Not all robo-advisors are created the same
Endowus Insights

Not all robo-advisors are created the same

Updated
June 7, 2022
published
March 23, 2022
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Choice is meaningful. It acknowledges the uniqueness of each individual, and respects their different needs as they pass through the different phases of life.

But the breadth and complexity of permutations can often leave us paralysed with indecision. 

One such choice that you might be facing today is in managing your wealth, specifically in choosing between the many offline and digital wealth management platforms available in Singapore. 

Despite looking similar in many ways, if you dig a little deeper you will find that these platforms are very different in the types of investment offerings, costs of underlying products, fees they charge, the experience and expertise of their teams, and even the underlying investment philosophies. 

Financial blogs categorise Endowus together with names like Stashaway and Syfe as robo-advisors, mostly based on the assumption that they help to simplify the investment process and provide advice digitally. Yet, these platforms are in fact very different — this difference has and will continue to produce very different outcomes for their clients.  

How should you make the call on which robo-advisor is best suited for your needs?

Difference in investment approach between robo-advisors

In 2021 alone, the variation of returns by the three most popular robo-advisors in Singapore was over 20% in their highest risk equities-only portfolios. While many people seem to bucket all robo-advisors together, there must be a fundamentally different investment philosophy and implementation for these players to be producing such vastly different performance outcomes in a year. 

Endowus vs robo benchmark
Source: Seedly

Understanding asset allocation strategies

Robo-advisors and digital wealth platforms can help their customers grow their wealth by providing advice, and allocating them into risk-appropriate and goal-appropriate portfolios made up of funds. (Many people talk about the difference between exchange-traded funds or ETFs and unit trusts, but it doesn’t matter as they are both open-ended mutual funds with one being listed, and the other being unlisted.)

If you have a higher risk tolerance and a longer investment horizon, a bigger share of your investment would likely be allocated into equity (stock) funds. If you have a lower risk tolerance, your portfolio would likely be mostly made up of fixed income (bond) funds. This relationship exists because equities carry a higher risk, greater short-term volatility, and higher long-term expected return than fixed income. 

historical risk returns between different asset classes
Source: Vanguard

Deciding your risk level should determine the percentage weight of your portfolio to the major asset classes of equities and fixed income. This is because the majority of long-term returns are indeed driven by this process known as asset allocation. Many people talk about additional layers of asset allocation, such as geographic, sector, type, style. Yet, all that talk does not always provide the benefits of diversification, which is the fundamental reason why you invest in different asset classes with different risk characteristics. It is the asset allocation that should collectively lead to the decision of what funds should be in your portfolio to give you a diversified exposure to the global stock and bond markets.

Wealth managers are tasked to select, manage and maintain a portfolio of funds to generate the best possible returns for their clients. What sets a good robo-advisor apart from a poor robo-advisor is how the platforms and teams design their portfolios so that every dollar you put in is worked harder through investments, and you are compensated with returns for the level of risk you are comfortable taking to reach your financial goals.

The question is, how does each platform come to a decision on how to allocate your money, and what are the differences in the investing strategies?

Investing with a Strategic Passive Asset Allocation (SPAA) with Endowus

Endowus takes an evidence-based approach to investing for the highest probability of success, which brings together strategic passive asset allocation and global diversification, expressed through best-in-class funds, at a low cost. We use these building blocks to design portfolios customised to your goals and preferences.

Endowus’ Strategic Passive Asset Allocation (SPAA) framework is:

  • Strategic top-down, meaning the allocation to different asset classes such as equities, fixed income, geography, style or factors, are set based on the goal of the portfolio 
  • Passive in implementation, meaning Endowus does not believe in tactically or actively changing your allocations based on market conditions or economic indicators
  • Curation of portfolio design bottom-up, meaning Endowus carefully selects best-in-class funds to best represent your goal’s SPAA. We access leading global fund managers with the expertise, scale, and a low-cost structure. They have real, proven track records in implementing their strategies with tens and hundreds of billions of assets successfully over time. These strategies can be passive, systematic or active, depending on the asset class they try to represent, and the investment objective. 

Taking luck and the temptation to time the market out of investing

The stock market allows you to become an owner of the profits and future growth of the biggest and best companies all over the world. Profits rise and sometimes fall during business cycles, but research shows that markets always emerge stronger through the cycles as businesses increase productivity, innovate, and produce more goods and services for the world. As a result, despite many tumultuous episodes, time in the market is more important than timing the market. Even the worst investor in the world can do well over the long run by staying invested through our SPAA framework.

long-term-returns-buy-and-hold
Source: Endowus

We often hear how investing in the stock market is like gambling because stock picking has such random outcomes. It is true that buying and selling single stocks or sectors and even countries or regions can be exciting, but it leads to random outcomes. 

That is not investing. That is speculation.

We must strip out the elements of luck in investing. Endowus uses scientific research sharpened by decades of empirical data that tells us there is no need to try to beat the entire market. Instead, look at the market indices that represent the performance of the overall markets — the broadest global benchmark is the MSCI All Country World Index (ACWI) — and buy portfolios with funds that track their performance. 

Given our investment philosophy, Endowus’ core Flagship Portfolios — which are designed to make up the core of your investment — are therefore the best representation of the SPAA process. The underlying funds chosen for the Flagship Portfolios are also designed in a portfolio and optimised to give you the broadest possible exposure to diversified global markets, and to track in line with the index in a faithful, steadfast way. 

As an extension of this philosophy, Endowus selects best-in-class fund managers that avoid big and sudden changes to their asset allocation chasing after sectors or a country-specific index because it is going up, just to quickly aim for short-term gains. Again, this is more akin to gambling than investing, as it is tactical, opportunistic, and short-term driven.  

For example, a fund manager tasked with tracking the global equity index’s performance should not double portfolio exposure to China overnight, on the back of the belief that the China equity market may do well over the next six months. It will certainly not make a single sector allocation to technology or Internet stocks in a single country that is China, and make that the single-largest position in the portfolio. This negligence in managing risk overall in the portfolio in this way is untenable for a core strategic portfolio. 

Doing so would mean that the fund manager is not disciplined about the risk of loss, and is more enticed by the promise of big gains and the ongoing attempt to try to “beat the market”, which has been proven to be futile over time. If a fund manager reaps fat profits in the short term this way, it may not be due to skill or an “algorithm”, but simply luck, which is random and unsustainable. Also, it means that they may be taking on more risk than is necessary or even wanted by the client. 

For each individual’s investment goal, Endowus finds a fixed strategic target asset allocation, and sticks to it passively. That is why it is called a strategic passive asset allocation (SPAA) path. 

Are active robos truly diversified?

Nobel prize-winning economist Harry Markowitz called diversification "the only free lunch in finance". His theory is that if you hold a portfolio of investments that are not perfectly correlated, an investor can lower risk without sacrificing expected returns. Simply put, spreading your investments across asset classes and geographies gets you the same reward with less risk. That’s the free lunch.

So investing through robo-advisors, it is argued, will give investors more diversified exposure than investing in a single stock. But there’s an important caveat: that diversification has to be maintained meaningfully across a long period of time. Picking sectors or countries randomly to “re-optimise” a portfolio runs the risk of buying high and selling low.

The broad-based diversification approach through SPAA that Endowus espouses reduces the risk of blow-ups due to any single sector or geography. A diversified portfolio will always have a few investments that are not doing so well, such as a tiny percentage exposure in Russian companies or Chinese stocks facing threats of sanctions. But with a SPAA built using highly diversified funds, the size of these positions are relatively small in a portfolio comprising over ten thousand stocks and bonds. This gives investors greater peace of mind and probability of success.

The SPAA process avoids major blow-ups, and if you can avoid major blow-ups you will always have opportunities to make back the money you lose from market cycles and can compound your returns over a longer period of time. That is the benefit of being diversified and always being exposed to markets — the long-term opportunities to rise with the markets. 

Now what about Endowus vs. Stashaway vs. Syfe

Endowus’ investment philosophy is different from a robo-advisor that has active trading as part of its investment mandate. Both Stashaway and Syfe are actively managed and are often tactical investors when it comes to asset allocation. They deviate meaningfully from the benchmark, and readjust often. Investors should ask what are the systems or processes in place to make frequent adjustments. 

You should know how your money is being invested and not leave it to chance.  Certainly there is no robot sitting in front of a computer watching markets and beating them consistently. Endowus does not like the name robo-advisor because it tends to give the wrong impression, especially to the retail investors it is trying to help invest better. 

In fact, many people dilute the main point about asset allocation. What you use as an underlying investment product — the structure of the fund being ETFs or unit trusts — doesn’t impact returns as explained earlier. 

It is what funds you buy and how you do asset allocation that drives the bulk of long-term returns. 

Both Stashaway and Syfe espouse an active asset allocation methodology that fundamentally sets them apart from the approach and process that Endowus follows. 

As one example, Stashaway had as late as in 2021 talked about the long-term investment merits of Chinese Internet stocks, with its exposure via the US-listed KraneShares CSI China Internet ETF (KWEB).

With this approach, the robo-advisor’s investment decision to go “overweight” and “underweight”on its exposure in a certain market or sector will determine the investment outcome. These are largely tactical and very active allocations that massively deviate from any global passive equities indices, and cannot be deemed as strategic or passive in nature. Not by any stretch of the imagination. 

To add, because it does not track the whole market in a systematic way, such a portfolio would not follow a passive investment allocation or track a broad index, as Endowus does with its core Flagship Portfolios.

kweb-historical-returns-poor
Source: Google Finance. data taken as at March 22, 2022, 8.00pm

Let’s delve a bit more into this specific asset allocation that both Stashaway and Syfe made last year into their active asset allocation framework. China’s technology sector has been under pressure from crackdowns by the Chinese government, as well as geopolitical tensions between the US and China.

Stashaway maintained or increased most portfolios’ allocation to KWEB, the biggest China tech ETF in the US, last July.  KWEB’s ETF price has slumped nearly -80% from its peak and its assets fell likewise from a US$104 billion peak in February last year, The Business Times reported.  With concerns of secondary sanctions spilling over the Russia-Ukraine conflict,  Stashaway reportedly sold off clients’ KWEB investments recently at the record low, even below the level at which the fund was incepted back in 2013, almost a decade ago.  

KWEB subsequently jumped nearly 40% on Wednesday, March 16 2022, just days after being removed from the portfolio. This once again highlights that trying to time the market is an impossibly difficult thing. 

Meanwhile, Syfe has gone on record to say that they did not sell their KWEB position down as Stashaway did. But this does not change the fact that they also have a massively large China country overweight through the MCHI ETF, as well as in the country’s sub-sector allocation in the form of the KWEB ETF. 

They may be able to skirt criticism that they sold the ETFs at the bottom as Stashaway did. However, they cannot avoid the fact that even after the 40% bounce, the KWEB ETF is still down -70% from the peak. The MCHI index had also more than halved from the peak to the recent bottom. They still own both in a big overweight position that is hard to justify as a passive long-term investor. 

We are not here to make a call on where KWEB will go from here. There is no crystal ball that can predict its future performance. For all we know, it may even go back to its previous highs over time. However, this episode is so relevant in understanding and highlighting the key difference that exists in the way portfolios are designed and managed, and Endowus’ fundamentally and diametrically opposed investment process and philosophy. 

The details matter. 

In this case, although buying an ETF may make it seem like you are investing passively by tracking the index, if that index is tracking a narrow sub-sector of a single country, then your returns do not come from following a systematic, diversified and passive strategy. Instead, your returns are dependent on Stashaway and Syfe making tactical allocations and being able to trade the markets consistently well.

Investors should ask if this is what they want and whether they are doing that in a manner that is transparent enough for them. This is important especially since the cost of that strategy in terms of transactions, underlying fund costs, FX transactions,  tax inefficiencies, and the fees charged by the platforms has to make sense (both Stashaway and Syfe charge a higher starting fee than Endowus). 

endowus-vs-stashaway-investment-approach-comparison
endowus-vs-stashaway-investment-comparison-access-fees

Stay invested with a reliable approach 

Investors should consider which investment approach is able to withstand the test of time. With our Flagship and other core portfolios, you remain fully in control of the portfolio that you started with for your investment goal. Any portfolio changes will be recommended to be approved by our clients*, and all clients have the option to opt out of the recommended changes to the portfolio. The portfolio changes are not to change the SPAA, but to recommend potentially more efficient and better funds to represent the SPAA.

Also importantly, any automated rebalancing (an opt-in selection) is solely done to bring the portfolio back to its strategic target equities / fixed income allocations that was pre-agreed with you before implementation. It is not to take tactical or active market bets, because that should not be called rebalancing or re-optimisation; it should be called what it actually is — new active and tactical bets on the asset allocation of the portfolio.

In 2021, Endowus Flagship Portfolios outperformed similar portfolios across equities and fixed income offered by our competitors, and tracked the broadest global market index very closely.

Endowus-2021-performance
Endowus-2021-CPF-performance

The Endowus core Flagship Portfolios are designed to give investors broad exposure to global markets through a strategic and passive asset allocation (SPAA) that has stood the test of time across multiple cycles. We believe it is well-suited for investors seeking portfolios towards essential life goals, and is available for investment with cash savings, as well as CPF and SRS savings. Our core Flagship Portfolios, the first choice for most clients, are a good place to start your investment journey. If interested, you can expand your exposure through a core-satellite strategy to gain exposure to a specific market or sector, or buy professionally managed fund strategies and construct your own portfolios through Fund Smart.

*The only exception in the Endowus advised portfolios is the newly launched Endowus Factor Portfolios by Dimensional. This is a single fund manager portfolio designed with Dimensional funds, and is exclusively available on the Endowus platform at the lowest cost. They give investors exposure to the long-term proven systematic factors of returns such as value, profitability, and size.

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