Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Self-driving markets: how retail investors broke speed limits
Retail investors have changed the dynamics of US share markets, according to a study by digital broking house DriveWealth. The analysis by DriveWealth, which is the engine of several Australasian US share-trading platforms, found retail investors “have driven a shift in order timing” on the New York Stock Exchange (NYSE) this year. US equity orders placed “at the open” have spiked upwards, particularly post the March pandemic market crash, “due to the heightened activity of retail traders”.
The study says: “The NYSE is seeing the continued impact of increased retail activity… Institutional investors do not generally place a large volume of trades at the open because they trade throughout the day or after hours. … After a retail investor feeding frenzy around the March 23 stock market lows, DriveWealth says it “expected to see a slowdown in retail trading volume. Instead, we saw an uptick across all metrics.”
June quarter US retail trading volumes jumped over 200 per cent compared to the first three months of 2020, the DriveWealth data shows, while assets in play more than doubled during the same period with positive net inflows recorded every day. Retail investor trades also doubled quarter-on-quarter while account openings rose 54 per cent in the three months ending June 30, the study says.
“The retail shift is being driven by four key factors – ease of use, first-time access to investing or U.S. investing, affordable entry points, and lower fees,” DriveWealth says. Despite tech-enabled youth copping blame for distorting share markets during the COVID lockdowns, the report says only “a subsegment of retail investors” appear to be aggressive day-traders.
“… we believe this increased activity is an acceleration of a pre-existing trend towards making investing easier and more accessible to average retail investors,” the study says. “This democratization of investing has resulted in a retail investing urge; the COVID-19 crisis has just accelerated the trend.”
Founded in 2012 by Robert Cortright, who previously built and sold two financial firms covering the currency and high-frequency trading sectors, DriveWealth provides US share-trading infrastructure to various sectors both at home and offshore. For example, DriveWealth serves as the technology and brokerage backbone for the three online platforms offering NZ investors direct access to US shares: the Kiwi Wealth subsidiary, Hatch; Sharesies; and, Australian-based firm, Stake.
The New Jersey-headquartered business highlights the ability to trade ‘fractional shares’ in real-time via its “patent-pending” Fracker technology as a key draw-card for retail investors. While chopping up equities into smaller pieces enables shallow-pocketed retail investors to build up a diversified market exposure, “fractional shares have unique risks and limitations that you should understand”, DriveWealth says.
In addition to fees, commissions and ’rounding’ exercises by the platform provider that could add significant costs, fractional shares are neither transferrable to other investors nor carry any voting rights. The DriveWealth report notes fractional share trading was “skyrocketing” in the June quarter, up almost 90 per cent on the previous quarter including a 60 per cent month-on-month increase in June.
– David Chaplin, Investment News NZ
