Rebalancing and Re-optimisation at StashAway

03 September 2020
Freddy Lim

Rebalancing and changing a portfolio’s allocation strategies (or, re-optimisation) are two crucial aspects of portfolio management that ensure your portfolios’ asset allocations, and in turn, risk are always managed properly. But did you know that most traditional wealth managers can’t efficiently and flexibly rebalance their portfolios?

Specifically, traditional wealth managers rebalance portfolios quarterly or on an ad-hoc basis. And when they do need to rebalance, or change their asset allocations, these wealth managers have to freeze their clients’ deposits and withdrawals for a period of time.

We didn’t want to limit when our clients could deposit or withdraw, so instead of adopting this status quo, we prioritised to solve these inefficiencies when we first built our technological infrastructure in 2016: our trading system can promptly and precisely determine when your portfolios need rebalancing and can rebalance and re-optimise without disrupting your deposits and withdrawals.

When our system rebalances a portfolio

Typically, we rebalance your portfolio when its asset allocation moves away from its target boundaries, which also causes your portfolios to move away from its targeted risk level.

For instance, your portfolio may have a target allocation of 60% stocks and 40% bonds. If the value of the stock portion of your portfolio increases to 80%, which is above the target boundaries of the portfolio, our system will sell some stocks to buy some bonds to bring your portfolio’s asset allocation and risk level back to its target.

Aside from rebalancing a portfolio back to its target allocation, our system also rebalances your portfolio when:

  1. You’ve made a deposit: In this instance, the moment we receive your funds, there’s too much cash in your portfolio. The cash needs to be invested according to the target allocation, and we do that right away.
  2. You’ve requested a partial withdrawal: To free up funds for you to withdraw, our system needs to sell assets in your portfolio while also maintaining your target allocation.
  3. You’ve changed your portfolio’s StashAway Risk Index (SRI): At StashAway, risk levels and asset allocation are directly correlated. So, your portfolio will have an entirely new target asset allocation when you change its SRI. In this instance, our system needs to sell some asset classes and buy other asset classes to adjust to the new SRI.

Bear in mind that your portfolios may need rebalancing at different points in time. Let’s say you have two portfolios, Portfolio A and Portfolio B, which have both moved away from their target allocation due to market movements.

A few days ago, you deposited funds in Portfolio A but you haven’t deposited any funds in Portfolio B for a while. In Portfolio A, our system automatically invests the deposit to bring the portfolio back to its target. As a result, Portfolio B may require a rebalancing today, while Portfolio A doesn’t because it was rebalanced a few days ago.

How our system manages rebalancing

The two portfolios above illustrate how complex rebalancing can get, especially when managing hundreds of thousands of portfolios. This complexity is what makes it difficult for most traditional wealth managers to rebalance their portfolios frequently, especially without putting deposits and withdrawals on hold when they rebalance.

So, we see that most wealth managers execute rebalancing every quarter, or on an ad-hoc basis. This also means that many of their clients’ portfolios could have been far off from their target allocations for quite some time. That’s exposing clients to more or less risk than they expect. Many portfolio managers can’t manage their clients’ asset allocations with precision simply because of their technological inefficiency.

But our engineering team built a sophisticated trading system that sets us apart from traditional wealth managers: our system evaluates every single portfolio of every single client every single day.

By executing non-trivial logics on thousands of portfolios every day, our system delivers ultimate precision by making sure that your portfolios are always near or at their target asset allocations without restricting you from depositing or withdrawing your funds. This precision allows us to keep your portfolios’ within your expected risk levels all the time, instead of once every quarter.

We also designed our system to evaluate every portfolio before the markets open each day to find out which assets in which of our clients’ portfolios need to be rebalanced. This way, we can place and execute our trade orders on time for all our clients.

How our system manages a re-optimisation

When the economy, or markets shift in a significant way, our investment framework, ERAA® will recommend changes to the target asset allocations for all the portfolios we manage to keep our clients’ risk profile constant through the changing macroeconomic, or market environment. This process is called re-optimisation. While our system checks for rebalancing daily, our re-optimisation happens only from time to time (maybe once a year).

Our latest reoptimisation occurred in July 2021, as the US economy shifted towards inflationary growth and non-US economies toward disflationary growth.

Since re-optimisation involves changing the allocations of every single portfolio, we need to strike a precise balance between executing large trade orders and reducing the impact of those trades on market prices.

For example, if we place a buy order for 1,000,000 units of an asset, that’s surely going to drive up the price of that asset. As you can imagine, it’s challenging for traditional managers that rely on human judgement to execute this process. But, at StashAway, we rely on our data-driven system to efficiently execute your trade orders with minimal market impact. And as with rebalancing, we can re-optimise your portfolios without disrupting your deposits or withdrawals.

The bottom line for investors

We’ve intentionally built our technology to rebalance and re-optimise with greater precision than traditional wealth managers so that you have the flexibility to do what you want with your money while we make sure that your portfolios are always risk-managed. Our system works hard, so you don’t have to!

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