ERAA® and the All-weather Portfolio

22 March 2018
Freddy Lim

StashAway’s ERAA® (Economic Regime-based Asset Allocation) is an investment framework that uses macroeconomic and market data to build and manage diversified portfolios across asset classes.

The main driver of medium-term market performance is the economy, and that’s why the most important data used by ERAA® to make asset allocation decisions are growth and inflation.

But what happens when economic data are not clear? If growth is 0.1%, is this “positive enough” to invest in a growth-oriented portfolio? If growth is negative 0.1%, is the right thing to do to have a very defensive portfolio?

ERAA® acknowledges that sometimes economic data might be unclear. When this happens, the framework first looks at the momentum (rate of change) of growth and/or inflation, to see if there is clear guidance on direction.

If the momentum is not solid enough to provide predictive guidance, ERAA® immediately adjusts clients’ portfolios to an All-Weather strategy, designed to protect capital and perform well in uncertain conditions.

In particular, the framework looks at interest rate expectations and inflation risk to decide whether to optimize the All-Weather strategy for 2 regimes (positive/negative growth with low inflation) or for 4 regimes (positive/negative growth with high/low inflation).

Even under the All-Weather strategy, clients will continue to have portfolios that maintain their risk-target. When the economy moves from the uncertain scenario toward a clearer path, ERAA® would once again switch clients’ portfolios toward the new economic regime. This process is systematic and is called “re-optimisation” on our platform. It comes with no additional costs to our clients.

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