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StashAway announced some interesting new changes on the platform earlier today. The changes include an increased number of asset types, the number of geographies available for investment, and an ad-hoc portfolio re-optimization to cater to the change in economic conditions.
Launching 13 new asset classes (bringing the total to 32) and geographies
StashAway’s fund selection universe now includes 13 new asset classes, including international treasury bonds (iShares International Treasury Bond ETF), Global ex-US REITs (Vanguard Global ex-U.S. Real Estate ETF), international inflation-linked government bonds and some industry sector-specific ETFs like healthcare, energy and finance.
The geographies that StashAway considers in its investment opportunity set is also expanded to commodity exporting countries like Australia and Canada through their respective countries’ indices (i.e. MSCI Australia and MSCI Canada) – which makes it more diversified.
The expanded investment universe basically increases the opportunity set for the algorithm to consider when selecting funds based on your risk profile and economic environment.
Personally, I see this as a natural progression for StashAway to cater to the increasingly diverse customer base across the region with varying needs. Retail investors have been asking for certain asset classes to be introduced (which StashAway previously did not offer).
While the expansion of investment opportunity set can be beneficial, I feel that the increased slicing-and-dicing of investment portfolios can be a double-edged sword. Not only does it increase costs (covered by StashAway for now as part of the platform fees), it lends a slight tilt towards active management whose benefits have not been proven.
The full list of ETF selection StashAway considers is available via this link.
Portfolio re-optimization in response to the new economic conditions
Further to the re-optimisation above in response to the expanded investment opportunity set, StashAway is performing another re-optimization in response to the new economic conditions that its systems detected, i.e. changing expectations of growth in the US versus ex-US economies.
StashAway periodically re-optimises portfolios, based on their investment methodology outlined in this article. To summarise, they utilise what’s called the Economic Regime-based Asset Allocation (ERAA) framework that keeps each individual’s risk profile constant throughout any economic climate.
ERAA leverages a multitude of different data to manage portfolios systematically, and to continuously control that asset allocations are optimised – protecting investors’ capital through keeping portfolio volatility (i.e risk profile) constant.
Explaining the reason for the change a little deeper…
StashAway explained that US industrial growth has already peaked in September last year at 5.3%, and has since slowed to an annualised growth rate of 1.3%. Growth has moderated but the economy is still growing (at a slower pace) – thanks to its conductive monetary policies and lower interest rates.
The rest of the world (ex-US) on the other hand, showed industrial growth peaking earlier than US. In China, for example, manufacturing activity has been declining rapidly since 2017, before the trade war even broke out. The slowdown has also expanded to the rest of the world including emerging markets, Asia and Europe.
An interesting heatmap from Bloomberg on global PMI activity trends around the world painted a similar story – with red showing negative change in sentiment and green showing positive change in sentiment. In 2019, many major economies aroiund the world in Europe and Asia are showing negative sentiment change, while the US remains neutral. The net global effect (i.e. world) is neutral as the US is the world’s biggest economy.
In-app changes – what you need to know and do
What I did
Normally, I wouldn’t touch my passive portfolios at all as they are supposed to be set it and forget it. But given the portfolio re-optimization, I’ve decided to combine my sub-portfolios into one and adjusted its risk level to 20.
At risk level 20, the allocation is around 55% stocks, 30% bonds and 15% gold.
We are moving slowly towards a gloomier economic environment both globally and in Singapore. With the trade war showing no signs of relief, US yield curve inversion, and ten years into an expansionary economic cycle, it is important for us to stay invested for the long haul but mitigate risk prudently to ride out the bumpy road ahead.
I continue to advocate staying invested through broad diversification, risk management and remaining prudent through all my other posts on this website.