Last Updated : Sep 08, 2016 05:52 PM IST | Source: CNBC-TV18

Angel Broking experts explain how investment engine 'ARQ' works

According to Vinay Agarwal, CEO, Angel Broking in the last two years there has been a considerable change in retail participation and an increase in demat accounts.

Angel Broking recently launched a new investment engine called ‘ARQ’ for efficient portfolio building.

ARQ is an automated investment advisory engine that has been designed to offer personalized advice, based on an individual investor’s unique needs. ARQ combines the triple powers of machine learning, cutting-edge cognitive technology and deep industry insights. This innovative technology builds monitors and rebalances your portfolio -- so you don’t have to do anything. That’s why we call ARQ - an investor’s dream-come-true.

To talk in details about how this new investment service will benefit investors, CNBC-TV18 spoke to CEO Vinay Agarwal and Head Research Vaibhav Agrawal of Angel Broking.

According to Vinay Agarwal, in the last two years there has been a considerable change in retail participation and an increase in demat accounts. ARQ as a tool would come in handy for all kind of investors.

Below is the transcript of Vinay Agarwal and Vaibhav Agrawal’s interview to Prashant Nair and Ekta Batra on CNBC-TV18.

Prashant: To begin with, you guys have launched a product called ARQ which we are going to talk about in just a bit, but to provide the context for this, what has been the retail participation in market like, as you see it in this phase of the bull-market and the last bull-market.

Agarwal: There are two things around it. The first is you have to look at the participation of retail. In the last two years, you have seen a considerable change in the way the retail was participating. So, if you just look at data points. Let us say for example, if you just look at the mutual fund numbers, last two years, the amount of retail inflows that you see is probably more than what you have seen 10 years preceding that. If you look at the client addition in the demat account, it has grown substantially. If you look at FY13 and FY14, we used to add close to 18 lakh demat accounts a year. If you look at FY15 and FY16, we were adding close to 25-26 lakh demat accounts a year. And if I extrapolate the current year, we may end up doing 35-36 lakhs demant account which is from 18 lakh to 36 lakh in there years which is phenomenal. But at the same point of time, for larger financial inclusion, it is also important that we fill the gaps, as you have rightly pointed out. There is still some hurdles which retail investors have.

Prashant: How do these numbers compare to the 2005 to 2007 phase? You think activity is back at those levels?

Agarwal: The retail activity is still not at that level. But if you look at the number of new additions that is happening it is higher than what it used to be in 2007. So, what I mean by activity is when you look at number of clients who have opened the account versus number of clients who have traded on a daily basis or a monthly basis, that used to be much higher in 2007. But if you look at the number of people participating in the market, this is much more higher now compared to 2007.

Ekta: Tell us more about this product that you have launched for retail investors, ARQ. What does it do, where is it available, when did you launch, how much interest?

Agarwal: As Prashant was rightly identifying it, the real issue is for retails there are two bottlenecks. One is the fear of losing money into this market which I call as risk appetite. And second is based on the risk appetite getting the right advice which matches his profile and his risk appetite. So, for an ultra high networth individual (HNI) there are still a lot of options available to them, they have good senior relationship managers or advisors talking to them on a one-to-one basis. But when you look at retail, you do not have that flexibility. So, they have a lot of recommendations floating into the market, but for them, it is very difficult to choose one of them. So, that is how, we filled this gap with launching this product. So, ARQ, what it typically does is, it takes the advantage of leveraging on this whole digital ecosystem that has got built. So, now with high speed internet available and smart gadgets available, you are able to use that ecosystem as well as the computing power has gone to a completely different level.

So, what we have done essentially is using this technology and the digital ecosystem, we have created a product which understands the customer’s needs, it analyses the risk appetite of the customer based on the profile using a modern portfolio theory which is a Nobel prize winner theory. It allocates the assets and within each asset class also it recommends what is the right script for him to buy. So, this way, a retail customer is able to get a one-on-one personal advice without paying any fees and without committing any large sum of money to be invested.

Prashant: You have worked on this extensively over the last one year. Would you like to add something?

Agrawal: As Vinay was saying, we use the modern portfolio theory to really give the asset allocation. How does that work, for every level of risk, it tries to maximise the return that investor can make using the diversification benefit between different asset classes. I will give you a small example. Let us say there is a 100 percent bond portfolio. If you look at the historical data on that portfolio, over the last 14-15 years, it made about 6.75 percent with a volatility of 3.6 percent. Now the insight with modern portfolio theory is that instead of that 100 percent bond portfolio, if you were to take 68 percent bonds, 14 percent equity and 18 percent gold, because of the short-term negative correlations between these assets, over that period, you would end up with the same volatility of 3.6 percent, but your return expectation, instead of 6.75 would be 8 percent.

So, for the same level of risk, you actually end up making more return. And it does that across the spectrum of risk. As the person’s risk appetite is higher, he can actually take more risk, maybe the equity proportion will go up. But for every level of risk, he gets the full benefit of diversification so that his risk comes down and return goes up.

Ekta: If, say for example, we have a hypothetical Rs 100 to invest and you have already rolled out ARQ, what is the kind of interest that you are seeing in terms of asset classes? That Rs 100 between equities, debt as well as gold at this point, as compared to earlier.

Agrawal: Obviously, the way this works is it is not specific to the near-term outlook on these asset classes, it is meant to be a portfolio long-term product, so depending on different profiles, they would be 10-20 different profiles, each person would get the recommended proportion of let us say, equity, debt and gold, based on his profile. Now, within individual profiles, let us say equity, we will recommend him specific stocks or mutual funds, based on their near-term performance outlook as well. So, our stock products would get a notification every month. Do they need to keep those stocks or churn into different stocks? Point is, they need to be invested in equities over a longer term. Within that which stocks or mutual funds to hold, that will change based on our advice.

Prashant: Just to give an example, if a retail investor walks into an Angel branch, how does it work? What questions does he get asked to assess what he wants to do with his money?

Agarwal: The questions are very simple, but very smart. Knowing that retail investors are typically laymen, the financial understanding may not be great. The kind of question that we ask is, it starts from a simple question like the age of a customer, the time horizon of the investments that he wants to look at. It also asks some interesting questions about what is his risk willingness, in the sense, it asks you a question if the markets were to go down by 20 percent and your investment portfolio has taken a hit of 20 percent, what will you do, will you sell, would you panic and sell, would you hold, would you buy more.

These kinds of simple questions which are easy to answer by the retail customers, but help us to understand what goes in his mind. Because if you ask a retail customer whether he wants to take risks, whether he does not want to take risk, it is too tough for him to answer because he himself does not know what does risk appetite mean. So, by asking these smart and simple questions, we are able to profile him and suggest a right recommendation.

Prashant: The focus is on risk adjusted returns as it should be across the board?

Agrawal: That is one part of the overall ARQ offering. But when you come to the second part which is within equity, what should you hold. There what we have used is a whole lot of back-testing. We have used very scientific processes.

Prashant: Since you back-tested this, how often does this throw up recommendations?

Agrawal: It is real-time. It keeps taking data and updating it. So, on a daily basis, recommendations get generated. From an investor point of view, let us say, if you take a mutual fund product.

Prashant: You said it is for the investor, it is not for the very near-term. Trading costs are also a significant percentage of overall returns eventually. So, how often does it ask you churn your portfolio?

Agrawal: We do in fact, build in all transaction costs while we are back-testing and I should say that the portfolio strategies are optimised for a minimum horizon of one year. Within mutual funds, we would never ask a person to churn it out before a year. There would never be exit loads or capital gains tax. But in stocks, it does not make sense to just leave it like that. We run the model constantly and if based on the dynamic changes in the market, if there is a need to change stocks, we automatically notify the customer on a monthly basis, so that he knows what to do. He can manage his own portfolio using this automated notification system.
First Published on Sep 8, 2016 12:38 pm
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