A conventional investment manager gained first-mover advantage in the Islamic finance space by launching Asia’s first Shariah compliant robo-advisor and has begun work on developing an artificial neural network trading algorithm for the Islamic markets.
Farringdon Group has officially rolled out its Shariah compliant automated digital investment platform, Algebra, and is confident of onboarding a local partner to tap the domestic ringgit market before the end of the third quarter.
Restricted from dealing in local currency investments as Farringdon is regulated offshore by the Labuan Financial Services Authority instead of Securities Commission Malaysia (SC), the group is nonetheless considering securing the necessary license from the SC as a means to enter the ringgit space.
“We are in discussions with our internal board about applying for the SC license before the end of the year – but we cannot guarantee it,” said Stuart Yeomans, CEO of Farringdon Group. “Honestly speaking, if we can partner up with good quality companies here, there will be no need – we will give them the engine to use.”
Making it affordable
About a year in the making, the main idea behind Algebra was to provide compelling investment returns at a significantly lower cost to investors. While US-based Wahed Invest, the first Islamic robo-advisor worldwide, keeps costs low by investing in cost-effective exchange-traded funds (ETFs), Algebra maintains price competitiveness (total expense ratio of 0.85% as opposed to the average 3-5%) by controlling expenses.
“As everything from start to end is done in-house, we have the advantage when it comes to pricing our product,” Yeomans told IFN Fintech. “However, I think the question is not how we are keeping costs low, but how much other asset managers are actually making from each investment.” The entire back office and operations of Algebra, certified Shariah compliant by Amanie Advisors, will be managed in Labuan.
Investment strategy
Martin Young, CEO of Singapore-based Farringdon Asset Management, who was greatly involved in the development of Algebra, shared: “We actually intended to follow a very similar model in the US but we were disappointed in the availability of investments in Southeast Asia as compared to the US and Europe. This is two-fold: one, the quality of investment available and two, the high charge involved.”
Depending on the risk profile of individual investors, Algebra will draw up an investment portfolio built using equity as well as fixed income instruments such as Sukuk and ETFs to manufacture a risk-weighted portfolio. For the equity portion, a smart beta strategy outperforming the Shariah S&P 500 index at a lower level of volatility is employed. At the moment, the investment universe of Algebra stands at 125.
“We have built the Shariah version of this platform and have also incorporated a non-Shariah option. Hence, whatever your investment profile is, we can mold a portfolio around your investment principals and appetite for risk,” said Yeomans.
Unlike Wahed, which slashed the required minimum investment from US$7,500 to US$500, Farringdon on the other hand increased the minimum investment needed from US$200 (when it first announced plans to launch Algebra in November 2016) to US$4,000 for one-time investment or US$325 per month.
White label the way to go
Recognizing that the entry point is relatively expensive, Farringdon does intend to lower it at some point.
“We want to get to a point where a farmer in India can invest as little as US$10 because we think that’s where the market needs to be and really needs,” said Young.
India and Indonesia – the two largest Muslim nations globally – are the two main focus for Algebra at the moment, with the Middle East on the cards. The firm is also aggressively pushing to white-label its platform to Malaysian financial institutions: it is currently in talks with four players and is confident of onboarding at least one by October.
ANN and VMF
For Yeomans and Young, Algebra is currently at about 70% of where it should be. The company is currently working on new technologies to enhance the robo-advisor. One of it is a Shariah compliant artificial neural network (ANN) to forecast the financial markets and design optimum Islamic investing strategies, potentially a world’s first, although it may be a while before this is rolled out as the company is still in the very early stages of development.
Designed to emulate certain significant attributes in the functioning of the human brain, ANN is a trainable algorithm with the ability to learn from observing data sets and is used as a tool to predict financial time series and most cost-effective or ideal solutions based on historical information.
In addition to that, the group has revealed a new investment asset class it termed as ‘virtual mutual funds’ (VMF), the technology of which it claims cuts out numerous layers of fees and allows the investors to directly hold securities while maintaining liquidity and performance.
“With VMF, we can set an algorithm to build a fund and blend it with fixed income and Sukuk, allowing us to virtually roll into any market in Asia without worrying about currency,” Young explained. “What we’ve observed is that Asian investors are more and more happy to invest in domestic currency and this is where we will go over the next 12-18 months.”
Over the next 18 months, Farringdon also expects to launch a face-matching algorithm to increase the security robustness of its platform.