Are Robo-advisors with no hedging gear, suitable for the 21st century?

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Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019.

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 performance

Screen Shot 2020-05-11 at 10.24.44Titan 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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Insurance- the great water balloon- squeeze here, bulges there

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Insurance is not a new business, but its functionality and appearance to the public may be in the post COVID-19 world. Plenty of thought is being given to the future of many types of insurance cover, its underwriting, distribution, and claims, etc.  But what about the ‘right now’ for insurance lines during COVID-19 operations?  Insurance is a global $5 trillion business, and while there are sectors that will be depressed, business marches on and so does insurance cover. So what factors may be affecting lines of cover, and what is the outlook going forward in 2020?

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

Without question 2020 will be a down year for global GDP, with one estimate supporting an overall decline of 2.4% (Economic Research: COVID-19 Deals A Larger, Longer Hit To Global GDP .)  Will insurance premiums decline by that amount, more less, increase?  It’s certain that the global economies will continue to require risk management. Having mandated shut downs does not allow for shut down of insurance cover for a business; liability remains something for which protection must be maintained. Motor cover has been shown to be less important by the mile, but still mandated in most jurisdictions.  The thought process carries on, and the process seems a good exercise for us this week, perhaps will generate some thoughts and discussion.  I’ll lead off, give my 2p and you can chime in.

Business Interruption

We’ll get the obvious cover out of the way.

COVID-19 has exposed business interruption cover as the factor no one knew that everyone needed.  There will be two main efforts for BI- litigation for those who insist their policy included it, and looking for purchase for those who know they will need it for the next pandemic. Government pressure for mandated cover (if successful) for BI would make all arguments moot- the BI response would cripple the industry for all covers.  As for availability of BI cover that addresses pandemics? A sea change for BI cover would be needed to exempt the cover from needing a covered physical loss, and removal of exclusions (or establishment of endorsements) related to pandemics. Oh, and the pesky needs for capacity, underwriting understanding, planning for claims, etc. Nothing available soon, at least in an indemnity product.

Two interesting related facts- Marsh and Munich Re had offered pandemic cover- Pathogen Rx as recently as Fall, 2019, but had little demand for the cover. And Amsterdam’s DGTL Festival ‘accidentally ‘ had event cancellation cover for pandemics due to an admin error by the organizer’s staffer who checked off a box for pandemic in error .  A $2.3 million error to the good.

Workers’ Compensation or Employers’ Liability

The cover that is a looming monster due to potential latent effects of COVID-19 being contracted after businesses begin to reopen. The WC cover in the U.S. while slightly differing state to state in large part will afford cover for employees who claim contracting the virus on the job. There’s not a heavy burden of proof so medical costs and loss of wages will accrue to the WC policies- all new peril costs for the systems.  India has similar potential for excess costs, the UK’s Employer Liability cover that mirrors WC a little will be limited for severity but will have frequency effects. For all jurisdictions there will be an expense increase as WC claims are cumbersome and heavily involved in unstructured data.

Business Owners/General Liability

If fewer feet are through the door there is less exposure to claims, so this cover will be a function of the length of shutdowns. What will affect the liability portion will be allegations of customers claiming COVID exposure and those businesses that are not careful and organized in their operations regarding safe methods and clear notices to customers may be higher frequency targets for lawsuits. And in similar fashion to WC and BI claims, handling the claims will consume adjuster production time. Carriers will be less able to simply deny/repudiate claims as regulatory oversight will be heightened. The UK’s FCA has opined that while it’s not the regulators place to determine cover, the carriers had better be thorough and prompt in determining cover and making payment where warranted.  The post-COVID environment would be an unfortunate place for a carrier to engage in coverage shenanigans.

Motor/auto

This cover has been the poster-child response cover for carriers in recognition of less service frequency needed, fewer claims, and the need to rebate premiums due to the reduction in exposure. Many carriers have taken those steps in handing premiums back or establishing forward looking credits (summarized well here by Nigel Walsh. )

An aspect of significant reductions in claim costs will be reduced loss ratios (surely a 1/1 rebate will not occur), but absent significant reductions in cost structure one might expect increased expense ratios due to earned premiums be reduced by rebate amounts.  It’s a big water balloon, isn’t it?

Property/Homeowners

Might just be a push- higher occupancy periods to detect issues sooner, but also higher occupancy rates to task mechanical systems and prompt sudden failures with ensuing damage.  No rebates offered quite yet, but one is never surprised.

Credit Risk

The ability to pay invoices will be hamstrung across many business sectors and severity concerns are already transmitting through to reinsurance products focused on same, and hedge vehicles have had the elevated risk priced into their trading prices already. Another form of credit risk- supply chain activity- will experience fits and starts as suppliers have reservations about purchasers’ ability to pay, and associated insurance costs will increase.  More water balloon action.

Mortgage default risk

Seems intuitive- higher unemployment, gradual recovery, delayed benefits flowing from the government, and those who live month-to-month will have less ability to pay mortgages, both individuals and businesses. Artemis.bm indicates approximately $9 billion in ILS/bonds related to mortgage default risk; combine that volume with the significant drop in the EurekaHedge ILS index during the month of March and while the data are not directly correlated they are related and suggests one’s pause for thought.

Health insurance will be left out of the discussion- that is the wild west in terms of severities prompted by COVID-19 treatments. The corollary however is that elective surgery has been curtailed as has regular health oversight, both high costs for insurers.  Combine the assistance governments have been providing and health insurer positions may not be as bad as one would expect. May not.

Reinsurance has little exposure to COVID-19 and so far pricing has been favorable for renewals and new placements based on market factors for those lines, see an example reported by SCOR here .

BIG water balloon, insurance.

The industry also must keep a weather eye on the next occurrence of systemic risk, including a pandemic, and the response would not serve well if it’s a fully government funded program. Too slow, inefficient, needlessly expensive and would overlook strengths the insurance industry and capital markets would bring. All the players affected by and influencing risk management need to work to collaboration- would make all the lines of cover more stable. #TenCsProject

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