What are the limitations of ERAA, StashAway’s investment framework?
StashAway’s Economic Regime-based Asset Allocation (“ERAA”) is a systematic, algorithm-based investment framework focused on strategic asset allocation. Some observers may think that the fact that it is purely systematic and does not include any element of human judgment is a limitation to this investment approach; to this, we disagree and argue that avoiding human bias is a key element of successful long-term investing that can only be achieved through a systematic approach. StashAway’s Investment Committee meets once a month to review the system’s recommendations and has an oversight function on the investment framework.
StashAway does not invest in single securities (e.g stocks), but rather focuses on indices (e.g. ETFs) that track the entire market. Some observers may think that an exclusive focus on asset allocation reduces opportunities to achieve higher returns; we disagree as it has been demonstrated that more than 80% of return differentials across portfolios of similar risk is driven by asset allocation, and in the last 15 years, the greater majority of active managers that select single securities have underperformed their relevant benchmark indexes.
StashAway does not use leverage and does not take short positions, limiting the amount of investment opportunities available. This limitation is an active choice of StashAway, as we prefer a more straightforward investment style that targets medium-to-long term wealth accumulation while keeping risks under control.
As with any model, StashAway’s ERAA is data-dependent. It assumes that the data of average returns and risks of asset classes observed in past economic regimes would repeat itself. In reality, no models can guarantee that history will repeat itself.