StashAway, a Singapore-based digital investment firm, is using an external technology platform to add unit trusts and mutual funds to what has been an ETF-only business.
Robo advisors like StashAway have relied on exchange-traded funds as building blocks to create portfolios for customers. Typically the robo’s app will gauge an individual’s risk appetite and investment goals, and generate bespoke portfolios. Most ETFs are cheap, liquid, and transparent (they are, after all, publicly listed baskets of other listed securities). Operationally they have been easy for robo advisory firms to manage.
But ETFs have their limits. There is a universe of other types of collective investment products, including mutual funds and unit trusts. These might include index funds but they also include money market funds and other actively managed strategies. And, depending on where they are licensed, they can offer investors favorable tax treatment.
StashAway wanted to build portfolios using all of these tools in order to create a more sophisticated range of products. This is to support two business objectives, says Freddy Lim, co-founder and chief investment officer.
First is to go after working professionals over the age of 35 and not remain focused just on young people. Second is to aid StashAway’s expansion to new markets in Asia Pacific: the firm hopes to have four or five markets added over the next two years in addition to Singapore and Malaysia. It is now in discussion with various regulators about acquiring retail investment licenses.
But to achieve these business goals requires an operationally efficient way to access the world’s mutual funds and unit trusts.
Technology is the only channel for collaborationFreddy Lim, StashAway
After a search, the firm chose to partner with U.K.-based Calastone, a technology company whose platform is used by fund houses and bank distributors worldwide to process subscriptions and redemptions, particularly across borders.
“Technology is the only channel for collaboration,” Lim said. “Calastone reduces the cost of doing business.”
Leo Chen, Asia managing director at Calastone in Hong Kong, says fund management companies require a lengthy due diligence before they agree to a new distribution relationship. In addition to KYC and other compliance checks, fund houses need to process trades, involving reporting, recordkeeping, and reconciliation – which in turn can require dedicated staff.
In this case, the distributor is StashAway. Being a three-year old startup makes it even more challenging to get a global asset manager to accept it as a business partner.
- Read more:
- ETF players assess robo-driven growth
- Schroders’s Asia CEO: mass customization is the key
- UOB goes live with FNZ-built robo
This is where Calastone comes in: although it does not have a role in such bilateral business relationships, its platform automates the entire process, which leaves the fund houses’s operations team with just exceptions processing to deal with (although this depends on the fund manager’s internal systems). Taking on a new distributor via Calastone’s APIs makes it a lot easier for a fund house to take a business risk.
Calastone was originally built to enable fund houses and their distributors communicate seamlessly across borders, automating the recording of a fund subscription or redemption in Country A for a product domiciled in Country B. The company refers to this as a “translation” service that automates the tedium of funds processing across markets. Now with digital investment firms like StashAway, Calastone is positioning this platform to service a new kind of demand: business connector.
Enabling product design
From StashAway’s perspective, using the platform to convince fund manufacturers to work with it gives the robo access to products it needs to underpin its own strategies. To begin with: a Singapore dollar-denominated cash product that offers an annualized 1.9% return with two-day liquidity, which the firm contrasts to the 1.4% a person would receive from a one-year term bank deposit today. A U.S. dollar version is also in the works.
The only way to create such a product was to access two money-market funds and an enhanced-liquidity unit trust.
“The use case hasn’t changed,” Lim said. “We’re still providing a Singapore-dollar cash product, but the underlying exposure is achieved via the use of unit trusts. Calastone’s platform helps us access these funds in a very efficient way. This could be a game changer.”
Tech-based wealth managers see us as able to help them do ‘distribution-out-of-a-box’Leo Chen, Calastone
Calastone hopes this deal is a game-changer too. StashAway is the first of a pipeline of wealth-tech companies the vendor hopes to add to its roster of clients, which include bank wealth managers and insurance companies selling investment-linked products. “Tech-based wealth managers see us as able to help them do ‘distribution-out-of-a-box’,” Chen said.
Such firms have the luxury of not needing to build a legacy infrastructure, but also face the challenge of dealing with buy-side manufacturers without hiring the usual team of dealing and operations people.
The idea is akin to a traditional multi-asset, multi-manager structure (as from an SEI or a Russell), but replacing a traditional infrastructure with technology.
“We want to construct highly diversified portfolios that invest across asset classes, industries and sectors, but not single-name securities,” Lim said. “We don’t want to be involved in security selection.” Instead his team’s focus is on asset allocation and managing the risk.
New impetus for B2C robo
The deal with Calastone represents a doubling-down of StashAway’s chasing the B2C market. To date robo-advisors worldwide have struggled to make retail-facing businesses profitable.
Lim declined to describe StashAway’s business in terms of number of customers (“our website says over 100,000”), volumes, or assets under management. He says however the firm is building a sustainably profitable robo business focused on direct-to-consumer models.
It also has about 100 companies signed up to its StashAway Workplace, in which it can service employees and H.R. departments, although it still requires employees to sign up directly.
StashAway looked at doing B2B business, providing digital solutions for banks, for example. Lim says that hasn’t worked out because banks’ wealth-management departments want to sell investment products with higher fees, whereas a key selling point for robo advisors’ products is their low cost.
- Read more:
- Meet the robo that just won BoCI money
- Grab/Bento: who wins
- Top takeaways from the Nomura/8 Securities deal
StashAway charges zero management fees for its Sing-dollar cash product; its other products charge 0.2% to 0.8% management fees. According to Morningstar, the median fee on a foreign fixed-income fund sold to retail investors through a bank in Singapore is 1.41%.
Lim says the company’s client cost of acquisition is likewise much lower than industry norms. He says digital marketing can attract users at relatively low cost, and once people like the product they are likely to recommend it. However he would not reveal the firm’s cost.
StashAway has raised $20 million in series-A and -B venture funding, with backing from Eight Roads Ventures (a private investment arm linked to Fidelity’s Johnson family), Singapore-based Asia Capital & Advisors, and directly from ACA’s backing Rozario family.