StashAway updates: new asset classes and re-optimization

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.

According to ERAA, there are 4 economic regimes – depending on the level of economic growth and inflation. Each regime has different risk and return profile for individual asset classes. By optimising for the economic regime, StashAway claims that it can offer reduced portfolio volatility and higher returns.

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.

Bloomberg Global PMI Tracker: what purchasing managers are saying around the world about the outlook – positive or negative.

In-app changes – what you need to know and do

When launching the app, you’d be greeted with a splash screen illustrating the latest updates
You’d then be advised to review each of your portfolios within your account on the changes in weightings, fund selection and risk levels
The re-optimization may significantly alter the investment mix of your portfolio, although the level of volatility (denoted by the risk index) may not significantly differ. In my case, for my Risk Index 30 portfolio, my commodities mix was reduced to 0% and US equity weight was increased

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.

In summary

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.

  1. Given that Stashaway charges a fixed management fee 0.75% average for $50k; is there an optimum risk level to take for the General Investing portfolio? Obviously, if you take a higher risk level, the potential for higher return will make the fixed management fee a smaller percentage of your potential return.
    If you set your risk level at 6.5, does it make more sense to just leave it in Stashaway Simple where there is no fixed management fees and your portfolio is exposed to less risk??

    1. I’d look at it at average annual returns per risk level, subtract the AUM fee and ask if the fees make sense for that level of return and management. If it doesn’t, then DIY might be better!

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