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Co-founder and CIO
23 July 2019
This month, we celebrate our 2nd anniversary, and so I wanted to share with you how our portfolios have performed since we started managing our clients’ investments in July 2017.
No one who’s been paying attention to geopolitics and the markets could accurately describe the last 2 years as even remotely uneventful. Despite multiple market corrections, our portfolios have performed well. Since we started managing your portfolios, we’ve seen interest rate hike scares, a never-ending trade war, US-North Korea tensions in 2018, recession fears driven by a misunderstanding of the flattening yield curve, Hurricane Harvey upending Texas in 2017, and questions of presidential impeachments that still linger… dare I continue reminding you of everything the world has gone through?
Since July 2017, we have gone through 3 market corrections (defined as a 10-20% decline) and 2 pullbacks (defined as a 5-10% decline). But corrections are not the same as a bear market. Corrections are common in bull markets, and they are random, but they recover quickly. On the other hand, bear markets rarely start with a bang and they are almost always driven by substantial deterioration in the economy. That’s why during these corrections we have not changed our portfolios’ asset allocations, and we’ve recommended our customers to stay invested and continue to dollar-cost average, taking advantage of the lower prices.
Source: Bloomberg, StashAway analysis
In the first 24 months, our portfolios have returned cumulatively from 8.6% (lowest risk portfolio, equivalent to a portfolio of 10% equity and 90% government bonds) to 23% (highest risk portfolio, equivalent to a portfolio of 100% global equities). This is equivalent to 4% to 11% annual returns, depending on risk levels. Our balanced-risk portfolio, equivalent to 40% equity and 60% bonds (StashAway Risk Index 16%), has returned 12.9% in 2 years, with a 2.6% overperformance versus its same-risk benchmark.1
Not only cumulatively, but also year-to-year, we have consistently outperformed our same-risk benchmarks:
From July 2017 to June 2018, our lowest-risk portfolio, balanced portfolio, and highest-risk portfolio, returned 2.0%, 5.2%, and 13.6%, respectively. The respective same-risk benchmarks returned 1.8%, 4.5%, and 9.9%.
From July 2018 to June 2019, our lowest-risk portfolio, balanced portfolio, and highest-risk portfolio, returned 6.3%, 7.1%, and 8.1%, respectively. The respective same-risk benchmarks returned 5%, 5.4%, and 6.3%.
While the last 18 months have seen particularly strong and frequent ups and downs, there is always volatility in the markets. The world is never short of geopolitical tension, disputes, and events that cause market volatility. It’s part and parcel of investing. As shown in the table below, over the last 70 years, there have been 92 pullbacks, corrections, and bear markets: another way of looking at that is that markets drop at least 5% more than once a year on average. Even more, there is a 20%+ decline every 6 years: so, from when you start working in your early 20s and your retirement in your 60s, your retirement portfolio will experience 6-7 bear markets! It’s time to manage your own expectations about the markets.
That’s exactly why you need to make sure your portfolio is ready to withstand the markets’ ups and downs, and that’s why we are so focused on risk management and diversification, and why we always encourage dollar-cost-averaging. To be clear, our portfolios will also experience ups and downs, but their diversification helps them be resilient, improving your returns over time. The returns of the last 24 months demonstrate that.
It’s very important for us to think in terms of risk-adjusted returns rather than an absolute number. This is because each of us have different backgrounds, risk tolerances, and timelines. This is why each StashAway portfolio is compared to its respective “same-risk” benchmarks. These benchmarks are essentially a combination of the MSCI World Equity Index and the FTSE World Government Bond Index chosen in a manner that has the same 10-years realised volatility (risk) as the StashAway portfolios that you have invested in. We use benchmark comparisons not only to help us evaluate performance, but also just as importantly to illustrate a core function of our investment strategy: risk management.
Our investment framework, ERAA® (Economic Regime-based Asset Allocation), looks at two major types of economic indicators: growth and inflation. Your returns are derived from the economy’s ability to grow, while inflation works in opposition to growth, as it dilutes the purchasing power of your savings. Our system constantly monitors and evaluates macroeconomic data and leading indicators to understand where the economy is heading, and at what pace.
Ultimately, an investor’s mid-to-long-term performance is driven by economic data, and so by following these economic signals, ERAA® reduces your investment’s exposure to large and long drawdowns (bear markets), and maximises returns’ growth when the economy is doing well.
Today, the trade war is not over, and the media will still be fear-mongering us of an impending recession. The truth is that the global economy is in a disinflationary growth environment. Growth is still positive but is now coming at a slower pace than it has in the last couple of boom years. We are also in an environment where inflation is still low for historical standards, so the purchasing of your savings remain stable. But these things change over time, and ERAA® will navigate your investments through meaningful changes in our economic environment.
As we enter our third year, we will continue to monitor the economic environment closely with a strong focus on risk management. In that regard, I look forward to introducing more differentiated asset classes and geographies to make your portfolio even more diversified. Innovations never tire and we are not going to stop here either. The team here at StashAway is very excited about the upcoming product and feature launches that will meet even more of your investment needs and expectations.
On behalf of the entire StashAway team, here’s to intelligent investing.
1 The benchmark portfolios are composed of MSCI World Equity Index, for the equity component, and FTSE World Government Bonds Index, for the bond component, in a proportion that produces the same risk of the relevant StashAway portfolio. Risk is measured using actual volatility realised, or average daily change in standard deviation, between 1 January 2007 and 31 December 2017.