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Can this robo-advice firm really deliver 20% returns?

Written by: Paloma Kubiak
European wealth management firm Novofina claims its 'state-of-the-art' trading algorithms could net investors annual returns of up to 20%. But sceptical advisers say the sums simply don’t stack up.

The Novofina 7plus and Novofina 20plus portfolios, which both invest in US large cap stocks only, aim to offer average annual net returns of 7% and 20% respectively, based on past simulations.

The minimum recommended deposit is €30,000 and the minimum fee per trade is USD 2.00. There are no management, transaction or ancillary fees giving clients greater transparency on cost, the Malta-based firm said.

Investors open a universal account where they trade in sterling so there’s no need to convert currency. This, Novofina says, means there is no exchange rate risk. It also says clients own individual shares, for example in Apple, so if Novofina were in trouble, there’d be no risk of clients losing money.

All prospective clients are vetted by Novofina’s founder, Harald Helnwein.

It has attracted €1.6m in seed funding to improve and update its software algorithm to create a “stable, high performance trading system” confirmed by more than 10,000 back-test simulated with current, live-trading results.

Helnwein said: “We are a truthful, honest provider of highly cost-effective financial services. The focus of Novofina is on the client’s position. We are not a high frequency hedge fund, but we aim to enter positions in an efficient way, resulting in better prices for our clients. Our low execution fees also play a big part in making a difference to significantly improve the client’s overall performance. We are not focused on maximising short-term profit; we are focused on managing risk.”

‘Pure fantasy’

While 20% returns may sound appealing, UK-based financial advisers have warned investors to be sceptical.

Martin Bamford, managing director of independent financial planners, Informed Choice, said even with “fancy algorithms”, the returns are “pure fantasy” and given the high minimum investment, it hopefully places it out of the reach of most retail investors.

“This is a company based and regulated in Malta, which is passporting into the UK to offer investments to UK resident investors. Hopefully our exit from the EU will prevent this from happening in the future and give British investors a greater layer of protection,” he said.

“Their marketing spiel perpetuates the myth that the super-rich somehow have access to different or better investment options, which is nonsense. They are offering returns based on back-testing and simulated returns, which anyone could artificially achieve by writing software to identify which assets have performed best in the past.

“Until this organisation can produce independently audited and verified performance data, over a decent length of time, investors will treat it with the scepticism it deserves.”

Dennis Hall, chartered financial planner and chief executive of Yellowtail Financial Planning, said theoretically the returns are achievable, but in practice, “it’s not going to happen”. He also takes issue with its use of back-testing.

“Back-testing models can prove that something would have worked in the past, but that’s all with hindsight. Long Term Capital Management the hedge fund that almost broke the world banking system had back-tested their algorithms, and subsequently failed.

“The trouble with algorithms is they have a limited life. As soon as one party has spotted a way to cream some extra return, the rest of the market participants try to replicate it, and the advantage disappears. Even promising 7% annual returns, let alone 20% is an optimistic boast. Hedge funds, absolute return funds, and ‘hands on’ discretionary portfolio managers haven’t been able to achieve it consistently.”

Hall said he’d “sit this out” until Novofina can demonstrate good long-term performance with no problems arising.

“They’re still a start-up, and although they’ve raised £1.5m, that’s peanuts compared to the money companies like Nutmeg have had to raise, and they’re still loss making. This is far too risky.”

‘We’re committed to deliver these returns’

Commenting on the scepticism, Helnwein said: “We strongly encourage people to be extremely sceptical about everything in the financial services industry. This includes us, they should carefully check us out. What they see is that they will not find many [companies] if any that are that transparent down to every cent and penny, work so hard to deliver net performance for the client, and have trading-algos in quality we have.

“Many of our closest clients are those who told me they absolutely believe that trading systems/algos do not work. But it is the best way to professionally address modern financial markets. At least a right-made back-test can often show you in an hour that the approach being promoted by X or Y would have led to three total losses if being traded over the last 15 years. Would you bet your hard-earned money on this, if you knew?”

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