Invited talk at Warwick Business School, overview of robo-advisory, ETFs, contemporary investment products and strategies.

1. Direct to Consumer
Investment Process
Dr Drago Indjic
Oxquant
Warwick Business School
21 November 2019

2. Quick Survey
• Q1. What is ETF?
• Q2. Anyone trading/investing DIY?
– Q1b. Any ETF owners?
• Q2. Try estimating your net wealth path
• Accumulation - (aspirational) expected pension pot
• Q/As
– Please write down your questions as we go
– or just @dindjic

3. Personal Profile
• Dipl Ing (Belgrade, SFRY), PhD (Imperial)
• Quantitative finance (1993-)
– Institutional asset management: hedge funds
– Alternative Beta, London Business School
– Finance industry change of sea post-2008
• Fintech (2015-)
– Retail digital investment agent(s); ETFs
– Suitability, risk attitudes, goals, life-events, (CX/IX)

4. Quantitative Contents
• Fund products and fund industry
• Small retail investors
• Delegated investment management
• B2B -> D2C
• Exchange Traded Products
• Robo-advisory
• Research topics: MBA, MSc, PhD

5. Past Seminars
• High frequency trading, Warwick (2007); 2019/20 teaching: Hedge Funds, (LBS,
2003-date), Fintech (QMUL) and Principles of Investment Management (Regents)
• https://www.slideshare.net/dindjic

6. QMUL Fintech (2019/20)
• .

7. Last Professional 5 Years
• https://www.richfox.com/
ETFs and

8. Funds and Fund ManCo
• Fund
• Off-shore Ltd (authorised by e.g. Guernsey, Cayman)
manages off-shore fund: corporate “substance” and
fund governance (NEDs)
• Manager
• On-shore, taxed (FCA authorised) LLP with private
agreements (staff, service contracts, quant strategy)
• Manager(s) ↔ Founders-owners; micro-enterprise
• Distribution limits: governmental policies
• HNW or “professional” or not; “controlled substance”

9. Fund Industry
• Demand (of yield)
• Retail vs institutional asset management
• Delegated2 at (?) price; no QC/warranty/money back
• Intermediaries
• Choosing between 100k+ products in various universes
• IFAs; cost of customer acquisition; “bargain” hunt
• Supply (of funds)
• Investment sale or service; margin pressures
• Over-capacity – new launches as well as graveyards

10. Fund Marketing
• Mutual, hedge and ETF fund universes
• Awards, rankings, off/on-shore; “investment policy” …

11. Delegated Management
• Fund Industry
• EFAMA: EUR 10tn UCITS + 6tn AIF
• Labour, inputs, brands …
• Demand: intermediated
– Fund platforms, consultants, selectors etc
• Principal/Agent Problem
• Contract design: incentives - commissions; mis-selling
• FCA RDR (2014) and FAMR regulatory sea change
– https://www.fca.org.uk/news/press-releases/fca-begins-
review-financial-advice-market

12. Fund Distribution
• .

13. Retail Customers
• Not professional/qualified - inclusive
– fiduciary; client money, depositary …
• Not wealth management
– Not self-directed trading
– Zero accumulation: portfolio funding problem
– Glide path; “terminal” wealth; path dependency
• Massive customisation: goal/liability driven
– Client suitability; risk profiling; goal horizon
– Preferences: path, utility, subjective probabilities

14. Beta vs Alpha

15. Fund Vendors Racing to Bottom
• Performance/Flow ≠ Cost/Flow relationship
• Fund families margins and break-even AUM
• Funds: <0.1% pa; product all inclusive <0.5%
• Negative fees during initial launch phase

16. Focus
• Advisory gap & suitability
– Product or service - massive customisation
– Inclusive: small initial amounts and contributions
– Inclusiveness; default solution
• Competition + better outcome
• Customer protection: literacy; risk profile; goals
feasibility (affordability)
• Cross-European?

17. Personal Investment Solutions
• Demand shift: investment apps, massive
• “Digital, customer-centricity, shift in end customer base
combine to radically alter the fund management”
• Product “quality” and value for money
• Risk profiling
• Complementing total past investment experience
• Portfolio engine racing
• Calibrated to risk profile; p(target)
• Choice of portfolio components; opex inc trading costs
• How many components (over time)?

18. Why ETFs?
• It does exactly what it says on the tin
– Pre-packaged underlying(s)
– Easy to trade
• http://www.londonstockexchange.com/global/portfolio
/portfolio-and-trading-simulator.htm
• Efficiency: fierce competition
– Tracking licensed index – or self-indexed
– Micro-structure: market makers/HFT
– Distribution: moare AUM

19. ETF/ETP Border Force
• A fund company, free(er) distribution
• UCITS “Boilerplate”: read the label/leaflet/accounts;
• Usually operating under Luxemburg or Irish flag/law
• “Passive”, plain vanilla index funds
• Fixed objective and risk parameters
• Pure investment strategy:, data-driven
• An index maintenance and/or weighting scheme
• Transparent, systematic; thus predictable risk
• Lowest cost Beta, small unit cost, (good) liquidity

20. Non-standard ETFs
• Inverse and leveraged
• Fixed income
• Note: NIRP “floor” index criteria (FTSE); Convertibles
• Commodities
• Smart Beta
• factor portfolios and alternative weighted indexes
• Alternative investment strategies
• Volatility; Alterative Beta

21. Smart Beta
• Early 2000s
• “Undiscovered Beta”
• Alternative to CAPM
• Indexes: non-capitalization weighted, better diversified
• Factor: novel Beta risk premia

22. Reverse Viewpoint
– Index products may replicate reverse index

23. Alt Beta
• e.g. CTA: (select) fund (Winton, Palomar), an
index fund or alternative/smart Beta?
– Capacity? Fees? Bargaining power?

24. Fintech Customer Journey
• Source: OneSpan

25. Robo Advisor Design
• Platform
• Robo-as-a-Service
• Universe: ETF/active funds, single stocks …
• Risk profiling
• Risk mapping
• Portfolio engine
• Construction and rebalancing
• Order management system

26. Implementation
• Suitability
• Risk rated product: profiling
• Implementation: bootstrap by €/£20 pm
• Personal advice vs guidance (segmentation)
• Product quality: independence/conflicts of interests
• Financial planning goals over stream of life events
• Deliver investment experience (engagement, fun)

27. Robo Investing Styles
• Portfolio construction
– (Human) forecasting or systematic: momentum vs
equilibrium pricing; glide path
• Robo risk benchmarking
– Turnover; risk profile consistency
• Case study [2 min]
– https://www.youtube.com/watch?v=j8YliLcJc4g

28. Downside Risk
• Hedged, active, risk-controlled strategies
outperform: smaller losses, lower variance
• Long-only, buy & hold strategies are riskier
• Maker: market neutral, contrarian, income …

29. Pricing Investment Skill
• Extremes of price discovery: ETF ↔ private funds

30. MBA (Excel) Projects
• Literacy, coaching, financial well-being
• Self-driving or not. Destination.
• Market research and marketing
• Price/Flow/Performance; price wars in fund families;
• client “localisation”; Tax allowance and losses
harvesting
• Product price points
• Costing: fund financial accounts; graveyards
• Does “Smart Beta” or “ESG” commands a premium?

31. MSc (Phyton/R) Projects
• Risk profiling & portfolio segmentation
• Order management and cash drag
• Fractional share trading benefits
• De-accumulation: (diversified) income
• Risk attribution
• Engagement
• Crowdtrading: Huddlestock, SharingAlpha

32. PhD Research
• Portfolio rebalancing
• Exotic and smart Betas
• Views ( ≠ Skills ); themes and values (Motif, ESG)
• Risk targeted; hedged; market neutral?
• Robo ensemble (swarm)
• 2nd robo service: the completion portfolios
• Investment contract
• pricing “Alpha” or wealth preservation: pay (act) only if
evidence for rare

33. References
• Antti Ilmanen (2011) Expected Returns, Wiley
• Richard, J-C and Roncalli, T (2015) Smart Beta:
Managing Diversification of Minimum Variance
Portfolios
– Roncalli (2013) Introduction to Risk Parity and Budgeting,
Chapman & Hall
– Cazalet, Z and Roncalli, T (2014) Facts and Fantasies About
Factor Investing
• Andrew Ang (2014) Asset Management, OUP
• Jurczenko, E and Teiletche, J (2015) Active Risk-Based
Investing
• Lasse Heje Pedersen (2015) Efficiently Inefficient, PUP