StashAway Review: Should you invest with this Robo Advisor?

It has come to my attention that most people today who are considering Robo Advisors, in general, have no idea what they are investing in.

All they know about Robo Advisor is that they:

• are cheaper than investing THROUGH a Financial Advisor / Banker / Insurance Agent

• promises to provide a return that most layman consumers are comfortable with

• uses Algorithm to help “optimize” the best portfolio asset allocation

• it is easy to use

Whenever I read comments or questions asking about Robo Advisor, it always amazes me that most of the people speak of Robo Advisors as if they are some sort of magical instrument that you simply “put money” and magically it will provide you with the 5-7% return a year.

To all you readers out there who are considering Robo Advisors, I have a question for you:

“Apart from the above 4 points, why are you investing with Robo Advisor (x)?”

If your answer to me is:

• I want to beat inflation

• I want to have enough money for my house, wedding, children’s education, and retirement

My second question would be:

“How do you know if the funds that the Robo Advisor invest in can provide you with the returns you need?”

In other words, where do the returns from Robo dvisors come from and is it sustainable?

If you have no interest in finding out the answers to the two question that I’ve just asked you, you can stop reading further as the information that I am going to share will not interest you.

If you are interested in understanding in detail, the funds that Robo Advisors are investing in and where the returns are actually coming from, read on!

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Understanding what Robo Advisors truly are

The first step to understanding whether an instrument/tool is good or bad is to treat it as what they TRUELY are and not what we believe or like to think they are.

So, what are Robo Advisors?

Robo Advisors are licensed under the Financial Advisors Act by the Monetary Authority of Singapore [MAS].

This enables them to market, sell and advice collective investment schemes such as ETF and Unit Trusts just like other Financial Advisors licensed by MAS.

With the authority to help their clients invest, Robo Advisors had created a “commercialized” advisory business by leveraging on their algorithm to allocate the assets of their clients.

This enables them to reach out to as many people as possible with the least amount of resources as possible.

In other words, they are product lining the entire advisory business starting with investment planning. (E.g. factory-made vs handmade)

Therefore, they are able to charge a low amount of commission – after all, the factory-made product is, of course, cheaper to produce.

As advisors that structures an investment portfolio for their clients, both Robo Advisors as well as other Financial advisors are essentially playing the role of a Portfolio Managers.

In the case of Robo Advisors, they behave more like a Fund of Funds Manager as it is not in their business strategy to advise clients on a personal level and plan out their finances in detail.

As such to understand where the returns are coming from and if it Is sustainable, we will have to analyze Robo Advisors just as how we analyze any other Fund of funds.

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Here’s how I will analyze Robo Advisor and how you can do it yourself.

As there is no way I can get my hands on the way Robo Advisors allocate the funds due to the lack of transparency in their algorithm (It is their trade secret after all), the best I can do is to look at the pool of funds that they use for each specific region.

I will first examine the funds they use for each region before looking at the entire pool of funds in general.

I will also provide a take on how I would structure my own portfolio given the pool of funds that they use as well as the rationale for doing so at the end of this article so do read till the end!

US Exchange Traded Funds

Personally, when it comes to investing in the United States of America, the use of the S&P 500 would provide the investor with a broad enough exposure to the underlying performance of the country itself.

And since most US-listed companies are global companies, an investment exposure to global companies (such as Apple, Microsoft, 3M, etc) would naturally bring about an indirect exposure to the global performances.

e.g. if Asia consumption increases, global companies will record higher sales and profits.

This will lead to an increase in the value of the stock of the company and hence an increase in performance on the S&P 500.

Having said that, there is no need to include industry targeted fund, consumer discretionary select, staple select, or technology select funds, as this will lead to an overlap of underlying investments. Refer to below:

This goes against the philosophy of investing broadly, and personally, I would not prefer it unless you are confident that the specific industry will outperform and wish to invest more narrowly.

As for the use of Vanguard Small Cap Growth and Real Estate ETF, I would personally stay away from these two funds regardless due to the high price to earnings and price to book value which signals a clear indication of an overvalued investment. (It may not be overvalued if we look at the PEG value… but we do not have access to such information)

A price to earnings of 30x price to earnings ratio would mean that you would need the 30 years of earnings to recover your capital investment.

A good personal benchmark that I adopt – which is preached in the book The Intelligent Investor – is a Price to Earnings of 15x and Price to Book of 1.5x.

Of course, you can adjust your personal benchmark accordingly depending on the nature of the investment itself, but it should not deviate too much from the above-recommended values.

As for the bond funds, the selection is highly subjective to your investment objective.

However, given current interest rate and economic environment, I would personally not incorporate the bond fund that has a higher duration as it is more sensitive to interest rate changes.

Hence, weighing between both the duration, yield to maturity and the respective risk of the underlying investments, the Funds that are highlighted in red does not make sense to me as there are better alternatives available in the market.

Other Region Exchange Traded Funds

Apart from US Exchange Traded Funds, StashAway also includes other Regional ETF to try and capture the underlying performance of the region.

As compared to their US ETF pool, I am more in favor of the ETFs for the Asia Regions.

However, the use of Vanguard FTSE emerging markets is a mystery to me as if we look at the underlying of the ETF itself, you will notice a good portion of overlap with the current existing iShares MSCI All Country Asia ex Japan.

(Highlighted below are the Emerging Regions that does not overlap.)

Once again, as the asset allocation between these two funds is not known to me, I am unable to comment on the overall portfolio strategy.

But on a fund level, the reason why I personally would prefer to use only the MSCI AC Asia Ex Jap. ETF and not both funds are because:

• Asia is the next economic growth driver

• Use of Vanguard FTSE Emerging Market ETF will only provide minor exposure to the highlighted countries.

• Investing in both funds is as good as “Doubling Down” on the same investments – as seen from the top 10 holdings of the funds

What about the Euro ETF and Gold ETF?

Personally, I am not a fan of the Euro Region due to their current economic and political climate.

It is not a region from which I would like to invest in and hence I would not advocate the use of the funds.

As an investor as well as an advisor, I strongly believe that your money will be better utilized elsewhere – especially in the Asia region. (pardon my bias but there is a good reason for it)

As for the use of Gold ETF, I personally would not invest in it as being a commodity, the only means of profit is through capital appreciation.

Gold by itself does not create value, does not issue dividends and hence it goes against my own investment principle.

Investing in commodities is an activity that closely resembles gambling, the only way you can profit is if there is a buyer willing to pay a higher price as determined by his or her own “gut-feeling”.

While there may be a fundamental means of valuing gold, it is often too complex for one to understand.

Once again this is – at the end of the day – my own take on the use of Gold Fund as part of a portfolio strategy, there can be a perfectly logical reason for one to include it into his or her portfolio.

All I can say is, it just isn’t appealing to me and I can easily find a better option that I can understand in the market to grow my money.

What about StashAway’s overall strategy?

Like other Robo Advisors, StashAway is a fan of investing in the United States.

And as an investor and an advisor who is focused on accumulating wealth for clients – mostly in their 30s and 40s – I have my concerns with respect to the sustainability of the growth of the region as well as the suitability of the returns generated for my clients.

Here’s why.

The United States is a developed country and not a developing country.

What this means for you as an investor investing in the S&P 500 is that your returns will closely resemble the underlying economic growth of the United States while being partially "boosted" by the economic growth of the country / region from which the listed company have exposure to.

And as a developed country, you can expect the growth of the economy and hence your investment to be low and slow down in the near future.

As a matter of fact, we can clearly see the slowing economic growth of the united states by examining the historical GDP growth data.

Moving forward, it is reasonable to expect an investment return rate of 4-7% per year from the United States due to their exposure to the developing markets through the global companies included within the S&P 500.

But whether a 4-7% return is suitable for you will largely depend on your financial goals.

(4-7% is based on a dollar-cost averaging method over the span of 10-20 years, the correlation between expected returns and economic growth is covered by the concept of reversion to mean)

In conclusion: Should you invest with StashAway

Given StashAway’s investment strategy and focus, I personally believe that the use of StashAway will be suitable for people who are seeking for a moderate return (4-7% per year).

Typically, people who fit into this profile would be people whose focus is on wealth preservation as well as income distribution and it is not suitable for people whose focus is on wealth accumulation.

If your goal is on wealth accumulation, I would suggest that you turn your attention to developing countries and regions such as Asia / Emerging markets and use ETFs such as S&P 500 to diversify your portfolio and reduce your volatility.

Looking at the pool of funds that they use, I do have my concerns and doubts about the selection of certain funds to be included in the portfolio itself.

Though as I do not have access to the algorithm, I am unable to comment much about the suitability of certain funds without knowing the full picture of StashAway’s portfolio construction strategy and philosophy.

If you wish to find out how you can structure your own fund portfolio that focuses on Asia / emerging market, you can download my e-book, investing playbook, where I share all strategy, philosophy and investment funds used to create a winning portfolio.

You can get the book for free here.

This article took me 20 hours of work, if you have benefited from the information presented do consider joining the mailing list to receive more in-depth dive into other Robo-advisors as well as financial planning strategies!

Also, by joining my mailing list, you will be able to receive insider secrets, tips, and tricks as to how you can D.I.Y. a portfolio of your own to passively achieve a 9-12% return per annum easily from which I will not be disclosing in my blog as those as for subscribers only.

So do enter your email and join the mailing list today!

if you have any inquires, you can reach me at 9234 7537 or drop me a message here.

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Disclaimer:

This article is meant to be the opinion of the author and is for information purposes only.

This article should not be seen as a financial advice

This advertisement has not been reviewed by the Monetary Authority of Singapore.