Market Commentary: EU vaccine export control | Our risk management-first approach

05 February 2021

05 February 2021

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Watch Freddy Lim, StashAway Co-founder and Chief Investment Officer, and Philipp Muedder, Head of Financial Planning, discuss the latest global events and their impact on the markets.

In this episode,

  • EU vaccine export control [0:22]
  • Our risk management-first approach to portfolio construction  [01:44]
  • Your returns had you opted out of re-optimisation  [04:16]


00:01 |  Philipp

Hello and welcome, everyone, to another weekly market commentary from StashAway. Of course, with us, our Chief Investment Officer, Freddy Lim. Freddy, how are you?

00:11 |  Freddy

Hey Philipp, welcome to February. Another month, another new milestone to achieve. We have less time in the year now to do a lot of stuff.

00:22 | Philipp

Yes. Well, a long year ahead and hopefully we'll get to be travelling soon. And I think when it comes to vaccines, it seems like the US is getting on track, right? And we're seeing obviously more and more people receiving the vaccine everywhere. So hopefully we'll get back on track soon.

00:43 | Freddy

On that point, absolutely. The US is actually having amazing progress on vaccines in contrast to Europe. As you know, the European Union had beef with the likes of AstraZeneca, where timelines for deliveries have been delayed. And the truth is, however, there was a lot of stuff going on behind the scenes where, you know, because AstraZeneca has contracted with a lot of other parties, it kind of felt unfair that the region that needs the vaccine quickest and is needy of it is not getting it. So there's some risk with respect to an EU ban on vaccine exports. And if that happens, that certainly could create a ripple because, you know, Singapore may think that they're going to get the Pfizer-BioNTech one and supply could be disrupted, same as other countries. So, just to watch out for that.

01:44 | Philipp

Yeah, I think there will still be some race to get everyone vaccinated, hopefully until the end of summer or something like that. But that's a good update on the vaccine. We'll keep an eye on that Freddy. But we did get a couple of questions that we wanted to highlight and answer today from our listeners. And the first one is from Ryan Tum. And he's saying, "Hey, Philipp and Freddy, congrats on the new milestone. Could you please briefly share what are some of the risk management techniques that StashAway employs for its portfolios?". Over to you, Freddy.

02:18 | Freddy

Thank you Ryan for the very interesting question. I think; it can go on for 3 days but I'll be careful with time. Risk management, we believe, has to be preemptive rather than reactive. You can't just do something only when you hear about it in the news. So Day 1, before we invest your money, there's quite a number of processes that go into it. For example, we always balance out a selection of asset classes in the portfolio with enough protection. Unless you went for our very high-risk portfolios, most portfolios you see, they do have international treasury, they have some government bonds, they have some gold, regardless of what they would expect to do in returns, their role in the portfolio is more protective in nature. And two, something that's more unique to StashAway is that we use currency exposure for systemic risk management a lot. As you know, the summary is this, funding currencies, safe haven currencies such as the US Dollar, the Japanese Yen, and the Swiss Franc, they tend to outperform a lot in a global market meltdown. We've seen it in 2008, you've seen it in Covid-19. And so actually our algorithms, other than allocating assets, it also tallies your exposure to... It targets a certain exposure to safe haven currencies based on economic fundamentals. And when times are good is when you want to start buying some protection. When times are already bad, you actually need to lock in your protection gains and go the other way. So, we systematically manage that through currency exposure. So extreme risk reduction with currency allocations.


04:16 | Philipp

Thank you, Freddy, and thank you, Ryan, for this question. I think a lot of people ask themselves the same question. So great, great question, Ryan. Next question Freddy, Calvin Chan, he says, "Hey, StashAway, thank you for doing this series every week." Thank you for listening first of all. Calvin says he has a question regarding the re-optimisation that we offer to our clients, Freddy. He says, "We get the option to turn it on and off. May I ask if the original StashAway portfolios for those who invested in 2017, how is the performance compared to the re-optimised portfolio?". So, let's say you didn't turn it off, right? And you kept investing in the original portfolio. Maybe you can also go back and explain what the re-optimisation means just quickly for the listeners that don't know.

05:06 | Freddy

Well, a lot of people confuse it with rebalancing, which is, rebalancing is just to; because the market's moved and your allocation in the asset class may change a little bit too much from your target. You buy-sell to return it to the target. Whereas re-optimisation is a process at StashAway where we explicitly change the target allocations and the change could be triggered by changes in the economic environment and also changes in valuations. These two are the biggest reasons for why we would change your allocations. As you know right, when the economic environment changes and asset class returns and risks are not going to stay the same as well, right? So, for example, if we head from a growth-oriented environment to a slow down, equities in your portfolio are going to have more volatility and perhaps even lower expected return. So, the re-optimisation is sort of designed to make sure that number one: We change the target allocation in such a way that your risk is kept constant, and your risk is not constant in this case. In the slowdown, your risk is gradually creeping up. So we want to return it to the target and two, to harness economic information and also valuations of assets to perform better. And now the final point is in terms of actual data; what's the difference in performance? In the very, very long term, actually, total returns have very small differences, but the volatility of getting there, the path of getting there, the way we get there has become a lot more stable, a lot less volatile with the re-optimisation. So this means that if you divide the return by volatility, the risk-adjusted return actually becomes significantly improved with the re-optimisation. So I don't know if I'm answering the question, Philipp. I guess what I'm trying to say is, the answer should be risk-adjusted returns have improved a lot. But in the very long term, you probably won't see it, you won't see much difference in terms of total return.

07:30 | Philipp

Yeah, that makes sense. And I think for Calvin or anyone who's listening as well that wants to learn a little bit more about that, you're always invited to join Freddy in our deep dive seminar on our asset allocation model. Where, Freddy, you go a little bit more deeper into this topic and you actually show the differences in the different environments and why we are actually re-optimising the portfolio. So if you want, feel free to look on our website to see when the next webinar on A Deep Dive is coming up and join us for that. So then that way you can get a little bit more deeper information on that. So thank you, Freddy. Thank you, Calvin. We do have some webinars coming up. For Singapore and the MENA region, we have StashAway Portfolio Performance and Ask Freddy Anything Live. So that will be super fun. You can ask Freddy even more questions than just today. So, anything that we didn't answer, go online and ask Freddy during that session. That's on Tuesday, the 9th of February 2021 7:00pm Singapore Time, 3:00pm Gulf Standard Time. So, please join us for that. The links are in the description below, as well as on our website. Also for Malaysia, we have a webinar on How to Plan for Your Retirement, so we'll talk to you through different retirement strategies and how we can optimise those as well. That's on Wednesday, the 10th of February, 6.00pm to 7.00pm Malaysia Time. Both of those links again, are down in the show description below. Thank you again for all the questions this week. Freddy and myself will be back next week and looking forward to more of those and connecting with you then. Have a great week, everyone. Bye bye.

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