Category: News

This article was first published in the Fall 2017 issue of Family Office Elite Magazine.

Fixed income as an asset class has always been a core component of an ultra-high net worth individual’s portfolio. However, as an asset class historically lagging in innovation, are investors being adequately served, and are their investments truly tailored to their individual goals and requirements?

Adrian Gostick, Chief Revenue Officer of BondIT, shares his thoughts on the challenges facing investors, and how BondIT is bringing much-needed innovation to the world of bonds.

So what are the challenges facing investors in fixed income assets? Since the Great Financial Crisis of 2007-8, regulations limiting bank trading activities, and increasing costs of holding riskier bonds, resulted in dramatic drops in dealer inventory, reducing market liquidity and available

inventory.

To gain exposure to fixed income, in an environment of decreasing liquidity, many investors turned to bond ETFs. From 2008 to the beginning of 2017, assets held in bond ETFs grew 600% as investors were attracted by the perception of higher levels of liquidity, lower fees, and easy diversification. However, there is no free lunch, and such perceived benefits carry several negative consequences, which ultimately result in investors receiving sub-optimal returns versus a portfolio of individual bonds.

As an illustration, to provide sufficient liquidity to an ETF that is based on an inherently illiquid asset class, ETFs must invest into the more liquid spectrum of bonds. This liquidity comes at a cost, with more liquid bonds, in general, having lower yields, all other things being equal, than less liquid ones, thereby reducing the returns of an ETF versus a portfolio without such liquidity restrictions.

Looking at the tracking error of a bond ETF against its benchmark adds evidence this view. Despite the relatively low ETF fees versus those for an actively managed fund, once you add the tracking error, the overall cost of owning an ETF can be significantly higher. Many advisors, aware of the limitations of using bond ETFs, prefer the approach of providing a portfolio of individual bonds, tailored to their

client’s requirements. Providing a bespoke portfolio has many benefits, including optimising the returns for the level of risk taken, ensuring the holdings reflect their clients’ preferences, such as investing into “green” assets, or avoiding specific countries or issuers, and providing cash pay-outs for specific life events by aligning maturing bonds with those events.

Why don’t more advisors promote bespoke bond portfolios over ETFs?

Quite simply, the main challenge in providing bespoke portfolios to customers is that it is a mathematically challenging problem to create and maintain such portfolios. As businesses scale, e.g. with multi-family offices, the challenge becomes even greater.

Today the process to construct and manage bond portfolios is largely manual and Excel based. The universe of bond is much larger than equities, with issuers often having many bonds versus a single equity issue, and with each bond having different terms and conditions, levels of liquidity, and pricing. Making sense of such a large universe, and ensuring the bonds selected meet the customer’s constraints, is the first challenge.

Once a suitable universe of bonds has been selected there are additional challenges in selecting which of them, and in which quantities, should be combined into the portfolio. The difficulty is compounded by the need to look at non-linear constraints, such as a bond’s minimum denomination, or the increment in which it can be added to a portfolio, during the construction process, and the enormous amount of correlation data to be analysed in the universe selected.

Due to the mathematical challenge of creating a bespoke portfolio, that honours all the constraints set by the customer, and provides a target return with minimal amount of risk, it is normal to see the use of “model” portfolios, which although helping to avoid the lower returns of comparable bond ETFs, are not truly tailored to an individual customer’s requirements.

So how is BondIT helping?

Fixed income has always lagged other asset classes, such as equities or foreign exchange, regarding innovation. Whether it is electronic trading, algo-pricing, roboadvisory, or introduction of ETFs, bonds have always been last to the party! The same is true in portfolio construction, optimization, and investment idea generation, the space that BondIT is focused on.

BondIT was established in 2012 with a mission to leverage data science and machine learning techniques to simplify the process of constructing, optimizing and managing fixed income portfolios. By leveraging machine learning algorithms, a user can enter portfolio goals, such as target returns, portfolio rating, and duration, and detailed customer constraints, for example, types of bonds, level of exposure to specific issuers, and percentage ranges for specific currencies, sectors, and coupon types, and construct an optimised portfolio within a matter of seconds.

Once the portfolio is created the user can instantly see detailed characteristics of the portfolio, such as which sectors, rating buckets, or currencies are contributing to the risk, and portfolio level figures including the yield, duration, rating, and VaR. The agility to quickly create, and tweak; portfolios provides an advisor with the ability to have a more engaging and meaningful dialogue with his customer, helping ensure a truly bespoke portfolio is created.

Portfolio monitoring, with customisable alerts, for example on market level changes, rating changes, and upcoming cash-flows, combined with algorithmically generated switching and rebalancing ideas, helps ensure the portfolios remain optimised for the customer’s specific goals.

In conclusion

Fixed income has always been a challenging asset class for investors, with innovation lagging other asset classes. But rather than taking the simple approach of gaining exposure through bond ETFs, which in the long term will provide inferior compensation for the risk taken, and cannot be tailored to an individual’s specific requirements or life events, it’s worth taking the effort to construct a carefully tailored, bespoke portfolio of individual bonds.

BondIT’s unique technology can help family offices provide a truly bespoke service for their customers, by supporting the construction, monitoring and management of their fixed income portfolios.

Bio: Adrian Gostick is Chief Revenue Officer for BondIT, and has over 25 years’ experience working in financial markets trading and technology roles across Europe, Asia and the U.S.

 

This article first appeared in the events brochure of Robo-Investing Europe 2017

Over the last few years the world has seen a dramatic growth in robo-advisory solutions to automate the process of asset allocation, and construction and management of appropriate portfolios. Despite the proliferation of solutions now available, numbering in the hundreds, there has been little focus on solving the challenge of creating and managing fixed income portfolios using actual bonds, rather than ETFs. Addressing the challenge of providing a robo-advisory platform for individual bonds is what BondIT, an Israel company headquartered in Herzliya, has been focused on since it was established in 2012.

Automating the construction, optimization and management of fixed income portfolios is a much more complex problem to solve than for asset classes like equities or ETFs, but with a market size more than double that of global equities, and with more than triple the daily volume, is a market ripe for disruption. BondIT’s expertise in managing big data, and in the application of proprietary machine learning algorithms to the world of fixed income data, has enabled the company to build a platform on which advisors and asset managers can automate the construction, optimization and ongoing management of fixed income portfolios. “Using the BondIT platform allows a user to construct a customised portfolio, taking into account investor constraints such as ratings, liquidity, bond types, etc., and optimized to hit portfolio targets with minimal risk, in a matter of seconds”, states Adrian Gostick, Chief Revenue Officer for BondIT. “The same process in a private bank could take several days”, adds Gostick.

Today the bond advisory process remains a very slow and manual process, with Excel the standard tool used to try and select appropriate bonds for an investor. Very often recommendations are based on inventory an institution wants to push rather than putting the needs of the customer first. For organizations to scale their business they must either add people, or look to technology solutions. Private banks and wealth advisors are starting to wake up to the opportunity that solutions like BondIT’s can bring. “Over the last year, we’ve seen a number of banks looking to engage in conversation with us as the realisation grows that a partnership approach can accelerate digital transformation”, explains Gostick. “And using a platform that tailors investment advice to an individual investor, and can demonstrate this with detailed audit trails, helps ensure organisations meet their fiduciary responsibilities towards their clients”.

As well as automating the construction of fixed income portfolios the BondIT platform provides alerts and rebalancing suggestions to ensure the portfolios remain optimal and within the mandates and constraints of the investor on an ongoing basis. At all stages of the workflow detailed analytics are available to show the impact of any changes in terms or returns and risk in the portfolio. “As well as traditional measures like duration and VaR the platform shows where in the portfolio the risk is coming from, for example by sector of issuer, or currency denomination of the bonds”, Gostick explains.

BondIT recently entered into a strategic partnership with Wind Information in China, the leading provider of fixed income data for the China market. “As the China market continues to open to investors, and with Chinese bonds soon to be included in global fixed income indices, providing a platform to build portfolios, powered by the most comprehensive data available for the China market, will significantly help customers enter what can be an unfamiliar and somewhat opaque market”, mentions Gostick.

BondIT is looking to build on initial success by exploring how incorporation of behavioural data into the platform can increase trade conversion rates, and by integrating into liquidity venues to take into account available inventory and ensure ideas generated can be transacted. “The fixed income markets are only just waking up to the fact that there’s an increasing amount of data that can be leveraged to bring efficiencies to the market”, says Gostick. “Whenever someone is making a decision on the construction or composition of a bond portfolio we want to support that process”.

With yesterday’s announcement by Bloomberg of the addition of bonds from the Chinese interbank bond market into a parallel index to the Bloomberg Barclays Global Aggregate Index, China’s bond market has been thrust into the limelight.

Why is this important?

China’s bond market has grown to become the 3rd largest in the world, with $9.4 trillion in outstanding debt. The RQFII program announced in 2011, and a scrapping of quotas for most institutional investors, announced last year, have gradually opened the market to foreign investors, yet due to capital controls, opaqueness, and difficulty in understanding the risks, foreigners still only hold around 2.5% of the market.

The inclusion of Chinese bonds in global indices will accelerate foreign inflows. With a parallel index institutional investors will still have a choice, rather than be mandated, whether or not to include Chinese bonds in their portfolios. But the move will increase awareness of the opportunities in the China market, and force investors to start exploring investment ideas. With yields significantly higher than other markets (e.g. China 10 year yield is 3.33% versus 2.52% in the US, 1.68% in HK, and 0.46% in Germany), and a currency 10% cheaper against the USD than 2 years ago, there is plenty to attract investors.

As new participants enter the market we are also likely to see a rapid increase in sophistication in how the market operates. Although only Government and Policy Bank Bonds will be included initially, inclusion of other bond types, such as  MTNs and Enterprise Bonds, will likely follow. Having a broader investor base will result in better pricing of credit, demand for higher rating standards, and introduction of additional credit analytics such as default probabilities and implied ratings.

BondIT provides investors with a platform that brings a digital approach to bond portfolio construction and management. Thanks to our strategic partnership with Wind Information we can support foreign investors who are investing in, or considering participating in, the onshore Chinese bond market.

 

Donald Chan, BondIT’s Head of Asia Pacific speaks to InvestHK on BondIT’s push into the Asia-Pacific region through Hong Kong. Click here to read the article on InvestHK’s website.

The fixed-income market is a complicated world to navigate. Bonds come with many different ratings, and some are not rated at all. They usually trade in the “over the counter” market instead of on exchanges. Adding in other factors such as interest rate sensitivity, duration and maturity and so on, and the task of creating an optimised fixed-income portfolio becomes daunting.

That was why it took a team of 25 experts three years to get BondIT, a digital algo-advisory solution for fixed-income investment, ready for commercialisation last year.

“We have people from the financial market with fixed-income knowledge, and those with data and machine-learning expertise; five of them are PhDs,” Donald Chan, Head of Asia Pacific, said. “The combination of know-how and the amount of lead time we have entered the market to generate this solution is precisely our competitive edge.”

BondIT has introduced the solution to its home country of Israel and to Europe, and it is now available in Asia as well. Given his in-depth understanding of the Asian markets and experience working with Israeli tech companies, Chan co-founded the Asia business with Hong Kong being chosen as its regional hub. Beyond Hong Kong, BondIT has successfully launched its business in Singapore, Korea, and now Mainland China.

“We have decided on Hong Kong because it is the financial hub of Asia, and it is one of the most developed and established fixed-income markets in the region. This city is also a wealth management hub, and then there is the ease of access to the Mainland Chinese market,” Chan explained.

The fixed-income market in Mainland China is rapidly developing, he furthered, and his company has formed a partnership with Wind Information, a leader in the country’s financial data services industry. He added that having a presence in Hong Kong played an important role in securing the pact.

“Hong Kong is one of the most forward-looking cities in Asia when it comes to FinTech. The Securities and Futures Commission and the Hong Kong Monetary Authority are being strategically involved in the whole ecosystem, to act as an enabler for FinTech,” he said.

“They are encouraging adoption and testing, and we are seeing a lot of other countries trying to play catch-up. We have an advantage of being at least a year or two ahead.”

Chan emphasised that BondIT is a B2B2C solution aiming to equip investment advisors and portfolio managers at financial institutions to manage the fixed-income universe more effectively. The solution “cleanses” the plethora of data for accuracy and concision, and then seeks out bonds based on an investor’s constraints and goals. What used to take analysts and financial professionals hours and days to do, often with sub-optimal results, can now be done in seconds, with more efficiency and precision.

“With our solution, it takes 15 seconds to construct a portfolio,” Chan said.

The efficiency allows the advisor to provide clients with timelier advice in response to the fast-changing market. The solution also sends out alerts when bonds in a portfolio are maturing or when weightings of assets in a portfolio need rebalancing.

From the financial institution’s perspective, Chan explained, the solution frees up time for advisors to reach out to “sleeping” clients and reactivate their accounts, and hence a wider outreach to clients. Recommendations are based on clearly defined risk parameters and analytics are well presented, which helps ensure regulatory compliance.

Heading BondIT’s Asia base in Hong Kong, Chan works with a chief revenue officer and a head of product management. He plans to add another 10 to the headcount in 2017 for functions such as front-end development, client support and marketing.

Originally published in Fintech News Singapore – BondIT is among 15 firms honored with The Asian Private Banker Technology Awards, which are awarded to the tech industry’s most innovative and practical companies. The Technology Awards Luncheon and Champagne Reception will be held in February 2017 and celebrates the end of another challenging and rewarding year of private banking innovation and technological change by those leading the effort to transform private banking and wealth management in Asia.

Release – Shanghai, China – 27th October 2016

Wind Info and BondIT have established a strategic partnership to bring AI and machine learning techniques to global fixed income markets, with an initial focus on more mature international markets, followed by rollout to the Chinese market. The partnership will build on BondIT’s global expertise in big-data and machine learning, and will leverage Wind Info’s comprehensive data-sets and distribution capabilities. The agreement includes an investment stake in BondIT by Wind Information (HK) Company Limited.

Wind Info provides financial data, research, and information for China’s financial markets to the majority of financial institutions in the Chinese market, including securities companies, fund management firms, insurance companies, and banks.

About BondIT

BondIT, headquartered in Herzliya, Israel, enables advisors and investment professionals to significantly boost sales and AUM by automating the construction, monitoring and management of optimised fixed income portfolios. BondIT provides sophisticated, yet easy-to-use, tools backed by proprietary machine learning algorithms, helping customers scale their business, generate sales, and comply with fiduciary responsibilities. BondIT is backed by prominent investors including Chinese VC firm Glory Ventures, US VC firm SixThirty, and Israel’s Club 100 Plus.

For more information, visit: www.bonditglobal.com

About Wind Info

As the market leader in China’s financial information services industry, Wind Info is dedicated to providing accurate and real-time information, as well as sophisticated communication platforms for financial professionals. In China, Wind Info serve more than 90% of financial institutions including hedge funds, asset management firms, securities companies, insurance companies, banks, research institutions, and government regulatory bodies. Overseas, Wind Info serves 70% of Qualified Foreign Institutional Investors (QFII). Hailed at home and abroad as the premier provider of Chinese financial information, Wind Info data are frequently quoted by Chinese and international media, in research reports, and in academic papers.

For more information, visit: http://www.wind.com.cn/En/

Contact Information

Adrian Gostick

BondIT

+852 9745 3030

[email protected]

Jiang Wenyan

Wind Information

+86 21 6888 2280

[email protected]

We are thrilled to announce that BondIT has been named one of the Top 10 Portfolio Analytics Solution Providers for 2016 by Capital Markets CIO Outlook magazine.

BondIT enters OCBC Bank’s fintech accelerator programme as one of the top three wealth management and artificial intelligence (AI) solutions to be deployed by the bank in Fall 2016, Banking Technology reports.

“Deploying these solutions will involve changing the way we do things. They may even require us to adjust our business model, and we are entirely happy to embrace ‘disruption’ of this kind,” says Samuel Tsien, group chief executive officer of OCBC Bank.

Forrester is one of the most influential research and advisory firms in the world. BondIT was recently cited in their report titled “Disruption Is Brewing In Digital Investment, Security, And Identity.”