Stashaway's August 2019 Re-optimisation

StashAway has always talked up their proprietary ERAA asset allocation framework/investment strategy which is supposed to respond to macroeconomic indicators and valuation of asset classes, but we’re seeing this first major “re-optimisation” now after over 2 years into their existence, and slightly over 1.5 years since I started dollar cost averaging into an account there.

In the upcoming re-optimisation, ERAA® is deploying asset allocations that maintain portfolios under a “disinflationary growth” regime for US-based assets and shifting to our “All-Weather” strategy for non-US assets.

More specifically, what you’ll see in your updated asset allocation is that ERAA® is allocating more growth-oriented assets toward the US and invest more in protective assets when it comes to non-US markets.

ERAA® is also allocating funds toward European equities, despite weaker economic performance in the Eurozone.

At the same time, StashAway is also adding More Asset Classes and Geographics:

We’ve added commodity-exporting countries, such as Canada and Australia; and, we’ve expanded equity sectors to include healthcare, energy, and finance. We’ve also widened our scope in fixed income, including more bonds, such as international treasury bonds. Finally, we’ve introduced some interesting asset classes, such as Emerging Market bonds, global ex-US REITs, floating-rate bonds, and global ex-US inflation-linked bonds.

Portfolio changes

I thought it might be useful to record the actual changes, for my “Core 20% Risk Index” portfolio, which claims “1% chance that my portfolio’s value will lose more than 20% of its value in any given year”.

Current state

GeographyTarget allocation
North America48.10%
Asia13.80%
Central America1.00%
Europe0.80%

Interestingly, this geography thing is new, it used to never be tabulated. It’s not like it adds up to 100% anyway since there are some non-regional ETFs so it’s kind of weird.

Asset categoryTarget allocation
Equity Sectors (US)32.18%
International Equities13.85%
Government Bonds23.27%
Corporate Bonds14.85%
Commodities14.85%
Cash1.00%
Asset classTarget allocation
Equity Sectors (US)
Technology Select Sector SPDR Fund2.80%
Consumer Staples Select Sector SPDR Fund13.81%
Consumer Discretionary Select Sector SPDR Fund13.77%
International Equities
iShares MSCI All Country Asia ex Japan ETF12.77%
Government Bonds
iShares TIPS Bond ETF14.40%
iShares 20+ Year Treasury Bond ETF8.65%
Corporate Bonds
SPDR Bloomberg Barclays Convertible Securities ETF13.97%
Commodities
SPDR Gold Trust15.09%
Cash (SGD)
Cash1.00%

Re-optimisation

GeographyBeforeAfter
North America48.10%36.00%
Central America1.00%0.80%
South America0.00%1.00%
Europe0.80%12.00%
Africa0.00%0.40%
Asia13.80%2.30%
Asset categoryBeforeAfter
Equity Sectors (US)25.74% - 38.62%36.00% - 54.00%
International Equities11.08% - 16.62%10.00% - 15.00%
Government Bonds18.62% - 27.92%21.20% - 31.80%
Corporate Bonds11.88% - 17.82%0.00%
Commodities11.88% - 17.82%12.00% - 18.00%
Cash0.80% - 1.20%0.80% - 1.20%

The most obvious difference is that the weights are now presented in +- 20% ranges instead of single numbers, but not for the geography thing for some reason. This is probably the range before they will actively rebalance?

To make the next table easier to parse, I’ve converted the ranges back to the midpoint of their +- 20% range.

Asset classBeforeAfter
Equity Sectors (US)32.18%45%
Consumer Staples Select Sector SPDR Fund14.35%0.00%
Consumer Discretionary Select Sector SPDR Fund14.85%15.00%
Technology Select Sector SPDR Fund2.96%0.00%
iShares Core S&P Small Cap ETF0.00%15.00%
Health Care Select Sector SPDR Fund0.00%15.00%
International Equities13.85%12.50%
iShares MSCI All Country Asia ex Japan ETF13.85%0.00%
Vanguard FTSE Europe ETF0.00%12.50%
Government Bonds23.26%26.50%
iShares 20+ Year Treasury Bond ETF8.41%0.00%
iShares TIPS Bond ETF14.85%11.50%
iShares J.P. Morgan USD Emerging Markets Bond ETF0.00%15.00%
Corporate Bonds14.85%0.00%
SPDR Bloomberg Barclays Convertible Securities ETF14.85%0.00%
Commodities14.85%15.00%
SPDR Gold Trust14.85%15.00%
Cash (SGD)1.00%1.00%
Cash1.00%1.00%

That’s certainly a move from AAXJ to VGK (FTSE Developed Europe All Cap), from TLT to EMB (USD-denominated EM sovereign debt), out of corp bonds towards different sectors in US equity.

Interestingly, there’s a new 22% risk level in the Core portfolios. The change from this 20% level is to decrease the allocation in EM Government Bonds, and move a bit to TIPS bonds and the rest to IVV (S&P 500).

Stay the course, but which course?

There are a ton of assumptions baked into this asset allocation framework – Modern Portfolio Theory, that market valuations should revert to the mean around economic fundamentals of “growth, inflation, and interest rate expectation”, the whole risk-adjusted returns thing…

I still don’t really understand it (and it’s not like they actually explain what they will do in each of the quadrants of their strategy) so I’m obviously not fully bought into it. This is probably a good reminder to think hard about whether I actually want to bet on these passive-but-still-quite-tactical slices and dices.

If I’m prepared to spend some time and energy managing brokerage accounts and buying ETFs myself, then the real question is whether this tactical thingy is likely to reliably outperform the 0.8% p.a. fee that they’re charging.