We’re reoptimising your portfolios

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ERAA™, our investment framework, is the core of our decision-making process. Using a systematic, data-based approach to asset allocation, ERAA™ optimises for returns while minimising volatility. The past two reoptimisations were executed in January 2022 to position for a global ‘Inflationary Growth’ environment, and in December 2022, as the macro cycle shifted to ‘Stagflation’.

Since the start of 2022 (the end of the previous bull market), and over the course of the past two reoptimisations, our General Investing portfolios have outperformed their same-risk benchmarks by about 5.6 percentage points on average across risk levels.

Now, ERAA™ is signalling that the macroeconomic environment is shifting once again. Let’s look at what this means for your portfolios, and what the changes are.

Key takeaways:

• ERAA™ trigger: Based on the latest economic data, our ERAA™ framework signals that the economic cycle has transitioned from ‘Stagflation’ to ‘Inflationary Growth’. This triggers a reoptimisation for ERAA™-managed portfolios on the StashAway platform.

• Asset allocation: The new regime signals that growth is returning. To position for this, ERAA™ is allocating more to asset classes that can benefit from an environment of accelerating growth. This means a greater emphasis on equities, and increased allocations to higher-yielding bonds. 

• New ETFs: To enhance our allocations to the US and India economies, we’re also introducing three newcomers to the ERAA™ universe: an equal-weight S&P ETF, an ETF investing in US defence and aerospace, and an ETF that provides targeted exposure to India.

We’re now back to an Inflationary Growth regime

Since our last reoptimisation in December 2022, manufacturing activity has gradually recovered and recently returned to positive growth, both in the US and globally. Meanwhile, while inflation has eased off from its peak, it remains relatively high versus history. Price pressures still remain a key concern among market participants and central banks, particularly given the tight labour market conditions in developed economies.

Within ERAA™’s 4-quadrant framework, we’re now back to the Inflationary Growth regime, where inflation remains high and growth is both positive and on an upwards trend.

As a result, ERAA™ has triggered a reoptimisation to position your portfolios for this new economic regime.

How our portfolios have performed since the last reoptimisation

The last economic environment was characterised by a combination of negative growth and high inflation: a stagflation. Historically, that’s a tough environment for returns – and one where a good defence was the best offence.

As the world grappled with soaring inflation, central banks countered with aggressive interest rate hikes. With that in mind, ERAA™ took an underweight position on duration, and instead focused on generating steady returns from ultra-short US Treasuries. That benefited our lower and medium-risk portfolios. For our higher-risk portfolios, allocations to Japan, US tech and large-cap equities were strong contributors towards the end of 2023.

Ultimately, by maintaining a strong defence, our portfolios had a strong performance in 2023, a year that was filled with investing ups and downs.

Now that we’re seeing a clear shift towards stronger growth, ERAA™ is setting up your portfolios for success in a new economic environment.

What this reoptimisation means for your portfolios

ERAA™ continues to keep your risk exposure constant at your selected StashAway Risk Index (SRI) level, while maximising your long-term returns. With this reoptimisation, your global portfolios now lean more towards asset classes that benefit from an environment of accelerating growth. Here are the key changes you’ll see in your portfolios:

Increased allocations to growth assets

• Equities: ERAA™ is increasing allocations to equities across all portfolios. The Inflationary Growth regime is a lower-risk environment for equities, and the asset class tends to have better risk-adjusted returns, comparatively.

• Bonds: ERAA™ is shifting to higher-risk within the asset class by raising allocations to high-yield and emerging market bonds.

• Ultra-short Treasuries: ERAA™ is reducing allocations to ultra-short-dated Treasury bonds, particularly for lower-risk portfolios.

• Gold: While most portfolios will see a reduction in gold allocations, ERAA™ maintains an overall overweight position on the asset. Looking ahead, gold may benefit from falling real interest rates; and as a diversifying element, it can increase risk-adjusted returns for multi-asset portfolios.

Expansion of the ERAA™ universe

We’re bringing in three new ETFs to our investing universe that will enhance the way we gain exposure to the US and India. ERAA™ has introduced allocations to the new ETFs under the current regime as the constituent companies tend to outperform during periods of high growth.

• Equal-weight S&P: The S&P is now heavily concentrated into a handful of stocks with the highest market capitalisation – the Magnificent Seven, for example. To mitigate this concentration risk, and to maintain a well-diversified exposure to the US market, we’re adding an equal-weight S&P 500 ETF.

• US defence and aerospace: Geopolitical conflict brings with it risks – risks that ERAA™ can hedge against. That’s why we’re introducing an ETF that provides exposure to the US defence and aerospace industries. The sector, which includes many industrial companies, can perform well in a regime of stronger economic growth.

• India: ERAA™ is overweight on India (up to 3% additional allocation in higher-risk portfolios), given its compelling growth story. We’re introducing an ETF to target direct exposure to the country, rather than via an emerging markets grouping. This allows ERAA™ to better manage its allocations.

Changes to equity allocations

Geography:

• Developed markets: ERAA™ continues to lean towards the US over Europe – there’s strong potential in US sectors beyond tech. It’s also maintaining an overweight on Japan, which has been the case since our last reoptimisation in December 2022. From a structural point of view, there’s potential for the country to emerge from its 30-year long deflation. During this reoptimisation, we’ve moved our Japan equity exposure to a new ETF, which has a lower expense ratio (0.19% as opposed to the previous 0.5%) and a stronger historical performance.

• Emerging markets: As mentioned, ERAA™ is overweight on India, adding up to 3 percentage points additional allocation in the higher-risk portfolios. Elsewhere, ERAA™ is maintaining an equal-weight exposure in China; economic growth is still stagnating for the country, though a positive shift here in the coming months is possible.

Sectoral:

• Healthcare: ERAA™ has pared back allocations to healthcare to a market-weight position. In a pro-growth environment, the market-weight allows ERAA™ to take more positions in cyclical sectors.

• Consumer and industrial: Reduced allocations to healthcare leaves room for diversified exposure to the cyclical consumer and industrial sectors, which tend to perform better in a regime of higher growth.

• Tech: Over the longer-term, advances in AI are likely to continue driving performance for tech – ERAA™ is maintaining its market-weight in the tech sector.

Changes to bond allocations

An environment of accelerating growth reduces the expected volatility of higher-risk bonds, making them more appealing. For lower-risk portfolios, ERAA™ is increasing the weightage to higher-yielding bonds from the industrial sector and from emerging markets. This positions for optimised returns while keeping risk levels in check.

Changes to thematic allocations

For our Technology Enablers and Future of Consumer Tech portfolios, ERAA™ is reducing its weightage on balancing assets (non-thematic instruments included to reduce risk). With this change, there’s room for increased allocations to core thematic holdings. Historically, these thematic assets have experienced lower volatility in the Inflationary Growth regime than in the Stagflation regime.

While separate from these changes, we’re also replacing the ETF in our investing universe that provides exposure to innovative Internet-related companies, due to the fund manager’s allocation to a cryptocurrency ETF – which is currently not permitted for retail investors in the jurisdictions where we operate. Not only will the new ETF provide our portfolios with exposure to the Internet sector in a way that is compliant with regulatory requirements, it also comes at half the cost.

Your portfolios are set up for success

The world’s economies continue to show resilience in the face of stifling interest rates, with growth now strengthening. Even so, inflation remains sticky, and the full picture for this year isn’t clear just yet. For one, the US presidential election in November will have long-term implications on global economics and geopolitics.

All in all, this reoptimisation sets up your portfolios to benefit from a new regime of higher growth. But macroeconomic conditions are always shifting – it’s why we built ERAA™, to ensure that your portfolios are managed for each stage of the economic cycle. Our framework will continue to monitor the data, and guide our allocations. As always, we will continue to keep you informed.

Portfolio reoptimisations require no action from your end, and come at no additional cost to you.

To view the changes to your portfolios: