How Scalable Capital differs from most other investment managers
Scalable Capital provide a modern investment model reflecting the latest capital markets research.
Most asset managers and robo-advisors like to mention that they are using “Nobel Prize-Winning Research” for their portfolio allocation process. What they refer to is typically a framework called “Modern Portfolio Theory” (MPT), which was, in fact, developed in the 1950’s and uses many simplifying assumptions about how capital markets behave. They were necessary to put the theory into practice before computers could work with the large amounts of data required to simulate the real, rather more complicated, behaviour of financial markets.
Most investment managers, both traditional and online, still use this theory today, ignoring the negative repercussions for their clients. The problem with this approach is that after several decades of observing and analysing how markets behave we now know that many of the simplifying assumptions of MPT do not hold true (e.g., losses of more than 2% are a lot more likely than the model suggests, and diversification doesn’t work equally well in all market environments). So by continuing to rely on MPT, most investment managers operating today construct portfolios and allocate assets in a way that neither diversifies risk as effectively as it should nor generates the best possible returns.
Instead of using this important, yet by now in many ways outdated theory, Scalable Capital use a technology-driven investment model based on the latest empirical research. They use modern computing capabilities (“cloud computing”) to optimise portfolio allocations without having to make simplifying assumptions. By running tens of thousands of projections on how portfolios might behave in the future, based on recent as well as historical behavioural patterns of each asset class, they achieve a better representation of the complex financial markets. This enables them to continuously optimise their clients’ portfolios with the objective of achieving a better return for every unit of risk they clients are exposed to. to maximise returns for their clients.
Generating better risk-adjusted returns through risk management
Risk can be predicted, but returns cannot. That is a central tenant to Scalable Capital’s investment process. While most investment managers focus on predicting how the prices of individual securities will develop in order to spot under- or overvalued stocks, empirical research shows that this is almost never successful.
However, if the markets move a lot today – so there is high volatility in the markets – they typically move a lot again tomorrow. It’s what capital market researchers call “volatility clustering”, and the benefit of this phenomenon is that it can be used to predict risk. In fact, Robert Engle, who helped to develop this concept from a mere theory into models that can be used for risk forecasting, was awarded the Nobel Memorial Prize for this work in 2003.
Scalable Capital uses this empirically observed and well-documented fact to identify periods of excess risk in the markets, which typically deliver poor or even negative returns. Unlike other many other investment managers, they don’t work with static weights for the different asset classes (for example, 60% shares and 40% bonds), but use dynamic weights to adjust client portfolios to changes in market risk. The benefit is two-fold: avoiding periods of excess risk in the different asset classes has been shown to improve returns for every unit of risk an investor is exposed to and, with dynamic weights, the absolute level of risk in a portfolio can be kept constant over time.
No more stressing out about the risk in your portfolio
In times of high volatility, it is important that retail investors understand exactly the amount of risk they take when investing. In the financial industry, risk is often described in vague terms such as ‘moderate’, ‘conservative’ or ‘opportunity orientated’, instead of giving a precise indication of the downside risk. The problem is that whilst a moderate portfolio may indeed on average have a moderate risk profile over the course of a 15-year investment, its risk can fluctuate significantly from year to year and even from month to month. During periods of turmoil, risk levels can multiply quickly and if the investment manager doesn’t work with dynamic weights across asset classes, the actual risk in a ‘moderate’ portfolio could easily increase to what most people would perceive as ‘adventurous’.
When investing with Scalable Capital, you will be told exactly how much downside risk is in your portfolio. To give you a precise understanding of your risk exposure, they use percentages, which represent a potential annual loss (Value-at-Risk or simply VaR). The VaR should not be exceeded with a probability of 95%, so a VaR of 12% means that only once in 20 years should you see your portfolio valuation decline by more than 12% over the course of a year. Scalable Capital’s investment questionnaire assesses your unique situation and provides you with the maximum level of risk suitable for you. You can then select a lower risk category, opting for lower estimated returns but a more limited downside risk, or you can invest in the highest risk category suitable for you, aiming at higher estimated returns with a larger potential loss in a bad year.
Independent of what risk category you are in, Scalable Capital’s continuous risk monitoring and dynamic adjustments to your portfolio allocation give you more peace of mind when investing.
The conclusion – fundamentally changing investing for the better.
Scalable Capital have fundamentally changed investing by using technology at the heart of their service. Built by a team of more than 40 experts spanning the financial, technology and academic worlds, their investment management service not only makes investment management cheaper and more convenient but better as well. They are the first, and only, investment service to use a technology-driven, data-led investment approach to grow your wealth. Their advanced algorithmic investment model does away with the need for teams of expensive investment researchers and gives clients access to professional-level money management, all at low cost, and with an unprecedented level of transparency.
Please visit Scalable for more information on their investment opportunities. Your Capital is At Risk.