Technology has profoundly improved access to information and general convenience — but does it improve life and outcomes? Digital wealth advisors like Endowus are trying to systematically deliver better investor outcomes by putting together the best of traditional financial services and technology.

0:00 - Introduction

1:55 - Introduction to Endowus

11:06 - Why Endowus?

19:14 - Taking a goal-based investment approach to investing

23:03 - Endowus’s approach to portfolio construction

28:50 - How trailer fees misalign interest

36:50 - Endowus’s strategic passive asset allocation strategy

41:48 - Endowus’s portfolio returns

45:10 - Endowus vs other roboadvisors

47:20 - Endowus’s investment funds list

51:35 - Question: “Is Endowus’s 0.3% platform fee sustainable? Is this low fee permanent or promotional?”

52:52 - Question: “Will Endowus allocate cash into preservation? Is there a prescribed cash allocation range?”

54:38 - Question: “Does Endowus have an all season portfolio strategy that is referenced by Ray Dalio?”

55:55 - Example Endowus account

1:05:40 - Question: “What is the difference between actively managed funds and active management of passive funds?”

Key terms shared during the webinar

1. Goal-based investing (19:14)

Goal-based investing is an investment approach that aims to help you achieve your personal and financial goals. Goal-based investing is less focused on how well your investment performs against the market average, and is instead focused on how well you are able to meet your personal financial goals.

Goals can be short term (e.g., to buy a car in 3 years) or long term (e.g., to retire in 40 years). Depending on the duration of your goals, the most suitable asset allocation plan to reach your goal with the highest probability will change. You should take appropriate amounts of compensated risks based on your needs. For short term goals, your money should be placed in a portfolio with lower risk and volatility. On the other hand, for longer term goals, you can afford to take on greater volatility on this sum of money to capture higher returns.

2. Portfolio construction (23:03)

Portfolio construction is the process of selecting a ‘basket’ of investment types that take into account the investor’s objectives, in order to maximise returns while minimising risks.

3. Rules-based systematic investing (23:45)

Systematic investing is a scientific, rules-based approach to investment management that allows for better investment outcomes over the long run, as investment decisions are based on evidence-based trading rules.

4. Trailer fees (28:50)

Trailer fees are paid by fund managers to distributors (i.e. your broker/financial advisor). Traditionally, distributors are incentivised to sell you funds that pay them the highest trailer fee so they can collect more sales fees, even if these funds are not the most aligned with your financial goals. As a result, you pay higher fees, while not receiving the maximum returns you deserve.

Excerpts from the webinar

Endowus’s strategic passive asset allocation (36:50)

Greg: A tactical active asset allocation is a strategy that believes in reading economic signals to minimise risk or get extra return. It requires frequent buying and selling in an attempt to outperform a certain index (for instance, the Standard & Poor 500 Index). This is the asset allocation strategy that many other roboadvisors use

But active asset allocation can be very expensive and carry very high risk. Frequent buying and selling can accumulate high transaction costs, and you have to pay the portfolio manager for actively managing your portfolio. Portfolio managers also decide on which investments to buy and sell, which brings you high rewards when their analyses are right, but costs you large losses when they are wrong, thus carrying a much higher risk than a passive asset allocation strategy.

Strategic passive asset allocation is one where every goal has its own target risk, geographic, and asset allocation. This is the asset allocation strategy that Endowus uses.

Endowus will always be passively managing your portfolios from the top down. If your portfolio is a cash management portfolio, it will only contain funds that are intended for cash management. But given the many funds that do cash management, we then need to analyse, from the bottom up, to determine which funds to use to utilise in your portfolio. These funds can be passive, systematic, or active, depending on what they are targeting. What you end up with is an Endowus portfolio of best-in-class funds at a low cost.

Endowus vs Other Roboadvisors (45:10)

(Data taken from https://investmentmoats.com/money/comparing-the-performance-of-some-robo-advisers-full-year-2020-2021-update/)

Greg: Endowus takes a more passive, evidence-based approach to investing, whereas other roboadvisors tend to take a more active, risk-managed approach. Research has found that across the highest risk portfolios of several roboadvisors, Endowus and MoneyOwl, both which are using a strategic passive asset allocation, performed the best (returns of 33.7% and 35.9% respectively) compared to other roboadvisors. Taking on a very active approach to markets (like most other roboadvisors do) is very difficult to sustain and produce good returns in the long run.

While performance in the short term is not always representative of performance in the long term, research has already proven how tactical active asset allocation can lead to a very large dispersion of returns, and to you not being compensated for the risk that you take.

Is Endowus’s 0.3% platform fee sustainable? Is this low fee permanent or promotional? (51:35)

Greg: We think that it is entirely sustainable. We think that investors deserve a low-cost way to access funds. In fact, we hope we can lower this fee in the future as we scale up. We have more than a billion dollars worth of assets on the platform today, and we see that number growing into the tens and hundreds of billions in the future, so we think that this low 0.3% fee is completely sustainable.

Should Endowus take a view that market systemic risk is looming, will Endowus allocate cash into preservation? Is there a prescribed cash allocation range? (52:52)

Greg: No, we do not think that such a move will serve your long term needs properly. We will not be tactically deciding whether a portion of your portfolio will be allocated to cash, as that is what a tactical active asset manager does, and exactly not what a strategic passive asset allocator does.

We believe that it is not an evidence-based scientific approach to wealth because it requires one to be able to time the market successfully, which is extremely difficult to do consistently successfully.

Endowus doesn't believe in active management but has actively managed funds. How is this different from active management of passive funds? (1:05:40)

Greg: The passive top-down asset allocation is the biggest driver of your returns. Taking an extreme example, say a client would like to invest in 50% US stocks, 30% other developed market stocks, and 20% emerging market stocks. Once we set that target allocation, we find the best funds to represent those asset classes. Depending on those asset classes and the market we’re looking at, Endowus will find funds that allow us the best way of getting that exposure, and being compensated for that exposure. We are hoping that the active management within our clients’ portfolios is going to outperform other portfolios that have no active management. Once we set the asset allocation, we do not change the underlying components. We then use strategic passive asset allocation using whatever components we think are the best to fill that asset allocation to get the best market exposure. Such a passive asset allocation strategy has been proven to outperform active allocation strategies in the long run.

On the other hand, under active management, the client’s asset allocation may change based on market conditions, resulting in a deviation from his/her initial target allocation. Even if the underlying assets are passive assets (e.g., ETFs), the active rebalancing of these passive assets is still considered an active asset allocation strategy, and might not be able to outperform the market in the long term.