DESIGN AND EVALUATION OF ROBO-ADVISORS USING INDEX FUND AND ALTERNATIVE ASSETS OF CRYPTOCURRENCY AND GOLD: CASE OF INDONESIAN CAPITAL MARKET

• Main Author: Prayoga, Dhanar
• Format: Theses
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/63608
• Institution: Institut Teknologi Bandung

In 2021, KPMG Published a report titled Digital Wealth Management in Asia Pacific. The report noted that wealth management industries in Asia Pacific will experience high level of growth because of digital innovation within the industry, such as the boom of Robo-Advisors. Robo-advisors is one of the most promising innovation in wealth management industries, and it’s success has been evident in the case of Bibit in Indonesia. Bibit, a Digital Mutual Fund Selling Agent (Digital APERD) poses a threat for bank’s wealth management division, due to its robo-advisors popularity and ease of use, and hence bank’s wealth management division needs to develop its own robo-advisors to achieve competitive parity. In developing its own robo-advisors, wealth management companies needs to consider several dilemmas for building the portfolio for its clients. Mean-Variance Optimization and Risk-Parity is used to perform strategic asset allocation to build an optimum portfolio. Mutual fund will be joined with gold and cryptocurrency to be the asset classes for the investment portfolio, using the monthly return data from January 2011- December 2020. The mutual fund will exclusively use passively managed (index) mutual fund, in accordance with the norm of robo-advisors around the world, because it has low Total Expense Ratio (TER) and performs better when compared to actively managed mutual funds. Sharpe Ratio analysis is performed to compare the resulting portfolios. Furthermore, the monthly return of the portfolio will be back-tested and compared to IDX Composite to analyze the behavior of the robo-advisor’s portfolio during equity market downturn. Finally, the author will analyze the actual performance of the robo-advisor in the last 3 years of the observation period, that is 2018, 2019, and 2020. Mean-Variance Optimization produced a better risk-adjusted return against Risk Parity, and the addition of gold and cryptocurrency does increase the performance of the robo-advisor’s portfolio. The back-testing of the robo-advisor’s portfolio during January 2011 – December 2020 showed that it protected investors from equity market downturn in 83,3% of the case. Finally, the portfolio outperformed the IDX Composite in 2019 and 2020. While in 2018 the robo-advisor cannot outperform IDX Composite, it showed how it manages a -71,62% drop in cryptocurrency. Therefore, Robo-advisors in Indonesia should incorporate gold and cryptocurrencies, and uses mean-variance optimization; and that the robo-advisor can provide protection for Indonesia’s retail investor during market downturn.