealthFront for example, is a strong believer of branchless banking and has a vision of Self-driving money.
As I look at the performance comparison from the Q1 2020 performance Backend Benchmarking Robo Report, I am reminded of what Paolo Sironi says repeatedly, `we humans are not rational`. Vanguard has accumulated $148billion AUM without being the top performer over the 4year period of the report. SigFig, Fidelity Go, and Axos Invest (ex WiseBanyan) are the long-term top performers.
What was more striking to me was the top performer during the March stock market debacle. A new kind of robo-advisor, Titan Invest, that was launched just 2yrs ago was identified as the top performer based on its relative performance to its benchmark.
Titan invest, is a different kind of robo advisor that has accumulated $75million and charges 1% in fees. It is an all-equity investing platform (100% equity) whose bread and butter is not low-cost ETFs but individual stocks. It banks off hedge funds and copies some of the hedge fund techniques. However, Titan has no minimum investment requirement and is open to any US retail investor.
Titan filters individual stocks from the major holdings of hedge funds and creates personalized portfolios of 20-30 stocks based on the risk profiling of its clients. Some of its holdings (reported in its blog) include Amazon, Microsoft, and Netflix (up during Q1) and TransDigm and Credit Acceptance (big losers in Q1). In late February, Titan started shorting the S&P 500 appropriately for each portfolio and was therefore able to reduce its drawdown.
The Robo report, reports that in March the Titan Flagship fund returned 8.02%, in a period where the S&P 500 was down 13.79%.
Titan was the only robo-advisor that beat the S&P 500 and its benchmark.
Titan admits that this the first time they use a personalized hedge. Their stock selection combines a quantitative filtering of common hedge fund holdings (based on different measures) and a subsequent fundamental and event analysis.
In their recent Q1 2020 investment letter, they also mentioned that in mid-February they initiated a position in Uber, as they think that the company is in the early stages of a powerful transformation. (see more here)
Titan Invest is a Ycombinator child. No VC investment. $2.5million seed round. It follows an actively managed approach.
The market will show whether active management of this style, pays off. It will also decide whether using hedges to protect portfolios from sharp drawdowns, will become more mainstream.
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